A recent, divided Sixth Circuit decision illustrates that courts continue to wrestle with the FCA's materiality and scienter requirements following the U.S. Supreme Court's Universal Health Services v. Escobar decision. In United States ex rel. Prather v. Brookdale Senior Living Communities, Inc., the Sixth Circuit reversed dismissal of an FCA qui tam suit. In our view, the decision does not apply Escobar with the rigor intended but may be limited to its unique facts. Further, Judge McKeague wrote a strong dissent. It may suggest strong arguments in other jurisdictions. The defendants recently requested rehearing en banc. If granted, the entire Sixth Circuit could provide significant further guidance.
The defendants ("Brookdale") provide Medicare-reimbursed home health services to seniors. To receive reimbursement, a physician must sign a certification of need either "at the time the plan of care is established or as soon thereafter as possible." The relator alleged that the defendants waited too long to get signatures, making subsequently submitted payment requests implicitly false. The district court dismissed the complaint on materiality grounds. Certification prior to claim submission (which indisputably happened), not the precise timing of signatures, was what actually mattered. The district court therefore dismissed the case without reaching scienter
A divided Sixth Circuit panel reversed. While citing Escobar, the majority held that the lower court erroneously "drew a negative inference" from the relator's failure to identity any government denial of a Medicare claim based on certification timing. Without past government practice for guidance, the majority asked whether the alleged "non-compliance" went "to the very essence of the bargain." The majority pointed out that the timing regulations were express conditions of payment and that Medicare guidance documents showed that the regulations were intended to prevent fraud. It concluded that a reasonable person would want to know whether a counterparty had complied. That was enough to plead FCA materiality. The majority also concluded the complaint adequately pled FCA scienter through reckless disregard. The relator alleged that employees were "instructed to review the claims only cursorily" and "to ignore any problems." An internal email acknowledged that physicians might be uncomfortable signing old certifications. And the relator alleged that Brookdale knew its submissions "might prompt an audit." According to the majority, "[o]nce the defendants had been informed … that there may be compliance issues, they had an obligation to inquire into whether they were actually in compliance with all appropriate regulations." In the majority's view, failure to do so was sufficient for scienter.
Judge McKeague wrote a strong dissent, emphasizing that the majority was inconsistent with Escobar. As to materiality, he explained that Rule 9(b) required pleading with particularity that the alleged errors "were significant enough to influence the government's actual payment decisions, not merely its abstract legal rights." The relator did not allege any payments were denied based upon the certification signatures' timing. The Medicare reimbursement request form did not even have a space to disclose it, and guidance and regulations were also silent. Because the government was "not looking for the information that Brookdale omitted," the "information is probably not material."
Such omissions were only "material" if they went to the "essence of the bargain." The mere timing of an otherwise-valid certification should not rise to that level.
As to scienter, Judge McKeague also argued that the relator failed to allege that Brookdale knew or recklessly disregarded that "omitting the explanations would influence the government's payment decisions." The whole point of the billing review that led the relator to file suit was to obtain certification signatures. Brookdale reasonably could have believed that it was complying once it had them.
The Brookdale majority does not appear to be applying Escobar's "demanding" materiality requirement with the rigor contemplated. Nevertheless, Brookdale's applicability may be limited to circumstances where the regulation at issue was an express condition of payment that the applicable agency had emphasized as an anti-fraud tool.
As for the FCA's scienter requirement, the Brookdale majority allowed the relator to proceed by pointing to allegations that Brookdale knew of compliance issues but failed to verify its regulatory compliance. It reached this conclusion even though negligence is not enough to establish FCA liability. See United States ex rel. Williams v. Renal Care Grp., Inc., 696 F.3d 518, 530-31 (6th Cir. 2012).
The majority's decision could be significantly modified, however, if the Sixth Circuit reconsiders the case en banc. Brookdale's petition is currently pending with the full court.