The U.S. Supreme Court issued a decision Thursday in a closely watched False Claims Act (FCA) case. The fact that the medical clinic involved in the case lost will cause many observers to conclude that the decision is bad for the healthcare industry. However, the decision has as much good news as bad. 

The core issue in the case is whether FCA cases are limited to situations in which a regulatory provision was a condition of payment. There were a number of court cases that previously had suggested unless a regulation indicated that payment was a condition of compliance, actions under the FCA were barred. Other courts had adopted a theory of “implied certification,” arguing that when you submit a claim to the government, you are functionally promising compliance with all rules and requirements. 

The Supreme Court, in a unanimous decision, took a more nuanced approach. It concluded that there are times when a provision can give rise to liability even when it is not a condition of payment, but it also said there may be times when a provision that explicitly states it is a condition of payment may not rise to false claims liability. The key factors are whether the error was material and whether the billing organization had improper intent (i.e. it either knew the claim was wrong, should have known it was wrong, or acted recklessly.)    

The case, Universal Health Services, Inc, v. United States and Commonwealth of Massachusetts ex rel Julio Escobar and Carmen Correa, involves a false claims action brought by parents of a teenager who died of a seizure following a reaction to drugs prescribed at the clinic in question. The parents assert that the clinic was not supervising care properly and that it lacked a board-certified or board-eligible psychiatrist and a licensed psychologist. They also note that some services were billed as professional services when the individuals providing them did not meet licensing requirements.  

The clinic alleges that even if there was a violation of some state regulation, that doesn’t mean that the claims submitted for services at the clinic were false. The District Court concluded that only one of the regulations involved was a condition of payment, and that there was no sufficient allegation that this regulation had been violated. 

The U.S. Court of Appeals for the First Circuit reversed, concluding that the relevant regulations were conditions of payment. In its decision, the Supreme Court vacated the appellate decision and set out some guiding principles that will be used in future FCA cases.

The Supreme Court was clearly troubled by the fact that the clinic had billed for services by unlicensed individuals as if they were professional services. The Court felt that whether or not the Medicaid program had clearly established a condition of payment, anyone billing the government should be held to a common-sense standard. As the court noted, if you sell guns to the government knowing they don’t work, you are liable under the FCA even if no one established a condition of payment explicitly requiring functional weapons.  

But the Court also made it clear that it is unreasonable to argue that every violation of a federal regulation gives rise to FCA liability. In a very important paragraph, the court observed: 

“Likewise, if the Government required contractors to aver their compliance with the entire U. S. Code and Code of Federal Regulations, then under this view, failing to mention noncompliance with any of those requirements would always be material. The False Claims Act does not adopt such an extraordinarily expansive view of liability.” 

The Court also seemed to recognize that if the government has paid claims, knowing of a situation, that eliminates false claims liability. That is important because in some cases the government has argued that even when it is aware of a particular situation, that doesn’t prevent it from imposing false claims liability.

The bottom line is that this case eliminates the argument that only explicit payment conditions can give rise to false claims liability, but it also emphasizes that the draconian penalties of the FCA should not be applied lightly. 

The fact that the Court applied a common-sense standard could ultimately serve as good news for the healthcare industry. 

About the Author

David M. Glaser, Esq., is a shareholder in Fredrikson & Byron’s Health Law Group. David helps clinics, hospitals, and other healthcare entities negotiate the maze of healthcare regulations, providing advice about risk management, reimbursement, and business planning issues. He has considerable experience in healthcare regulation and litigation, including compliance, criminal and civil fraud investigations, and reimbursement disputes. David’s goal is to explain the government’s enforcement position and to analyze whether the law supports this position. David is a popular panelist on Monitor Mondays and is a member of the RACmonitor editorial board. 

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