The False Claims Act’s (FCA) materiality requirement as articulated by the U.S. Supreme Court in Universal Health Servs., Inc. v. United States ex rel. Escobar, 579 U.S. 176 (2016) was again front and center, this time in a case recently decided by the Third Circuit Court of Appeals.
In United States ex. rel. Druding v. Care Alternatives, the court, in a precedential opinion, applied Escobar’s materiality test and ruled that the District Court had improperly granted defendant Care Alternatives’ motion for summary judgment because it had assigned dispositive weight to only one of the materiality factors laid out by the Court in Escobar and had overlooked the remaining factors which could have weighed in favor of materiality.
The Third Circuit’s analysis of each of the Escobar factors in the context of the specific facts involving Care Alternatives provides another illustration of how courts are applying the principles laid out in Escobar in deciding materiality issues in FCA cases.[1]
Escobar in Summary
The FCA imposes liability on any person who knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval to the government, provided the false or fraudulent claim is material to the government’s payment decision.
Escobar involved a suit by a qui tam relator against Universal Health Services alleging that Universal, acting through an affiliate, violated the FCA by submitting reimbursement claims that made representations about the specific services provided by specific types of professionals, but that failed to disclose serious violations of regulations pertaining to staff qualifications and licensing requirements for these services.
The dispute in Escobar was whether, in order for the materiality standard to be satisfied, the false or fraudulent claim had to involve the violation of a contractual, statutory or regulatory provision that the government expressly designated a condition of payment.
The Court concluded that when evaluating materiality under the FCA, the government’s decision to expressly identify a provision as a condition of payment is relevant, but not automatically dispositive. Likewise, proof of materiality can include, but is not necessarily limited to, evidence that the defendant knows that the government consistently refuses to pay claims in the “mine-run of cases” based on noncompliance with the particular statutory, regulatory or contractual requirement.
Conversely, if the government pays a particular claim in full, despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material. Or, if the government regularly pays a particular type of claim in full, despite actual knowledge that certain requirements were violated, and has signaled no change in position, that is strong evidence that the requirements are not material.[2]
Having thus outlined core general principles with respect to the materiality standard, the Court went on to state that the FCA is not “an all-purpose antifraud statute or a vehicle for punishing garden-variety breaches of contract or regulatory violations.” It described the materiality requirement as “demanding” and “rigorous,” explaining that materiality “cannot be found where noncompliance is minor or insubstantial.”
Applying the Escobar Factors – The Care Alternatives Case
The recently decided Care Alternatives case involves a qui tam suit brought by former employees of Care Alternatives, a hospice provider, (the “Relators”) alleging that Care Alternatives submitted claims for Medicare reimbursement despite inadequate documentation in the patients’ medical records supporting hospice eligibility.
The District Court granted summary judgment to Care Alternatives for lack of materiality based principally on the government’s continued reimbursement of Care Alternatives even after being made aware of its deficient documentation.
The Third Circuit reversed and remanded the case concluding that the District Court improperly assigned dispositive weight to a single Escobar factor – government action – while overlooking the factors that could have weighed in favor of materiality, and despite an open dispute over the government’s “actual knowledge” of the documentation deficiency.
Referencing Escobar, the Third Circuit stated that materiality turns on a variety of factors such as:
- whether the government has expressly designated the legal requirement at issue as a condition of payment;
- whether the alleged violation is “minor or insubstantial” or instead goes to the “essence of the bargain” between the contractor and the government; and
- whether the government made continued payments, or does so in the “mine-run of cases,” despite actual knowledge of the violation.
According to the court, this is a holistic, totality-of-the-circumstances inquiry.
The court then analyzed each of the three factors as more fully explained below and concluded that:
- Notwithstanding that the documentation requirement was a condition of participation, based on Escobar, Care Alternatives’ failure to satisfy that condition was relevant to the question of materiality but not dispositive;
- Care Alternatives’ alleged documentation violations were not isolated instances of incomplete notes or misplaced documents, i.e., “minor or insubstantial” violations, but rather Care Alternatives’ violations went to the “essence of the bargain” – patients’ medical need for hospice care, and, accordingly, Escobar’s substantiality factor could support a materiality finding; and
- Notwithstanding that the government continued to pay claims, it was not clear that the government, in fact, had actual knowledge of Care Alternatives’ alleged violation of the documentation requirements.
Condition of Participation
With respect to the condition of participation factor, it was undisputed that the documentation requirement was a condition. However, applying Escobar, that mere fact did not in and of itself support a finding of materiality. Accordingly, while this designation did not necessarily preclude summary judgment in defendant’s favor, it was probative evidence of materiality and a jury should have been permitted to weigh it along with the other factors.
Minor or Insubstantial Violations
On the question whether the alleged violations were “minor or insubstantial” violations, or went to the “essence of the bargain,” Care Alternatives argued that its purported violations were insignificant because every patient who was part of the lawsuit had a certification of hospice eligibility signed by an appropriate physician and no one was disputing that the staff at Care Alternatives provided good, compassionate care.
The court rejected this argument: “[The physicians’ signatures and the overall quality of care provided by Care Alternatives is neither here nor there. Instead, Escobar spotlights whether the contractor’s alleged violations are ‘minor or insubstantial.’ And here, those alleged violations are Care Alternatives’ certifications of patients with insufficient clinical documentation to support a terminal diagnosis …”
In concluding that the alleged violations were not “minor or insubstantial” and could support a finding of materiality, the Court pointed to the following:
- Per CMS regulations, a hospice needs to be certain that a physician’s clinical judgment can be supported by clinical information and other documentation that provide a basis for the certification of six months or less if the illness runs its normal course.
