The FCA continues to be the federal government’s primary civil enforcement tool for investigating allegations that healthcare providers or government contractors defrauded the federal government. In the coming weeks, we will continue to take a closer look at recent legal developments involving the FCA. This week, we examine the requirement that a relator plead and prove that a defendant acted with the requisite level of knowledge to establish an FCA claim and evaluate how courts have evaluated this issue in recent cases.

To prevail in FCA cases, relators or the government must prove that the defendant acted with the requisite level of knowledge in connection with the FCA allegations at issue. In a number of cases, defendants made considerable headway in convincing courts to scrutinize allegations of knowledge closely, particularly in instances where defendants argued that the underlying conduct at issue was governed by ambiguous statutes or regulations.

In U.S. ex rel. Donegan v. Anesthesia Assocs. of Kansas City, PC, 833 F.3d 874 (8th Cir. 2016), the Eighth Circuit affirmed summary judgment for Anesthesia Assocs. of Kansas City (AAKC), finding AAKC’s objectively reasonable interpretation of an ambiguous regulation precluded a determination that AAKC knowingly submitted false claims in violation of the FCA. This holding “lies in harmony with the principle that summary judgment is not proper on the issue of FCA scienter if a Relator (or the United States) produces sufficient evidence of government guidance that warned a regulated defendant away from an otherwise reasonable interpretation of an ambiguous regulation.” In this case, the relator failed to submit evidence refuting AAKC’s strong showing that its interpretation of the provision was objectively reasonable or demonstrating that the government had warned AAKC of a different interpretation. The Eighth Circuit disagreed that AAKC had a duty to confirm that its interpretation was proper, noting “[a]s the agency had not clarified an obvious ambiguity in [the provision at issue] for decades, AAKC’s failure to obtain a legal opinion or prior CMS approval cannot support a finding of [scienter].”

The Eighth Circuit ruled similarly in U.S. ex rel. Olson v. Fairview Health, 831 F.3d 1063 (8th Cir. 2016), affirming dismissal of a complaint based on relator’s inability to assail defendant hospital’s “reasonable interpretation of ambiguous statutory language” and thus adequately plead scienter. The relator argued that the statute at issue was unambiguous and defendants’ interpretation of “children’s hospital” to include its children’s unit was unreasonable, but in so doing, relied heavily on his role in drafting the applicable statutory language and the historical and contextual understanding of “children’s hospital” in Minnesota. The Eighth Circuit noted that legislative history is properly consulted only for textual ambiguities, thus relator’s support “actually favor[ed] a finding that [defendant] did not act fraudulently.”

In U.S. ex rel. Harper v. Muskingum Watershed Conservancy Dist., 842 F.3d 430 (6th Cir. 2016), the Sixth Circuit was the first circuit to interpret the FCA’s scienter requirement in relation to the post-FERA versions of the reverse false claims and conversion provisions. The relators alleged that Muskingum Watershed Conservancy District (MWCD) knowingly withheld United States property from the federal government after it violated certain deed restrictions that triggered a provision reverting ownership in the land to the United States. The Sixth Circuit held that the term “knowingly” must be interpreted to refer to MWCD’s awareness of both the existence of a relevant obligation and the defendant’s own avoidance of that obligation. The Sixth Circuit affirmed dismissal under Rule 8(a), finding that the relators had failed to state facts from which MWCD’s awareness of the FCA violations could be inferred, even under the relatively liberal standard of Rule 8(a).

In U.S. ex rel. Miller v. Weston Educ., Inc., 840 F.3d 494 (8th Cir. 2016), the Eighth Circuit reversed summary judgment for defendants on the issues of knowledge and materiality. Relators alleged that defendant Heritage College fraudulently induced the Department of Education to provide funds by falsely promising in its Program Participation Agreement (PPA) to keep accurate student records. The Eighth Circuit focused on Heritage’s pre-PPA knowledge and intent to determine whether, when signing the PPA, Heritage knew accurate grade and attendance records were required and intended not to maintain those records. Based on evidence that Heritage: (1) had its own policy acknowledging the vital importance of accurate student records; (2) was aware from the PPA and other sources that accurate records were necessary to ensure proper and efficient administration of funds; (3) had a pattern of altering records, both before and after signing the PPA; and (4) aimed to maximize Title IV funds, the Eighth Circuit found that a dispute of material fact existed as to whether Heritage intended to manipulate its records at the time it signed the PPA and summary judgment was inappropriate. The case was remanded by the Eighth Circuit for further proceedings before the district court.

In U.S. ex rel. Swoben v. United Healthcare Ins. Co., 832 F.3d 1084 (9th Cir. 2016), the relator alleged that defendant Medicare Advantage organizations took affirmative steps to generate and report skewed data in order to increase capitated payments from CMS, rendering their certifications of accurate data false. The relator alleged defendants knew their certifications were false because they: (1) helped design a template that would not capture disadvantageous errors; (2) were on notice from risk adjustment data validation (RADV) audits that their reported data had a 20% error rate; and (3) designed retrospective reviews of enrollees’ medical records deliberately to avoid identifying erroneously submitted codes that might have otherwise been identified with the diligence required by the applicable regulations. The Ninth Circuit rejected defendants’ argument that their conduct represented an objectively reasonable interpretation of their diligence obligations and noted defendants did not need actual knowledge of any specific unsupported diagnosis codes for a jury to find the requisite scienter. After finding the district court abused its discretion in denying leave to file a fourth amended complaint, the Ninth Circuit remanded for further proceedings.

In U.S. ex rel. Sheet Metal Workers Int’l Assoc. v. Horning Inv., LLC, 828 F.3d 587 (7th Cir. 2016), the Seventh Circuit affirmed summary judgment for the defendant. The relator alleged that the defendant knowingly submitted false statements to the government certifying that it was paying Davis-Bacon rates to employees. The Seventh Circuit found that there was “enough ambiguity” about the circumstances of calculating and accounting for fringe benefits in wage reports “that we cannot infer that Horning either knew or must have known it was violating the Davis-Bacon Act.” Further, the Seventh Circuit noted in dicta that “[i]n some situations, reliance on the advice of a professional, such as an attorney or an accountant, can negate the mental state” required to find an FCA violation, but found Horning had not developed the facts needed to provide a basis for such defense in the present case.

Finally, in U.S. ex rel. Polansky v. Exec. Health Res., 2016 WL 4059667 (E.D. Pa. July 26, 2016), the district court denied dismissal of allegations that defendant Executive Health Res. (HER) participated in a nationwide and nearly decade-long scheme to cause client hospitals to knowingly bill patient admissions as inpatient when they should have properly been billed as outpatient services. EHR completed second level medical necessity review for client hospitals. The relator argued that “the gap between EHR’s approach to second level review and the applicable legal requirements is so enormous, that the only plausible explanation … is that EHR knowingly ignored them … to devise a review platform that would generate vast numbers of false inpatient status certifications.” The district court agreed that the relator had adequately pleaded scienter, noting that the relator provided specific examples of EHR’s awareness of how its approach differed from the applicable regulatory framework, including internal discussions among leadership about CMS guidance and inclusion of CMS guidance in promotional materials.