George B. Breen, Erica Sibley, Bahnsen, Daniel C. Fundakowski, and Alexis Boaz, attorneys in the Health Care & Life Sciences practice, in the firm’s Washington, DC, office, co-authored “Key False Claims Act Developments Affecting the Health Care Industry: What We Learned in 2020 & Predictions for What We Can Expect in 2021” for the American Health Law Association’s (AHLA) Physicians and Hospitals Law Institute.

Following is an excerpt:

II. Courts continue to grapple with “materiality” following Escobar

The FCA requires that a false record or statement be “material” to the government’s payment decision before liability can attach. In accordance with the Supreme Court’s 2016 decision in Universal Health Services, Inc. v. U.S. ex rel. Escobar, the touchstone of materiality is whether the government would have paid the claim in question if it had known of the defendant’s noncompliance with an applicable law or regulation. Throughout 2020, courts across the country continued to grapple with the FCA’s materiality framework.

In U.S. ex rel. Janssen v. Lawrence Memorial Hospital, the relator alleged that the hospital fabricated patient arrival times associated with certain Centers for Medicare & Medicaid Services (“CMS”) pay-for-reporting and pay-for-performance programs. A key issue in the case was from whose perspective materiality should be judged; the relator argued that materiality should be judged based on the likely impact of the noncompliance on a “reasonable person” (an objective standard). In affirming the district court’s opinion that the alleged false claims were not material, the Tenth Circuit relied on the Supreme Court’s Escobar decision in holding that the proper focus in determining materiality is on the actual reaction of the recipient of the false claim, not on a “reasonable person.” Applying that standard, the Tenth Circuit held that CMS’s inaction and continued payment of claims, even after CMS was made aware of the alleged noncompliance six years earlier, “suggests immateriality.” The Tenth Circuit’s analysis reinforces the Escobar materiality analysis as one that is heavily fact-specific and focused on the government’s prior conduct relative to the alleged noncompliance with the provisions and requirements at issue. The Supreme Court denied the relator’s certiorari petition on October 5, 2020.

In U.S. ex rel. Porter v. Magnolia Health Plan, Inc., the Fifth Circuit applied Escobar’s materiality framework at the pleadings stage. In this case, the relator alleged that her former employer violated the FCA by using “licensed practical nurses” for tasks that contractually required the expertise of “registered nurses.” The district court dismissed the FCA claims, holding that the contracts between the state (Mississippi Medicaid) and the defendant “contain broad boilerplate language generally requiring a contractor to follow all laws, which is the same type of language Escobar found too general to support a FCA claim.” In affirming, the Fifth Circuit agreed with the district court that the governing contracts did not require the defendant to staff the positions at issue with registered nurses, and that the “boilerplate language” was insufficient to establish materiality sufficient to withstand a motion to dismiss. The Fifth Circuit also found that the “continued payments to and contracts with” the defendant “substantially increase the burden . . . in establishing materiality” and noted specifically that the state “took no action” after being advised by the relator of the alleged misconduct and even “continued payment and renewed its contract with [defendant] several times.” Interestingly, the Fifth Circuit also affirmed the district court’s decision to dismiss the case with prejudice, finding that there was “no reasonable basis to predict that [relator] can recover on her claims.” The Supreme Court denied the relator’s certiorari petition on January 19, 2021.

In U.S. ex rel. Ruckh v. Salus Rehabilitation, LLC, the Eleventh Circuit reinstated an $85 million jury verdict (over $255 million after trebling and penalties) on Medicare claims that the district court initially set aside after a month-long jury trial where the judge found that the relator “failed to introduce evidence of materiality and scienter at trial.” The case involved allegations that nursing home operators artificially inflated Medicare patients’ Resource Utilization Group (“RUG”) scores by “upcoding” and “ramping” to yield increased Medicare payments. The Eleventh Circuit rejected the district court’s conclusion that the relator’s allegations amounted to “a handful of paperwork defects,” and found that the upcoding and ramping allegations were a “simple and direct theory of fraud” with “plain and obvious materiality [that] went to the heart of the SNFs’ ability to obtain reimbursement from Medicare.” On August 27, 2020, the Eleventh Circuit declined to rehear the case en banc.

Given the Supreme Court’s apparent reluctance to take up materiality again in the near term (every certiorari petition on materiality since Escobar has been denied), district courts will continue to be where the key decisions as to how FCA materiality, and the scope of what can be enforced with the FCA, will be made.

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