This is the first post of a two-part discussion of recent developments related to the materiality standard set forth by the Supreme Court in Universal Health Services, Inc. v. U.S. ex rel. Escobar. Our second post will cover government intervention decisions, the “essence of the bargain” test, and the materiality of Anti-Kickback Statute violations.
The Supreme Court’s 2016 decision in Universal Health Services, Inc. v. U.S. ex rel. Escobar continues to play a significant role in FCA litigation, particularly with respect to courts’ analyses of the FCA’s materiality element. In Escobar, the Supreme Court described the materiality element as “rigorous” and “demanding” and set forth a number of non-exclusive considerations to guide the materiality inquiry, which primarily focus on the government’s actual conduct and its payment (or non-payment) of purportedly false claims. In 2019, courts continued to grapple with specific applications of Escobar’s directives, with some courts appearing to apply its materiality guidance less “rigorously” than others.
As we have previously discussed, the seemingly irreconcilable decisions issued by the nation’s circuit courts about how Escobar’s non-exclusive factors should apply in particular cases led parties in at least three such cases to seek further clarity from the Supreme Court. But last year the Supreme Court denied review in each of those three cases, perhaps signaling that – at least for now – it is content to allow the various issues raised in Escobar to continue to percolate in the lower courts.
Meanwhile, appellate court decisions have continued to apply Escobar’s materiality guidance in a manner that is arguably less “rigorous” than how it has often times been applied by district courts. For example, in U.S. ex rel. Lemon v. Nurses to Go, Inc., the Fifth Circuit reversed a district court’s order that had dismissed an FCA action on materiality grounds, holding that the relators had plausibly alleged that the hospice regulations at issue were material requirements. In rejecting the district court’s conclusion to the contrary, the Fifth Circuit emphasized that Congress and Medicare had expressly designated the regulations as conditions of payment and credited the relators’ allegation that the government had sought to enforce the regulations in the past both civilly and criminally. Notably, the Fifth Circuit cited the Sixth Circuit’s 2018 decision in U.S. ex rel. Prather v. Brookdale Senior Living Communities as “persuasive” authority for the proposition that “Escobar does not require the relator to allege in the complaint specific prior government actions prosecuting similar claims.”
In Godecke v. Kinetic Concepts, Inc., the Ninth Circuit likewise reversed a district court decision holding that the relators had failed to adequately plead the materiality of the alleged false representations. In that case, the relator alleged that the defendant, a DME supplier, violated applicable local coverage determinations (LCDs) by supplying the relevant equipment to patients before receiving an order from a physician. In finding that the LCDs’ “prior order” requirement was material, the Ninth Circuit stressed that not only did the LCDs explicitly identify the requirement as a condition of payment, but the LCDs also were themselves the product of “extensive negotiation” between the specific defendant and Medicare representatives. In addition, the Ninth Circuit pointed to the lack of any evidence that the government had paid any claims in full with actual knowledge that the prior-order requirement had not been followed.
Consistent with Escobar’s guidance, the government’s decisions about whether to pay particular claims allegedly tainted by regulatory violations have continued to be a significant focus of courts’ materiality analyses. In particular, several courts last year found the materiality element satisfied based on evidence that the government would not have paid particular claims had it known about the alleged misrepresentations. In U.S. ex rel. Doe v. Heart Solution, PC, the Third Circuit affirmed the district court’s grant of summary judgment based on unrebutted evidence submitted by the government that it would not pay claims for diagnostic neurological testing “in the absence of a certification from a supervising neurologist.” Similarly, in U.S. ex rel. Park v. Legacy Heart Care, LLC, the U.S. District Court for the Northern District of Texas held that the relator had plausibly alleged the materiality of the defendants’ purported violations of a Medicare National Coverage Determination (NCD) in part because the complaint “state[d] that the government recoups payment for procedures performed in violation of the NCD.”
Conversely, when a defendant can show that the government continued to pay claims despite actual knowledge of the alleged false representations, courts have found the materiality element lacking. For example, in U.S. ex rel. Hartpence v. Kinetic Concepts, Inc., the relator alleged that a DME supplier violated the FCA by submitting claims to Medicare that were not compliant with an applicable LCD. As the U.S. District Court for the Central District of California explained, however, the relevant Medicare administrative contractor had long been aware of the defendant’s noncompliant billing practices, including through repeated discussions with the defendant and various pre- and post-payment audits. Despite that knowledge, the government never took any steps to deny or recoup payment, which the court concluded meant that the relevant requirements could not have been material.
Nevertheless, courts have continued to split as to whether a relator bears the burden to plead specific facts regarding the government’s past payment decisions to survive a motion to dismiss. In U.S. ex rel. Thornton v. Pfizer Inc., the U.S. District Court for the Northern District of Illinois dismissed the relator’s claims because the relator “fail[ed] to allege any change to Government reimbursement” or “any regulatory action taken by the FDA” in response to his lawsuit, nor had he alleged that the government consistently refused to pay claims based on noncompliance with the relevant regulations. By contrast, in U.S. ex rel. Wollman v. The General Hospital Corp., the U.S. District Court for the District of Massachusetts declined to dismiss a relator’s FCA claims related to billing for overlapping surgeries – despite the defendants’ protestations that the government pays for at least some overlapping surgeries – because the regulations at issue were sufficiently “central to the payment scheme,” and the defendants had not offered sufficient evidence that the violations were not material.
Notably, in analyzing Escobar’s government-knowledge factor, several courts have distinguished between the government’s mere awareness of allegations of misconduct and specific knowledge of actual regulatory noncompliance. For example, in U.S. ex rel. Clarke v. Aegerion Pharmaceuticals, Inc., the U.S. District Court for the District of Massachusetts observed that although the government learned about the relators’ off-label marketing allegations when they filed their qui tam lawsuit, the government’s continued payment was not relevant to the materiality analysis because there was “no indication that the government had ‘actual knowledge’ of ‘actual noncompliance’” with FDA regulations.
Likewise, in U.S. ex rel. Rahimi v. Rite Aid Corp., the U.S. District Court for the Eastern District of Michigan rejected the defendant pharmacy’s argument that alleged regulatory violations were not material because the government continued paying its claims after learning about allegations related to certain pricing regulations. The district court explained that the pharmacy’s argument wrongly “assume[d] that the Government knows that [the pharmacy] violated” the regulatory requirements when the pharmacy itself argued it had not done so. In the district court’s view, the pharmacy’s argument “conflate[ed] ‘actual knowledge that certain requirements were violated’ with actual knowledge of allegations that certain requirements were violated.” Justifying such a distinction, the Northern District of West Virginia similarly aptly explained that the industry “would [not] warmly welcome a rule that required the Government to cut off…funding whenever a qui tam action is filed or forfeit its right to seek reimbursement.”