United States ex rel. Escobar v. Universal Health Servs. - 842 F.3d 103 (1st Cir. 2016)

Rule:

Under the “The False Claims Act (FCA), 31 U.S.C.S. § 3729 et seq.,” courts are to conduct a holistic approach to determining materiality in connection with a payment decision, with no one factor being necessarily dispositive. Materiality cannot rest on a single fact or occurrence as always determinative. Because the materiality requirement in the FCA descends from common-law antecedents, under both the FCA and under the common law, materiality looks to the effect on the likely or actual behavior of the recipient of the alleged misrepresentation. Materiality is more likely to be found where the information at issue goes to the very essence of the bargain. The materiality standard is demanding, as the FCA is not an all-purpose antifraud statute or a vehicle for punishing garden-variety breaches of contract or regulatory violations. Materiality cannot be found where noncompliance is minor or insubstantial. 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.

Facts:

Yarushka Rivera died of a seizure in 2009 after receiving mental health treatment at Arbour Counseling Services in Lawrence, Massachusetts, a facility owned and operated by Defendant-Appellee Universal Health Services ("UHS"). UHS submitted reimbursement claims for these services to MassHealth, the state's Medicaid agency. Following Yarushka's death, her mother and stepfather learned that Arbour had employed unlicensed and unsupervised personnel, in violation of state regulations -- many of whom were involved in treating their daughter during the years leading up to her death. Relators subsequently brought a qui tam action against UHS under the False Claims Act (FCA), alleging that Arbour had employed unlicensed and unsupervised personnel, in violation of state regulations, and that UHS had fraudulently submitted reimbursement claims to the Commonwealth, despite knowing that they were in violation of relevant state regulations dealing with mental health and counseling facilities. The district court granted defendant's motion to dismiss, concluding that the regulatory violations were conditions for participation in the state Medicaid program, but were not conditions of payment as required for a claim to be actionable under the FCA. The United States Court of Appeals for the First Circuit reversed, holding that the regulatory violations in question were, in fact, conditions for payment and that the Relators' complaint had properly pleaded that the condition of payment at issue was a material one. UHS sought review in the Supreme Court, the Court granted certiorari, and ruled that the implied false certification theory can be a basis for FCA liability. However, the Supreme Court vacated the First Circuit’s judgment and remanded the case for further consideration of whether Relators' complaint sufficiently alleged that the regulatory violations in question were material to the government's payment decision, a requirement for an actionable FCA claim.

Issue:

Were the alleged misrepresentations of UHS “material” under the FCA?

Answer:

Yes.

Conclusion:

Applying the Supreme Court’s holistic approach to determining materiality, the First Circuit concluded that the UHS's alleged misrepresentations were material when looking to the effect on the likely or actual behavior of the recipient of the alleged misrepresentation. According to the court, UHS’s violations of regulatory requirements were material under the FCA to payment of state Medicaid claims since regulatory compliance was a condition of payment, the centrality of the requirements was sufficiently important to influence the decision whether to pay claims, and there was no evidence that the state knew of the violations when it paid the claims. Accordingly, the court reversed the district court’s grant of UHS’s motion to dismiss and remanded for further proceedings.