Second and Fifth Circuits in Holding That FCA Claims Based on Implied False Certifications Must Allege and Prove That the Alleged Violation Was a Prerequisite to Payment

Last week, in a False Claims Act (“FCA”) case based on the so-called “implied false certification theory,” the Sixth Circuit held that the plaintiff must plead a violation that is a “prerequisite to payment” and applied this requirement as a necessary element of proof of “falsity” under that theory. In United States ex rel. Chesbrough v. VPA, PC, dba Visiting Physicians Ass’n, No. 10-1494, 2011 WL 3667648 (6th Cir. Aug. 23, 2011), a decision that affirmed dismissal of the qui tam complaint for failure to satisfy Rule 9(b), the court held that in the absence of any statute or regulation that conditioned the government’s payment on compliance with radiology industry standards or HIPAA’s patient confidentiality provisions, there is no FCA cause of action based on a violation of those standards or provisions. The Sixth Circuit specifically relied on the Second Circuit’s reasoning in United States ex rel. Mikes v. Straus, 274 F.3d 687 (2d Cir. 2001), where the court held that alleged violations of medical standards of care are not actionable under the FCA because they are not requirements of reimbursement. Applying similar reasoning to the relators’ allegations of substandard testing and HIPAA violations, the Chesbrough decision held that the allegations failed to satisfy Rule 9(b) because they did not allege that the purported violations were prerequisites to payment. The Sixth Circuit’s decision is significant in that it adopts a stringent interpretation of “falsity” and effectively limits FCA liability based on implied false certifications. While not citing the Fifth Circuit’s decision in Steury v. Cardinal Health, Inc., 625 F.3d 262 (5th Cir. 2010), which also relied heavily on Mikes, the decision in Chesbrough means that three separate circuits have limited FCA liability based on the implied certification theory to situations in which the violation is a prerequisite to payment of a claim by the government agency.

The relators in Chesbrough operated a business that interpreted radiology tests performed by the defendant, Visiting Physicians Association (“VPA”), which billed the government for the tests. Relators claimed that VPA (a) billed Medicare and Medicaid for purportedly substandard radiology tests and for “nondiagnostic” or worthless tests, and (b) failed to preserve patients’ confidentiality as required by the Health Insurance Portability and Accountability Act (“HIPAA”). The Sixth Circuit rejected relators’ substandard testing allegations because they failed to allege that VPA was required to comply with what relators’ claimed were objective, industry-wide standards for radiology tests as a prerequisite to payment. Nor did relators identify any Medicare or Medicaid regulation that mentioned the purported industry standards. The Sixth Circuit applied a similar analysis to the claim that VPA failed to preserve HIPAA’s patient confidentiality protections. Finding no mention in the complaint of any statute or regulation that conditioned payment of a claim on compliance with HIPAA, the court dismissed the claim.

The Chesbrough decision places the Sixth Circuit in the same camp as other circuits in applying the prerequisite to payment requirement to define “falsity” and to limit implied false certification liability. Notably, the Sixth Circuit cited the Second Circuit’s reasoning in Mikes that the FCA should not be interpreted “to enforce compliance with all medical regulations” that would require resolving issues such as levels of care that were not requirements for reimbursement. The Second Circuit found that

caution should be exercised not to read this theory expansively and out of context. . . .[T]he False Claims Act was not designed for use as a blunt instrument to enforce compliance with all medical regulations―but rather only those regulations that are a precondition to payment―and to construe the impliedly false certification theory in an expansive fashion would improperly broaden the Act's reach.  

Mikes, 274 F.3d at 699. Consistent with Mikes, the Sixth Circuit applied the “prerequisite to payment” limitation on FCA liability in the context of defining the statutory requirement for a “false” or “fraudulent” claim―terms that are not defined in the statute―as opposed to assessing whether the false statements were “material” to a false claim. In addition, without specifically referencing the Fifth Circuit’s decision in Steury, the Sixth Circuit’s adoption of the prerequisite to payment requirement follows the holding in Steury that this requirement is fundamental to establishing “falsity” in implied false certification cases. See Steury, 625 F.3d at 269. See also FraudMail Alert No. 10-11-03; John T. Boese, The Past, Present, and Future of “Materiality” Under the False Claims Act, 3 ST. LOUIS U. J. OF HEALTH L. & POL’Y 291 (2010) (arguing that, after Congress eliminated the “prerequisite to payment” test for materiality in 2009, courts must necessarily impose such a requirement to limit abuse of the FCA).

The decision in Chesbrough is also noteworthy for other reasons. Increasingly, courts are using Rule 9(b) to engage in more thorough analyses of qui tam complaints, particularly in declined cases based on false certification allegations. See, e.g., Steury, 625 F.3d 262 (finding no indication that the government conditioned payment on a certification that Signature pumps complied with implied warranty); United States ex rel. Gross v. AIDS Research Alliance-Chicago, 415 F.3d 601 (7th Cir. 2005) (allegations failed to plead materiality of alleged false certifications); United States ex rel. Conner v. Salina Reg’l Health Ctr., 543 F.3d 1211 (10th Cir. 2008) (concluding that sweeping annual cost report certifications did not require “perfect compliance as an absolute condition to receiving Medicare payments for services rendered”). The Chesbrough decision follows that pattern by carefully parsing relators’ allegations of “fraudulent scheme[s]” and “misrepresentation[s]” and assessing whether the underlying condition that is the object of the false certification is in fact a prerequisite for payment. By applying this requirement, courts are able to weed out false certification claims―at the motion to dismiss stage of litigation―that arise out of certain regulatory requirements. In addition, the Sixth Circuit’s ruling that there was no FCA liability absent any statute or regulation conditioning the government’s payment on compliance with HIPAA is the first circuit court confirmation that compliance with HIPAA’s patient confidentiality provisions is not a condition of payment under the FCA.  

As for relators’ nondiagnostic testing allegations, the Sixth Circuit rejected them on more traditional grounds, finding that relators failed to identify any false claim that was actually submitted to the government. Applying United States ex rel. Bledsoe v. Community Health Sys., 501 F.3d 493, 510 (6th Cir. 2007), the court noted that simply pleading a scheme was insufficient; rather, the relator “must also identify a representative false claim that was actually submitted to the government.” Chesbrough, at *6. Recognizing that other courts have relaxed this requirement in cases where the facts pled supported a strong inference that a false claim was submitted, the court observed that the Sixth Circuit in Bledsoe declined to speculate “as to the contours or existence of any such exception to the general rule that an allegation of an actual false claim is a necessary element of a FCA violation.” Id. at *7 (quoting Bledsoe, 501 F.3d at 504 n.12). The court declined to relax Rule 9(b)’s requirements because the relators’ personal knowledge was limited to the scheme and did not extend to the defendant’s billing practices or contracts with the government. Chesbrough, at *8.