Healthcare Fraud and “Materiality” Under Escobar
Healthcare Fraud prosecutors are pursing “false claims” theories
We’ve seen a rash of healthcare fraud cases against pharmacies and telehealth companies brought by the Federal Government on behalf of Pharmacy Benefit Managers (PBMs), healthcare insurance entities, and government payors based mere contractual breaches. In these cases, the third party insurer claims that the healthcare entity (physician, pharmacy, etc.) failed to comply with its pricing, licensing, or contracting requirements and this failure amounts to healthcare fraud because of a theory called “false certification theory”. False certification theory originated as a theory of liability in False Claims cases. The theory goes… the defendant certified that it would agree with the third party healthcare contract and failure to comply with this certification in any way constitutes fraud. But as we describe below, minor contract violations without proof that the actual claim was false is insufficient for a conviction for healthcare fraud or even a false claims case.
The Government’s Theories in PBM Healthcare Fraud Prosecutions
The Government’s theory is generally that the agreements with Medicare, Medicaid, PBMs and third party insurance companies incorporate endless and ever changing federal and state regulations, policies and manuals, and laws which trigger the weight of federal healthcare fraud and mail fraud statutes when violated. This theory of fraud is “implied false certification theory”. This theory is principally a civil theory of liability and in nearly identical cases, the Government has treated it as such. See United States v. Rite Aid Corp. 2019 U.S. Dist. LEXIS 54854 (2019) (false claims case alleging charging of higher price for prescriptions than usual and customary price – an identical allegation to the present case); see also, United States ex rel. Schutte v. SuperValu Inc, 9 F.4h 455, 2021 U.S. App. LEXIS 24018 (2021); United States ex rel. Spay v. CVS Caremark Corp., 875 F.3d 746 (3rd Cir. 2017); United States Ex rel. Buth v. Walmart, Inc. 18-cv-840 (E.D. Wis. Aug, 13 2019). As the Court can see in the prior cases, every major United States pharmacy retailer (CVS, Rite Aid, and Walmart) has been hit with similar allegations and these allegations did not result in the indictment of their principles.
“Implied false certification” is unique in that the theory of fraud is predicated on an express omission but an implied omission. In federal healthcare fraud cases the government generally alleges that the Defendant agreed to comply with all federal and state rules and regulations and policies of the healthcare contracts and because he certified that he would comply – his failure makes his prior certification a material misrepresentation.
ESCOBAR APPLIES TO HEALTHCARE FRAUD PROSECUTIONS
This theory of fraud was specifically addressed in the landmark Supreme Court case Universal Health Servs. V. United States ex rel. Escobar, 579 U.S. 176 (2016). In Escober the Supreme Court set out to resolve a circuit split regarding this emerging theory of fraud. See United States v. Sandford-Brown, Ltd. 788 F.4df 696, 711-712 (2015) (rejecting implied false certification theory); see also, Mikes v. Straus, 274 F.3d 687, 700 (CA2 2011) (limiting implied false certification theory to only when defendants fail to disclose violations of expressly designated conditions of payment). In a unanimous decision authored by Justice Thomas, the Supreme Court held that false certification theory is a cognizable area of fraud, but it is not without limits.
In sum, the Supreme Court held that the implied certification theory can be a basis for liability, at least where two (2) conditions are satisfied: First, the claim does not merely request payment but also makes material representations about the goods or services provided; and second, the defendant’s failure to disclose non-compliance with material statutory, regulatory, or contractual requirements makes these representations half-truths. Escobar, 579 U.S, at 181.
Under the first prong, materiality means having a tendency to influence or be capable of influencing the payment or receipt of money or property. See also, Neder, 527 U.S. at 16. The Court strongly believed that “false claims” cases are not a vehicle for punishing “garden-variety” breaches of contract or regulatory violations and “a misrepresentation cannot be deemed material merely because the Government designates compliance with a particular statutory, regulatory, or contractual requirement as a condition of payment. Escobar, 579 U.S. at 194. “Nor is it sufficient for a finding of materiality that the Government would have the option to decline to pay if it knew of the defendant’s noncompliance”. Id. Here we can see the Government’s theory begin to erode when put up against very clear Supreme Court precedent; then completely crumble under the weight of the next phrase authored by Justice Thomas:
If the Government required contractors to aver their compliance with the entire U.S. Code and Code of Federal Regulations, then under this view, failing to mention noncompliance with any of those requirements would always be material. The False Claims Act does not adopt such an extraordinarily expansive view of liability.
Id. at 196.
