Following the recent high-stakes trial in U.S. ex rel. Ruckh v. Salus Rehabilitation, LLC, a federal district court overturned the $350 million verdict handed down against the owners and operators of 53 skilled nursing facilities who were accused of “upcoding” patient Resource Utilization Group scores, “ramping up” treatment during assessment periods and failing to maintain comprehensive plans of care for their patients.

As set out in a previous post, in overturning the verdict, the district court held that the relator failed to offer sufficient evidence at trial to satisfy the “rigorous and demanding” requirements of materiality and scienter as set forth in the Supreme Court’s landmark decision in Universal Health Services, Inc. v. U.S. ex rel. Escobar.

The relator appealed that decision to the Eleventh Circuit, and the Department of Justice (DOJ) has filed an amicus brief characterizing the district court’s ruling as a “serious misunderstanding” of Escobar. The DOJ takes particular issue with the district court’s reliance on the fact that the relator put on no evidence regarding the government’s (neither Florida’s nor the United States’) actions under comparable circumstances.

Relator Did Not Prove that the Government Would Have Denied Claims Upon Knowledge of Deficiencies

The district court held that the relator’s burden was to show that the government did not know of the alleged deficiencies in the defendants’ submitted claims, but had it known, it would have refused to pay those claims—as opposed to taking some other action short of non-payment. The court provided several examples, of such actions, including the following:

  1. Issuing a notice of non-compliance and a demand and deadline for compliance
  2. Issuing a show cause order
  3. Conducting an administrative hearing
  4. Offering a price adjustment
  5. Simply paying the claim despite the alleged shortfalls

In the absence of evidence to establish the government’s likely course of action (i.e., examples of the government’s conduct in similar circumstances), the district court held that the relator failed to meet her burden, leaving the jury to guess whether the government would have paid the claims had it known of the alleged deficiencies.

DOJ: Materiality Analysis Should Focus on the Decision When It Happens, Not After

According to the DOJ, however, the court’s materiality analysis should not have focused on the government’s actions taken after it became aware of non-compliance. Instead, “the materiality inquiry is meant to shed light on the government’s decision-making at the time of the relevant transaction—not at some later date after the transaction is over.” Under the DOJ’s position, a court should consider only whether the alleged violations would have been deemed important by the government during the decision-making process as to whether to pay the claims.

In addition, the DOJ maintains that the district court erred by evaluating the claims collectively and hypothesizing that the government would not have risked bankrupting numerous nursing homes by denying payment on the submitted claims without first pursuing a less severe course of action. The DOJ argues that the court should decide not whether the government would have denied payment on the aggregate of claims but instead whether the government would have attached importance to an alleged violation in deciding to pay any individual claim.

Decision Lends Itself to More Questions

The DOJ’s amicus brief potentially tees up the following two important questions for the Eleventh Circuit to address regarding the materiality analysis under Escobar:

  1. Is a relator (or the government) required to prove that the government would have denied payment of a claim based on an alleged regulatory violation, as opposed to taking some other, more remedial step? Or is proving that such a violation would have been considered “important” in the government’s payment decision process sufficient to establish materiality?
  2. In determining whether a government would pay a claim, should a court conduct a claim-by-claim analysis, irrespective of the number and type of claims put at issue in the case, or should it account for the likely real-world impact that non-payment would have with respect to all of the claims at issue?

How the Eleventh Circuit addresses these issues on appeal may have a significant impact on how courts within the Eleventh Circuit conduct the materiality analysis under Escobar moving forward.