AMARILLO, TX – A recent Supreme Court case about the False Claims Act continues to make waves. The False Claims Act “FCA” creates liability for anyone who, among other things, “knowingly presents … a false or fraudulent claim” to the government for payment. Designed to curb rampant fraud and price gouging during the reconstruction era following the Civil War, the FCA created a right of private action under which whistleblowers, or what are sometimes called “relators,” may sue companies for defrauding the government.
FCA penalties can be steep. Each fraudulent claim can result in a separate monetary penalty along with treble damages. Because a large portion of medical claims in the U.S. are paid by the federal government, the dangers posed by FCA litigation to DME suppliers and other providers loom large, and key developments in FCA adjudication merit scrutiny.
In the recently decided landmark case, Schutte v. SuperValu, the Supreme Court turned its attention to the FCA’s “knowledge” element. The idea is intuitively simple. When we accuse someone of lying, we typically mean that the person has said something that he/she knows to be false. That “knowing” is what lawyers sometimes call scienter—the culpable state of mind. To show that a person or company has violated the FCA, one has to show that the false claim was made knowingly.
A casual reader of news reports about SuperValu could initially regard the decision as a good development for businesses. Much of the press coverage blandly reports that the Court held that FCA liability depends on a defendant’s subjective belief rather than what a reasonable person might have believed. On its face, this looks like replacing a comparatively clear standard with a murky one.
If anything, the reverse is true. The decision has removed a powerful defense against FCA liability. But of course, the “devil is in the details.” In SuperValu, the relators accused the retail pharmacy operations of SuperValu and Safeway of defrauding the government by systematically misrepresenting their “usual and customary” price for medication on claims submitted to Medicare and Medicaid for payment. CMS uses the reported “usual and customary” price as a basis for reimbursing the claim. (See 42 CFR § 447.512(b).)
This is where things get tricky. The phrase “usual and customary” is susceptible to different possible interpretations. The phrase is intended to capture the price at which the drug is offered at retail. But that does not solve the ambiguity. It is sometimes used to indicate the “sticker” price of a drug. The problem is that almost nobody pays the sticker price. Pharmacies offer discounts, group memberships, price-matching, and a number of ways around paying the sticker price.
Discovery in the case showed that Safeway and SuperValu were not exceptions to that rule. For example, while Safeway was reporting to CMS that its “usual and customary” price for a 90-day supply of a popular generic drug was as much as $108, records showed that 94% of its cash sales for that drug charged only $10. More than 80% of SuperValu’s cash sales were for less than its reported “usual and customary” prices for the same medicine.
Before reaching the Supreme Court, two lower Courts had granted summary judgment to Safeway and SuperValu. The District Court agreed that the pharmacies understood “usual and customary” to mean the actual prices charged to cash customers, including discounts, and that the prices they reported to Medicare were materially false based on the pharmacies’ own understanding. But paradoxically, the Court also ruled that there was no FCA liability, because the “knowledge” element of the FCA was not met.
Why? The District Court accepted the defense that “usual and customary” is an ambiguous legal term, and that, even if the defendants believed they were misrepresenting their usual and customary prices, the defendants could only be said to “know” their claims were false if no reasonable person would accept the interpretation of “usual and customary” provided in their claims.
The Seventh Circuit affirmed, applying a two-step test from Safeco Ins. Co. of America v. Burr. The Safeco test starts by asking whether the “defendant’s acts were consistent with any objectively reasonable interpretation of the relevant law that had not been ruled out by definitive legal authority or guidance.”
Part of this has to do with the basic “notice” requirement of legal liability. It is unfair to hold companies liable for actions against which they are not specifically warned. The issue the Supreme Court took up, however, was the bigger puzzle. If the defendants demonstrably did not believe that the “usual and customary” prices they were reporting reflected their actual “usual and customary” prices—that is, if they were lying—could they still escape liability, because a different possible (“objectively reasonable”) interpretation of “usual and customary” was available?
The Supreme Court roundly rejected this possibility. In a rare unanimous opinion without any concurrence, Justice Thomas delivered a lesson on the origins of the FCA in the common law conceptions of fraud. According to Justice Thomas, what is important in cases of fraud is the actual belief of the accused at the time the putative deception is undertaken: “The FCA’s scienter element refers to respondents’ knowledge and subjective beliefs—not to what an objectively reasonable person may have known or believed.”
This interpretation tracks the different kinds of knowledge that create liability under the FCA. The FCA invokes three slightly different standards—”actual knowledge” of the facts being misrepresented, “deliberate ignorance” of the facts, and “reckless disregard” of the facts. A person can knowingly lie in each of these ways. The contractor that claims to have delivered five pallets knowing it only delivered three lies with actual knowledge. The contractor that has reason to believe it only delivered three pallets but claims to have delivered five lies through deliberate ignorance by not checking. Closer to home, the DME supplier that submits a Medicare claim without first investigating which facts are necessary to substantiate it is recklessly disregarding the truth of its claim.
