A recent decision from a judge in the Middle District of Florida reversed a $350 million jury FCA verdict and joined other courts throughout the country in showing that Escobar's materiality standard has real teeth. In United States of America and State of Florida ex rel. Angela Ruckh v. Salus Rehabilitation, LLC et al., a relator alleged that the defendants, including several operators of nursing home and rehabilitation facilities and a management services organization, billed the government for unnecessary, inadequate or incompetent services, thereby implicating the False Claims Act (FCA) (No. 8:11-cv-1303-T-23TBM (M.D. Fla. Jan. 11, 2018)). The court found that the proof at trial failed to satisfy the FCA's heightened materiality requirement based on the Supreme Court's decision in Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016).
The relator was a former nurse who worked at two of the defendant's facilities. She filed a qui tamaction. In April 2012, the government declined to intervene in the case, the case was unsealed and the relator proceeded on her own.
The relator alleged that the defendants engaged in a scheme to improperly increase reimbursement received from the government by overstating residents'needs and the amount of care and services provided to them. This information is contained in reports known as Minimum Data Set Assessments (MDS Assessments), which are used to determine Resource Utilization Groups (RUG), and is ultimately how Medicare determines reimbursement levels for nursing facilities. The relator argued that defendants failure to maintain documentation sufficiently and appropriately allowed for the "pervasive use of the highest codes in the [MDS] Assessments." U.S. ex rel. Ruckh v. Genoa Healthcare, LLC No. 8:11CV1303 SDM-TBM (M.D. Fla. Aug. 2, 2012).
Materiality and scienter
In finding that "[t]he record fatally wants for evidence of materiality and scienter," the district court made several key observations. First, the relator failed to offer competent evidence that the defendants knew that the government regarded the disputed practices as material and nonetheless requested payment. Far from establishing that the defendants knew that the government regarded the practices as material, the evidence actually proved the contrary – that the practices were not material and that Medicare and Medicaid consistently continued to make payments notwithstanding full awareness of "billing and documentation deficiencies." As the court stated, the evidence established that the relevant government agencies "regard the disputed practices with leniency or tolerance or indifference or perhaps with resignation to the colossal difficulty" of perfect record-keeping in this challenging clinical context. Given that, the evidence similarly fell short as to knowledge by the defendants that the government (contrary to the evidence summarized above) viewed the practices as material – because "until one proves, say, that the moon is green cheese, one cannot prove that someone else knows that the moon is green cheese." U.S. ex rel. Ruckh v. Salus Rehabilitation, LLC et al. at 4.
The district court also relied upon Escobar's holding that liability for "implied false certification" does not depend on the government's label of "condition of payment" or "condition of participation. Instead, to be actionable under the FCA, a misrepresentation about compliance must be material to the government's decision to pay. Moreover, the defendant must know at the moment the defendant sought payment from the government that the non-compliance was material to the government's payment decision.
In this case, the district court concluded that the "defendants delivered the services for which the governments were billed; the governments paid and continue to pay to this day despite the disputed practices, long ago known to all who cared to know." Id. at 10. The judge noted several ways in which the relator, had she offered similar evidence, could have overcome the Escobar "rigorous and demanding" materiality standard, including:
- Evidence of whether record-keeping deficiencies resulted in the sudden and indefinite discontinuation of payment to providers of health care services to elderly, disabled, dependent and other especially vulnerable patients
- Evidence of whether, when and to what extent an administrative remedy, rather than a sudden and unexpected refusal to pay, is required or preferred to address administrative non-compliance, including a record-keeping deficiency
- Evidence of whether governments are content – assisted by a regime of rigorous and regular inspections, audits and accounting – to permit record-keeping practices that largely achieve the ends of, but differ from, the prescribed record-keeping
- Evidence otherwise establishing the historical response of government to a long-standing non-compliance by a large provider of services in a pervasively regulated and monitored industry with a slim profit margin, that provides an essential service to a large and vulnerable population without a viable alternative.
Id. at 10-11.
As the court noted at the outset, "Escobar necessarily means that if a service is non-compliant with a statute, a rule, or a contract; if the non-compliance is disclosed to, or discovered by, the United States; and if the United States pays notwithstanding the disclosed or discovered non-compliance, the False Claims Act provides a relator no claim for 'implied false certification'..." Id. at 5.
In reversing this substantial jury verdict, the Middle District of Florida has joined an increasing number of courts that have applied the heightened materiality standard identified in Escobar.
This case shows the growing trend that when the government continues to pay claims, despite knowledge of an alleged false claim, the relator's allegations cannot satisfy the FCA's demanding materiality requirement. See, eg, Petratos, et al. v. Genentech Inc., et al, No. 15-3805, 2017 WL 1541919 (3d Cir. May 1, 2017); United States ex rel. Harman v. Trinity Indus.,Inc., 872 F.3d 645 (5th Cir. 2017); D'Agostino v. ev3, Inc., No. 16-1126, 2016 WL 7422943 at *5 (1st Cir. Dec. 23, 2016); U.S. ex rel. McBride v. Halliburton Co., No. 15-7144, 2017 WL 655439, at *5-6 (D.C. Cir. Feb. 17, 2017); Abbott v. BP Exploration & Production, Inc., 851 F. 3d 384, 388 (5th Cir. 2017); U.S. ex rel. Nelson v. Sanford-Brown Ltd., 830 F.3d 445, 447 (7th Cir. 2016); U.S. ex rel. Kolchinsky v. Moody's Corp., No. 12-1399, 2017 WL 825478, *5 (S.D.N.Y. Mar. 2, 2017).