If the false claims act doesn’t adopt such an extraordinarily expansive view under the same materiality definition used of federal fraud statutes, then it cannot be said that federal fraud statutes and their weighty punishments adopt a more expansive view. See Skilling v. United States, 561 U.S. 358, 416 (2010) (interpreting honest services fraud narrowly to save the statute from a vagueness challenge)
The Court continues:
We emphasize, however, that the False Claims Act is not a means of imposing treble damages and other penalties for insignificant regulatory or contractual violations. This case centers on allegations of fraud, not medical malpractice. Respondents have alleged that Universal Health misrepresented its compliance with mental health facility requirements that are so central to the provision of mental health counseling that the Medicaid program would not have paid these claims had it known of these violations
Escobar, 579 U.S. at 194.
In most federal healthcare fraud cases brought under this theory the violation is regulatory and contractual in nature and only connected to the “claim” by the fact that the Defendant doctor, pharmacy or other healthcare company certified compliance with unspecified federal and state regulations and statutes. Justice Thomas believes that such a view of materiality stretches the false claims act too far. The Government generally takes the position that Escobar is a false claims case, and this is a fraud case. That argument is unavailing. As discussed above, Justice Thomas’s opinion addressed the heart of the common law fraud concept of “materiality” which found a home in the modern mail fraud, wire fraud, and healthcare fraud statutes.
Circuit Support for Applying Escobar to Fraud Cases
The Sixth Circuit agrees that Escobar applies to fraud cases:
The key feature of [materiality] is the “knowing concealment of material facts.” That suffices to violate the statute because omissions of material fact constitute a scheme to defraud. “To obtain something fraudulently,” we have explained, “means to use misrepresentations or false promises, including statements that are known untruths, statements made with reckless disregard for their truth, half-truths, and knowing concealment of material facts.”
United States v. Washington, 715 F.3d 975, 980 n.4 (6th Cir. 2013).
To understand why, consider the mail fraud, wire fraud, and bank fraud statutes. They also prohibit “scheme[s] or artifice[s] to defraud.” 18 U.S.C. §§ 1341, 1343, 1344. And they all incorporate the common law meaning of fraud as a “misrepresentation or concealment of material fact.” Neder v. United States, 527 U.S. 1, 22, 119 S. Ct. 1827, 144 L. Ed. 2d 35 (1999). So too for the False Claims Act. “[F]alse or fraudulent claims” include “half-truths—representations that state the truth only so far as it goes, while omitting critical qualifying information,” all of which “can be actionable misrepresentations.” Universal Health Servs., Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989, 2000, 195 L. Ed. 2d 348 (2016). More specifically, the omission of a material fact with the intent to get the victim to take an action he wouldn't otherwise have taken establishes intent to defraud under the wire fraud statute. See United States v. DeSantis, 134 F.3d 760, 764 (6th Cir. 1998); see also United States v. Daniel, 329 F.3d 480, 487 (6th Cir. 2003). Other circuits have followed this path in construing the wire fraud statute. See, e.g., United States v. Weaver, 860 F.3d 90, 94 (2d Cir. 2017) (per curiam); United States v. Ferriero, 866 F.3d 107, 122 (3d Cir. 2017); United States v. Maxwell, 579 F.3d 1282, 1299 (11th Cir. 2009); see also United States v. Colton, 231 F.3d 890, 900-01 (4th Cir. 2000); United States v. Townley, 665 F.2d 579, 585 (5th Cir. 1982); United States v. Keplinger, 776 F.2d 678, 697-98 (7th Cir. 1985), United States v. Bertram, 900 F.3d 743, 749 (6th Cir. 2018).
The Sixth Circuit in citing Escobar in a fraud case informs us that it views “materiality” in the same light as the Supreme Court. For actionable fraud, the Defendant must have made an “actionable” misrepresentation, in the context of omissions, requires knowing concealment of material facts – when submitting the claim.
Defending an “implied certification” healthcare fraud theory
Trial courts will likely resist application of Escobar to healthcare fraud cases. For some reason, prominent decisions in the civil and administrative context are pigeonholed by lower courts to prevent application to criminal violations. This is true even if the cases are based on the same principles as is evidence here. But the defense must still be raised. Its just common sense that a claim that does not trigger false claims liability cannot trigger healthcare fraud liability - a claim must first be false to be actionable fraud and in Escobar the Supreme Court clearly set the definition of falsity in a much different place than the government would have liked. Pre-trial motions to dismiss are not likely to be successful but this theory can certainly be attacked at the Rule 29 and Rule 33 stage.