George B. Breen, Member of the Firm in the Health Care & Life Sciences and Litigation practices and Co-Chair of the firm’s National Health Care & Life Sciences Practice Steering Committee, in the firm’s Washington, DC, office, was quoted in Healthcare Risk Management, in “Supreme Court Ruling Changes View of Wrongful Intent.”

Following is an excerpt:

A Supreme Court ruling is changing how a defendant’s knowledge of wrongdoing and intent to commit fraud is viewed in civil cases. The ruling has significant implications for healthcare cases in which the False Claims Act (FCA) is involved.

The decision in U.S. ex rel. Schutte v. SuperValu Inc. unanimously held that liability under the FCA depends on a defendant’s subjective belief regarding whether a claim was false. Before this landmark ruling, it was unclear whether the standard for determining knowledge in an FCA claim was objective or subjective.

The Supreme Court held a defendant can be held liable for “knowingly” submitting a false claim by demonstrating that the defendant knew or suspected the submission was false, even if an objectively reasonable person would not have known the claim was false. The decision means the healthcare industry is now grappling with the FCA’s “scienter” test, says George B. Breen, JD, an attorney with Epstein Becker Green in Washington, DC. “Scienter” is a legal term involving a culpable state of mind or a defendant’s knowledge that an act or conduct is wrongful and commits the act, anyway.

In Schutte, private parties sued retail pharmacies, claiming violations of the FCA through alleged fraud on Medicare and Medicaid, Breen says. Those government programs provide prescription drug coverage to their beneficiaries and usually limit the reimbursement to the pharmacy’s “usual and customary” charge to the public. However, the respondent pharmacies reported their higher retail prices to Medicare and Medicaid — as opposed to the lower discounted prices they offered customers through programs such as price matching, Breen explains.

The U.S. District Court for the Central District of Illinois held that the pharmacies’ “usual and customary” prices were its discounted prices, as opposed to the higher retail prices, and concluded that the pharmacies submitted false claims on that basis, Breen says. The district court held pharmacies could not have acted “knowingly” under the statute.

Breen notes that the two essential elements of an FCA violation are the falsity of the claim and the defendant’s knowledge of the falsity or scienter. The U.S. Court of Appeals for the Seventh Circuit affirmed in August 2021, finding that “there is no statutory indication that Congress meant its usage of ‘knowingly,’ or the scienter definitions it encompasses, to bear a different meaning than its common law definition,” Breen explains. “The Supreme Court, however, held in Schutte that the FCA’s scienter element refers to the defendant’s knowledge and subjective beliefs — not to what an objectively reasonable person may have known or believed. While the FCA clearly imposes liability on those who purposely intend to defraud the government, other cases might involve, by way of example, doctors who honestly mistake what ‘customary’ means — or who might correctly understand ‘customary’ but submit inaccurate claims, anyway.”

Justice Clarence Thomas wrote for the Supreme Court as it vacated and remanded the case to the Seventh Circuit that, “What matters for an FCA case is whether the defendant knew the claim was false. Thus, if respondents correctly interpreted the relevant phrase and believed their claims were false, then they could have known their claims were false.”

In Schutte, the qui tam petitioners presented evidence that the companies believed that their “usual and customary” prices were their discounted prices — and took steps to prevent regulators and contractors from finding out about those discounted prices, Breen explains. For example, a pharmacy might charge $10 for a drug under a price-match program but report $108 to the government for reimbursement. This kind of evidence could eventually help establish the scienter requirement for an FCA violation on remand.

Schutte is a disappointing decision for the defense bar, and one likely to impact the ability to secure dismissal at the early stages of litigation. Healthcare providers must understand that the obligation of a relator or the government to show scienter is not dead as a result of Schutte,” he explains. “Recklessness means defendants being ‘conscious of a substantial and unjustifiable risk that their claims are false but submit[ing] the claims anyway.’ The focus will be on how providers can demonstrate their understanding at the time of claims submission and show that they were not acting with reckless disregard.”

This also might mean more scrutiny of attorney guidance on those complex, significant regulatory issues upon which FCA claims are based and the real-time documentation of a defendant’s understanding at the time of claims submission, Breen says.

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