Every new Supreme Court opinion gives lawyers fresh opportunities to try out novel arguments. A recent defense brief (“Brief”) filed in the ongoing case of Miller v. Reckitt Benckiser (Case No 1:15-cv-00017) argued that the SuperValu decision created a new three-part test and pleading standard for “reckless disregard.” (See “Corrected Brief on The Impact of The SuperValu Decision And in Further Support of Defendants’ Motion to Dismiss Relator’s Fifth Amended Complaint,” filed June 23, 2023, in the U.S District Court for the Western District of Virginia.)
The relevant paragraph from the Brief reads as follows:
The Supreme Court clarified that the FCA’s “reckless disregard” standard “captures defendants who are [1] conscious of a [2] substantial and [3] unjustifiable risk that their claims are false, but submit them anyway.” The Fifth Amended Complaint fails under this three-part test, as it does not allege that [the defendant] consciously disregarded a substantial risk of noncompliance, let alone that it did so without justification.
(See Brief at 10-11; quoting from SuperValu.)
The suggestion that SuperValu created a new three-part test to establish reckless disregard under the FCA, and that this test would need to be incorporated into a complaint to survive dismissal, was sufficiently novel to generate a Statement of Interest from the Department of Justice (“Statement”). Unsurprisingly, the DOJ rejected the interpretation.
Explaining that the SuperValu decision involved a general review of the roots of the FCA in common law fraud, the DOJ responded:
By summarizing each of the three elements in the FCA definition of “knowledge” — actual knowledge, deliberate ignorance, and reckless disregard — the Court clearly did not intend to place new limitations on them. Indeed, the Court’s citation to existing FCA case law, restatements, and legal dictionaries reflects that the Court was simply drawing from and reaffirming existing standards for proving knowledge, and not establishing new and restrictive criteria. The Court thus left existing FCA precedent on this point intact.
The Statement goes on to clarify that the Court’s discussion of reckless disregard was effectively what lawyers call dicta—the portions of judicial opinions that attempt to explain relevant legal notions but that do not create new rules, because they do not directly address the question before the court. The SuperValu decision did not expand on the required elements of reckless disregard. Instead, the court used settled notions of reckless disregard to illustrate its underlying contention that a defendant’s own subjective understanding, rather than another possible interpretation of the defendant’s statement that a rational person might accept, is the essential feature of the kind of deception targeted by the FCA.
The use of terms like “objective” and “subjective” is bound to introduce the kind of confusion that defense attorneys can exploit. The DOJ went on to explain that under existing case law, the standard for reckless disregard under the FCA already “includes an objective component.”
This is because recklessness, like gross negligence, implies the awareness that a rational person would be assumed to possess. So just as drivers know better than to park their cars in the middle of the road because of the risk of an accident; so providers are assumed to understand the basic conditions for Medicare repayment sufficiently to check that those conditions are fulfilled prior to submitting a claim. In such cases, ignorance of the conditions is less a defense than an admission of liability. The Brief in effect attempted to insinuate a new “conscious,” subjective belief element in the recklessness standard that would stand reckless disregard on its head.
The fact that the DOJ is scrutinizing a case brief at the District Court level is significant, and likely signals increased scrutiny of these FCA cases in the wake of SuperValu. Although SuperValu treated a very narrow question, it might have major repercussions on FCA adjudication. Defendants have effectively been barred from pointing to possible reasonable interpretations of their claims to avoid liability.
SuperValu will instead focus attention on where it arguably should have remained in the first place: The possible mismatch between what the defendants claim when they bill the government, and what they actually believe. In proving facts about defendants’ subjective beliefs, relators will have the usual evidence unearthed in discovery. But in pointing directly to those objective measures of belief—words and conduct—and away from hypothetical “reasonable interpretations,” the Court has made it harder for providers to avoid liability under the FCA.
The DOJ has given us all notice that it is paying close attention to these developments. DME suppliers probably should, too.
Blinn E. Combs, Esq., is an attorney with the Health Care Group at Brown & Fortunato, a law firm with a national health care practice based in Texas. He represents pharmacies, infusion companies, HME companies, manufacturers and other health care providers throughout the United States. Combs can be reached at (806) 345-6355 or [email protected].
Jeffrey S. Baird, Esq., is chairman of the Health Care Group at Brown & Fortunato, a law firm with a national health care practice based in Texas. He represents pharmacies, infusion companies, HME companies, manufacturers, and other health care providers throughout the United States. Baird is Board Certified in Health Law by the Texas Board of Legal Specialization and can be reached at (806) 345-6320 or [email protected].
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