December 9, 2016

First Circuit Weighs in on Supreme Court’s Materiality Standard in Escobar Remand

By Rosie Dawn Griffin

The Supreme Court’s opinion in Universal Health Services, Inc. v. United States ex rel. Escobar—in which the high court upheld the implied false certification theory of liability but placed a new focus on materiality under the False Claims Act (FCA)—has predictably spawned a number of lower court decisions grappling with materiality in the varied factual landscape of FCA litigation, including decisions in the Seventh and Eighth Circuits. The First Circuit added to post-Escobar FCA materiality jurisprudence with a recent decision in Escobar itself, which it considered on remand from the Supreme Court.

At issue in Escobar were relators’ allegations that Universal Health Services (UHS) had failed to comply with applicable Massachusetts state regulations by knowingly hiring and failing to properly supervise unqualified and unlicensed mental health personnel. Relators argued that UHS’s actions—which included billing MassHealth for services rendered by these unqualified providers using National Provider Identification (NPI) numbers that inflated provider qualifications—trigged liability under the False Claims Act. Relators alleged they suffered serious, tangible harm due to UHS’s failure to comply with applicable regulations: namely the loss of their daughter, who died of a seizure after receiving mental health treatment from unqualified UHS personnel.

With implied false certification off the table, the First Circuit was left to determine whether the facts alleged presented a sufficiently material regulatory violation to defeat a motion to dismiss. The court on remand reaffirmed its prior decision, holding, with “little difficulty,” that UHS’s alleged failure to properly staff its facilities met the Supreme Court’s materiality standard. The First Circuit provided three reasons for its decision:

  • First, relators adequately alleged that regulatory compliance was a condition of payment, a relevant though not dispositive factor in determining materiality;
  • Second, the MassHealth licensing and supervision requirements at issue were central to MassHealth’s contractual relationship with UHS, and indeed went to the “very essence of the bargain;”
  • And third, was no evidence in the record that MassHealth paid the claims at issue despite knowing of the regulatory noncompliance.

The court was careful to stress that government knowledge, the third consideration underlying its holding, is not itself dispositive, but instead forms part of the Supreme Court’s “holistic” approach to materiality questions.

Finally, the court recognized the Supreme Court’s admonition that the FCA is not “a vehicle for punishing garden-variety breaches of contract or regulatory violations,” and concluded that the “expectation that mental health services are to be performed by licensed professionals, not charlatans” would not give rise to a mere “garden-variety” breach. The court instead compared UHS’s noncompliance with the archetypal Civil War-era FCA violation cited at Supreme Court oral argument, equating impostor mental health practitioners to guns incapable of firing.

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