Common Law and Common Sense: Supreme Court Redresses Patient Harm Under False Claims Act

A young woman from a poor Massachusetts family struggles in school and is referred to a behavioral health provider serving Medicaid patients. After prolonged counseling of questionable quality, she is diagnosed with bipolar disorder and medicated. She suffers from an epileptic seizure because of the drugs. Several months later, still receiving less than optimal medical care, she convulsed again and died. Her distraught parents complain to state regulators and learn that those involved in her care were both unqualified and unsupervised.

These are the facts in Universal Health Services Co. v. United States ex rel. Escobar, which was decided by the United States Supreme Court on June 16, 2016. The case features an unusual legal vehicle for redressing physical harm to patients: the False Claims Act. A Civil War procurement law that has been greatly strengthened since the 1980s to control both defense contracts and federal health programs, the False Claims Act empowers private “relators” with knowledge of a misconduct to sue on behalf of the government and rewards them with a share of any judgment or settlement. Seeking substantial damages, the young woman’s parents sued under the False Claims Act against the company that owned the facility that treated her and billed Medicaid.

In its decision, the Court provided a seemingly simple answer to a fairly technical question: whether an “implied false certification” of compliance with government requirements can violate the Misrepresentation Act, which imposes significant penalties for “representations false or fraudulent” but does not define these terms. Several federal courts had wrestled with this issue, reaching a series of conclusions. In Escobar itself, the Massachusetts District Court had dismissed the case, finding that the licensing and supervision requirements for medical professionals were not “terms of payment.” The First Circuit Court of Appeals reversed, finding that a regulatory violation sufficient to allow Medicaid to withhold payment could also justify an action under the False Claims Act.

The Supreme Court rejected both lower court interpretations of federal law, reversed the First Circuit’s decision, and remanded the case for further consideration. In a unanimous decision written by Justice Thomas, all eight members of the current Court agreed that failure to disclose non-compliance with a legal, regulatory or contractual requirement could render a claim false or fraudulent (thereby validating the theory of “false implicit certification” of liability); however, the Court nonetheless imposed a “high” standard on the plaintiffs to demonstrate that the omission was both relevant and material. Because Universal Health Services had submitted Medicaid claims using specific billing codes that misrepresented the qualifications of their workforce, and because the underlying regulatory violations were material, the Court suggested that the family Escobar had discharged her legal burden.

In adopting this approach, the Court – in the absence of the late Justice Scalia – avoided clear tests and relied only marginally on textualist principles, demonstrating instead the shared respect that seasoned American jurists have for the judgment of common law. Judge Thomas pointed out that the term “fraud” has a well-developed common law meaning – which requires awareness on the part of the fraudster and loss of value for the person defrauded – even if it is not not defined in the False Claims Act.

The text of the False Claims Act made it easier to hold the Court. The law imposes liability on anyone who “(A) knowingly makes, or causes to be made, a false or fraudulent request for payment or approval; [or] (B) knowingly makes, uses, or causes to be made or used, a false record or statement substantiating a false or fraudulent statement. It defines “material” as “having a natural tendency to influence, or being capable of influencing, the payment or receipt of money or property.” And he defines “knowingly” as “actual knowledge; … willful ignorance; … or reckless disregard for the truth or falsity of information; and … no evidence of specific intent to defraud [is required].”

It’s a refreshingly common-sense resolution, one that was no doubt facilitated by a desire for consensus on an evenly divided Court responding to the seemingly preventable death of a young woman. Unanimous Supreme Court decisions are often intellectually unsatisfactory because they tend to rely on narrow grounds and sidestep important underlying issues. In this case, however, refining several peculiarities of the False Claims Act’s liability in health care cases may be beneficial in that it directs lower courts to focus on substance rather than form when dealing with (and perhaps rejection) of business.

Civil or criminal?

The False Claims Act is a civil law enforceable both by the government and by private parties on behalf of the government. A separate law allows the Department of Justice to prosecute fraud as a criminal offence. Because federal health programs are structurally vulnerable to abuse, Congress continues to increase penalties for violations of fraud laws. Escobar does not press the point, noting only that the potentially serious consequences of liability for false claims render the law “essentially punitive in nature” and increase the importance of proving knowledge and materiality.

Delict or contract?

Similarly, the judges were not interested in whether implied false certification under the False Claims Act should be treated as breach of contract or tort. During oral argument, the attorney for Universal Health Services had repeatedly warned the Court of the dangers of applying (lower) standards of contract law while weighing (higher) penalties in tort. the Escobar However, the opinion also cites the law of contract and the law of torts in support of its conclusion that fraud under the False Claims Act should be interpreted within the meaning of the common law.

Payment or settlement?

Historically, states regulated health and safety as part of their general policing powers. Federal influence over health care has been achieved primarily through requirements imposed on individuals and organizations receiving payments under Medicare and Medicaid. Instead of basing liability for material noncompliance on whether the rule violated qualified as a federal condition of payment, federal condition of participation, or state law, Escobar reasonably asks whether the defendant knew that his non-compliance would be material to a purchaser of the services for which he was claiming payment. In contrast, the court-rejected standards seem less fair to government contractors by continually attempting Medicare and Medicaid to adopt more, even insignificant, rules and label them all as payment terms generating potential liability under the False Claims Act.

Quality or quantity?

In various legal contexts, including matters under the Employees Retirement Income Security Act (ERISA) and the Emergency Medical Treatment and Active Labor Act (EMTALA), the Supreme Court has sought to avoid federalizing medical malpractice claims and subjecting federal judges to an avalanche of disputes previously heard in state courts. Cases involving the False Claims Act suffered the same fate, with lower courts finding that the law does not prohibit charging for poor quality care.

In Escobarhowever, Judge Thomas is content with the caveat that “[t]his case centers on allegations of fraud, not medical malpractice,” even though determining the adequacy of supervision resembles setting the standard of care in a malpractice case. The Court also does not mention any other legal theories the family may have held in relation to their daughter’s death.

In sum, the Escobar The decision is an exercise in both common law and common sense by a now balanced Court whose previous majority had more often emphasized statutory primacy, textualism and ideological purity. The plaintiffs and their lawyers should prevail in pretrial detention, with the possibility of recovering a high percentage of the accumulated fines and treble damages not only for the care provided to their daughter by unqualified personnel, but also for the care provided to other patients. Given the facts of the case as we know them, this seems like a fair outcome. Whether that creates reasonable incentives for other health care providers and potential litigants will be a question for Congress.

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