March 19, 2015

First Circuit Joins Growing Number Of Courts Taking More Reasoned View Of What Constitutes Fraud Under The False Claims Act

By Gordon Schnell

The False Claims Act is all about addressing fraud resulting in financial loss to the government.  But the statute does not actually define what constitutes this essential element.  Instead, it has been up to the courts to decide how far to extend the statute’s ultimate reach.  This has led to a divergence of views with some courts taking a narrow and more formalistic approach to the statute’s coverage, and others being more expansive to get at all types of fraud against the government regardless of the form.  In its United States ex rel. Escobar v. Universal Health Services decision issued Tuesday, the First Circuit made a clear pronouncement it was joining the latter camp of courts.

The case was brought under the whistleblower provisions of the False Claims Act by the parents of Yarushka Rivera who died by seizure while under the care of Arbour Counseling Services, a mental health services provider owned and operated by the defendant Universal Health.  The parents claim their daughter’s death resulted from Arbour’s failure to provide proper care.  Specifically, they claim she was treated by various unlicensed and unsupervised staff in violation of numerous state regulations.  These violations, they argue, rendered Arbour’s claims for Medicaid reimbursement false under both the federal and Massachusetts False Claims Acts.

There seems to be little issue about Arbour’s transgressions here.  Indeed, after Ms. Rivera’s death several state agencies investigated Arbour and found it in violation of numerous regulations, including those relating to staff supervision and licensing.  As the Court pointedly noted, perhaps swaying its ultimate decision, “in the final analysis, Relators’ daughter died after receiving treatment that was out of compliance with over a dozen regulations.”  But the question before the Court was not whether Arbour’s misbehavior caused Ms. Rivera’s death.  Rather, it was whether the company’s submission of reimbursement claims for these seriously deficient services was false or fraudulent under the federal and state False Claims Acts.

The district court ruled it was not and dismissed the case in its entirety.  It found the whistleblowers had failed to plead the requisite element of falsity because Arbour’s regulatory violations related to conditions of participation in the state Medicaid program, not conditions of payment by the program.  This condition of payment/condition of participation dichotomy is a much recognized and much debated issue in False Claims Act cases premised on Medicare and Medicaid fraud.  The district court joined the vast majority of courts in ruling that only noncompliance with conditions of payment can support a claim under the False Claims Act.

The Appellate Court did not take issue with the lower court’s stance on conditions of payment versus conditions of participation.  Perhaps saving that question for another day, the Court found the payment/participation distinction irrelevant because the violations at issue related to conditions of payment.  It thus reversed the district court’s dismissal on this essential ground.  What is most notable about this decision is how the Court got there and the clear path it paves for a more relaxed approach to defining what constitutes fraud under the False Claims Act.

The First Circuit made it clear in its decision that in assessing the ultimate reach of the statute, it is critical to avoid the legalistic distinctions or “artificial barriers” so many courts have erected in devising formal categories of false claims.  It thus rejected outright the forced bucketing of claims as factually false or legally false or based on so-called implied or express certification theories.  Instead, the Court insisted on “a broad view of what may constitute a false or fraudulent statement to avoid foreclosing FCA liability in situations that Congress intended to fall within the Act’s scope.”

In this vein, the Court stressed that in weighing whether a particular regulation acts as a condition of payment under Medicare or Medicaid, it is not about whether there is any kind of express language in the regulation, statute or contract.  It is about a “fact-intensive and context-specific inquiry” which focuses on the ultimate question of materiality; namely, whether the failure to comply with the requirement was material to the government’s decision to pay.  Accordingly, the Court parted ways with those courts that have insisted on express contractual or regulatory language specifically linking compliance to eligibility for payment.

Under this more expansive view, the Court went on to find the lower court had erred in finding Arbour had not violated any conditions of payment under the Massachusetts Medicaid rules.  The Court rejected the district court’s overly-limited reading of the relevant regulatory provisions, finding it “overlooked a critical interaction between [the many] substantive provisions of the MassHealth regulations.”  The Court did not need to address the ultimate question of “whether the False Claims Act embraces a distinction between conditions of payment and conditions of participation.”  However, the decision is a welcome departure from the “judicially created formal categories” of fraud so many courts have relied on and a move towards a more reasoned assessment based on what the False Claims Act is supposed to be about — “all types of fraud, without qualification, that might result in financial loss to the government.”

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