Supreme Court lays new groundwork for liability in False Claims Act cases with UHS v. Escobar decision

The Supreme Court handed down a unanimous decision today in the case of Universal Health Services vs. Escobar that could expand the use of the implied certification theory as a basis for liability under the False Claims Act, meaning the potential for more lawsuits.

Following two battles, one in Massachusetts District Court where the case was dismissed, and the lower Court of Appeals, which reversed that decision, the Supreme Court heard arguments in April and on Thursday sent the case back to the lower court once again. At the same time, in its decision/opinion, it laid new groundwork on which to judge the case and others like it.

Specifically, it gave new guidance on evaluating whether UHS's omission of compliance violations made their reimbursement claims fraudulent under the implied certification theory of liability, which court documents explain "treats a payment request as a claimant's implied certification of compliance with relevant statutes, regulations, or contract requirements that are material conditions of payment, and treats a failure to disclose a violation as a misrepresentation that renders the claim "false or fraudulent."

Universal Health Services had argued that they couldn't be held liable for fraud over violations that were not explicitly designated as conditions of payment by the government, and that excluded the violations involved in UHS v Escobar.  They argued that False Claims Act liability should be limited to undisclosed violations of designated conditions of payment

[Also: Supreme Court to hear arguments in lawsuit stemming from Massachusetts Psychiatric clinic death]

The court rejected that notion, and cautiously broadened the scope of what establishes liability under implied certification. First, it clarified that in certain circumstances, the implied certification rule can establish liability for fraud when the defendant submits a claim for payment "that makes specific representations about the goods or services provided, but knowingly fails to disclose the defendant's noncompliance with a statutory, regulatory, or contractual requirement."

More importantly, they ruled that that defendants can be held liable for violating requirements that aren't necessarily conditions of payment. The pivotal issue, as laid out by the high court, is whether that violation would have influenced the government's decision to pay the claim.

In the opinion, written by Justice Clarence Thomas, he said "What matters is not the label the Government attaches to a requirement, but whether the defendant knowingly violated a requirement that the defendant knows is material to the Government's payment decision. A misrepresentation about compliance with a statutory, regulatory, or contractual requirement must be material to the Government's payment decision in order to be actionable under the False Claims Act."

The court implied it felt UHS's violations fall under this category.

"The claims in this case do more than merely demand payment. They fall squarely within the rule that half-truths--representations that state the truth only so far as it goes, while omitting critical qualifying information--can be actionable misrepresentations," wrote Justice Thomas.

The case arose from the circumstances surrounding the death of Yarushka Rivera, a teenager and medicare beneficiary who for five years received counseling services at Arbour Counseling Services in Lawrence, Massachusetts which was owned by UHS.  She died in 2009 after an adverse reaction to medication.

Her mother, Carmen Correa and stepfather Julio Escobar, were later told many Arbour employees were unlicensed to provide mental health counseling or prescribe drugs, and were not properly supervised as required by state and federal law. In the lawsuit, they alleged UHS had committed fraud by submitting reimbursement claims to Medicare for Yarushka's care, but not disclosing the violations related to their employees lack of proper credentials and supervision. They said that "lie by omission" rendered their claims fraudulent.

"There's a saying that bad facts make bad law," said Roger Cohen, Senior Counsel on Healthcare for the Proskauer Law Firm in New York City. "This is a case where you had tough facts that I think caused the court to say no matter what the regulation said, whether these regulations were requiring the providers of mental health services to be licensed, whether they say they're a condition of payment or not, common sense says those are material to the government's payment decision and had the government known that the provider was billing for services that had to be provided by licensed professionals but were not provided by licensed professionals they wouldn't have paid the claim."

Cohen said this decision by the Supreme Court has ramifications moving forward. Instead of a "bright line standard", now things are more subjective and based on specific circumstances, not a unilateral standard. 

"I think the court has made it more difficult to defeat cases in many circumstances where the allegation is that you violated some statute or provision and that implied certification of compliance made the claim false. I do think the court was cautious in its opinion and recognized the risks of setting the bar too low. The decision doesn't mean that you can't prevail in this kind of case prior to discovery but on the whole the decision does make it harder to prevail on these cases early."

He also said the new language and standards could open up the potential for a barrage of new lawsuits against providers.

"There's a lot of concern about that theory and the ability to essentially use the False Claims Act to police every single regulatory violation no matter how minute in a highly regulated industry like healthcare and for government contractors. There's a concern that there are so many regulations that its just impossible to have a100 percent compliance with everything at all time."

The case will go back to Massachusetts District Court and Cohen said that move could prompt a settlement. If not he expects the court will allow case to proceed to discovery.

"It's hard to predict beyond that, hard to know what the facts will show," Cohen said.

Twitter: @BethJSanborn