- Requiring that physicians’ signed certifications be supported by the patients’ medical records is an essential form of oversight. It protects the overall integrity of the Medicare hospice program by helping ensure that hospice care goes to those who actually need it and by ensuring that patients who are not terminally ill do not receive hospice benefits, and therefore, they remain eligible for curative care.
- Care Alternatives’ documentation deficiencies were pervasive. (An expert for the Relators opined that 45% of the files he reviewed did not support hospice eligibility.)
- Care Alternatives was aware of the gravity of its noncompliance.
1) Its former CEO observed that it was a “constant, constant fight to make sure the documentation was good, that it was accurate, clinical, made sense, and made its way to the charts.”
2) An internal audit revealed that its maintenance of clinical records was below standard, and this was confirmed by a random audit of charts.
3) The testimony of certain employees also raised doubts about patients’ substantive eligibility, some testifying that medical records could not have supported hospice eligibility and others testifying that they were directed to alter or re-write records, to paint a picture that the patients were actually hospice eligible.
Government’s Continued Payment
With respect to Escobar’s third factor, i.e., whether the government’s actions in the wake of Relators’ fraud allegations disproved materiality, the Court, while acknowledging the government had conducted an investigation involving a subpoena for a substantial number of patient medical records and a variety of company policies, internal documents and employee emails, and while acknowledging that the government’s inaction over fifteen years was certainly evidence of immateriality, nevertheless concluded that it was still not sufficiently clear that the government had “actual knowledge” of the insufficient documentation when it continued to pay the claims being submitted by Care Alternatives. (And even if it had, under Escobar that would only be “very strong — but not dispositive — evidence of immateriality.”)[3]
Based on this analysis of the relevant materiality factors, the Court found that a reasonable jury could conclude that the government’s inaction was not conclusive in the context of a motion for summary judgment and a jury must therefore be permitted to weigh the government’s inaction alongside Escobar’s other factors.[4]
Concluding Thoughts
The Care Alternatives case is not the first post-Escobar case to consider the materiality requirement. There have in fact been a slew of cases decided by both district courts and courts of appeal that have wrestled with the materiality factors and there remains a continuing split among the courts with respect to their interpretation and application. (A few of the cases are briefly discussed and others cited in the Appendix.)
The cases typically involve motions to dismiss complaints filed by defendants and/or motions for summary judgment sought by both relators and defendants. The fact that the courts have split in both their interpretation and application of the factors and the fact-sensitive nature of the decisions in individual cases suggests it will continue to be difficult for parties to succeed with these motions.
Additionally, given the splits, there is obviously a continuing need for Supreme Court guidance on these issues. In several instances, parties have sought certiorari and, while there have been indications that the Court has an interest in the issues, no requests for certiorari have been granted.
APPENDIX
Some of the cases that have considered the materiality question:
United States ex rel. Doe v. Heart Sol., PC, 923 F.3d 308 (3d Cir. 2019) Case involved submission of diagnostic reports to Medicare that should have been written by a specialist physician; initial burden on the government to show materiality and it did so by asserting that, pursuant to applicable regulations, Medicare would not pay the claims in absence of a certification from a supervising neurologist and defendants made no showing that noncompliance with the supervision requirement was “minor or insubstantial” or that Medicare generally pays this type of claim in full despite its actual knowledge that certain requirements had not been satisfied.
U.S. ex rel. Harman v. Trinity Industries, Inc., 872 F.3d 645 (5th Cir. 2017) Fifth Circuit reverses jury verdict in favor of relator in case involving Federal Highway Administration (“FHWA”) and highway guardrails; court concludes that record demonstrates FHWA continued to reimburse defendants’ claims with respect to a new type of guardrail with full knowledge of the relator’s claims about the product’s purported deficiencies; while no single factor is outcome determinative, the very strong evidence of FHWA’s continued payment remains unrebutted.
Brown v. Okmulgee Terrace, Inc., 2019 WL 845269 (E.D. Okla. 2019) Court grants defendant’s motion for summary judgment concluding that violation of state law was minor or insubstantial in the case of an intermediate care facility that hired a convicted felon in its housekeeping department; housekeeping duties, “while certainly necessary and proper for the residents, are not central to Medicare/Medicaid cost reports” –fact that a member of the housekeeping staff was a convicted felon does not approach the significance of serious violations of regulations pertaining to staff qualifications and licensing requirements for specific professional services.
Other cases considering materiality factors, including those relating to the presence or absence of a condition of participation, the minor or insubstantial nature of a violation and the continued payment of claims by the government and the question of its actual knowledge (in many instances reaching differing conclusions), include:
[1] Post-Escobar and prior to the Care Alternatives decision, there have been numerous other cases considering the materiality requirement, some of which are referenced later in this article.
[2] A separate issue in Escobar concerned the applicability of the “implied false certification” theory. According to this theory, when a party submits a claim, it impliedly certifies compliance with all conditions of payment. Accordingly, if the claim fails to disclose the party’s violation of a material statutory, regulatory or contractual requirement, the party has made a misrepresentation that renders the claim “false or fraudulent.” In Escobar, the Court held that, in certain circumstances, the implied false certification theory can be a basis for liability.
[3] In reaching its conclusion, the Court also noted that if it credited (“as we must at this stage”) Relators’ testimony that Care Alternatives’ providers charted to “paint a picture” of hospice eligibility, then the government would not have known that Care Alternatives was certifying patients who were potentially inappropriate for hospice care.
[4] In granting summary judgment, the District Court held that it was incumbent upon the Relators to present some evidence suggesting the government’s apparent disregard of the inadequacies in Care Alternatives’ billing documentation was not the result of its having concluded those inadequacies were immaterial.
The Third Circuit disagreed, holding that, as a general matter, relators are not required to conduct discovery on government officials to demonstrate materiality — an imposition that according to the court would find no support in Escobar’s holistic approach.
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