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Triple Canopy and Evolving Standards of Materiality Under the Civil False Claims Act (FCA)

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By Joan H. Krause

[Cross-posted from L3: Long Leaf Law Blog]

In Universal Health Services v. United States ex rel. Escobar (UHS), the Supreme Court upheld the Civil False Claims Act (FCA) theory of “implied certification,” under which the submission of a claim for reimbursement “implies” that the claimant is in compliance with the statutes, regulations, and contract provisions necessary for that claim to be paid. Escobar was filed by the parents of a young woman who died after receiving Medicaid-covered mental health treatment from a Massachusetts clinic that violated state licensing and supervision regulations. Her parents alleged that the clinic’s claims were fraudulent because they implicitly (and falsely) represented that the facility was in compliance with the relevant provisions. A district court dismissed the suit, but the First Circuit reversed. In a unanimous opinion written by Justice Thomas, the Supreme Court held that where a defendant “makes specific representations about the goods or services provided, but knowingly fails to disclose . . . noncompliance with a statutory, regulatory, or contractual requirement[,] . . . liability may attach if the omission renders those representations misleading.”  But cautioning that such misrepresentations must be “material to the Government’s payment decision,” the Court reversed and remanded because the First Circuit had applied an impermissibly broad test.

Escobar was not the only federal appellate case to grapple with implied certification in recent years. In 2015, the year the First Circuit considered Escobar, no fewer than four federal appellate cases confronted the theory. Arguably the most important of these cases, at least from the standpoint of national security, was United States ex rel. Badr v. Triple Canopy, Inc., a Fourth Circuit case reversing the dismissal of a suit alleging that a military contractor had falsified marksmanship scores for Ugandan security guards hired to protect Al Asad Airbase in Iraq. Noting that the contract did not expressly condition payment on marksmanship, the district court had concluded that the claims did not contain any factually false statements. The Fourth Circuit disagreed, upholding the allegations under the theory of implied certification. Perhaps due to the tragic facts and sympathetic plaintiffs, or perhaps in recognition of the important role Medicare and Medicaid FCA cases now occupy, the Court instead chose to review Escobar rather than Triple Canopy. Nevertheless, in light of Escobar, Triple Canopy was reversed and remanded for further proceedings. On May 16, 2017, the Fourth Circuit issued its long-awaited decision on remand.

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Implied Certification and Materiality Under the Civil False Claims Act

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By Joan H. Krause

[Cross-posted from Hamilton and Griffin On Rights]

On June 17, the Supreme Court unanimously decided Universal Health Services v. United States ex rel. Escobar (UHS), holding that FCA cases may be predicated on “implied certifications” of compliance as long as the defendant knowingly violates a requirement it knows is material to the government’s payment determination. Because the First Circuit applied an incorrectly broad interpretation of materiality, however, the Justices nonetheless vacated the appellate judgment and remanded. While both parties quickly claimed victory, in reality the decision is likely to satisfy no one and to raise as many questions as it answers.

The case was filed by the parents of a young woman who died after receiving Medicaid-covered mental health treatment from a Massachusetts clinic that failed to satisfy state licensing and supervision regulations. Her parents alleged that the clinic’s MassHealth claims were fraudulent because, by filing for payment, the clinic had implicitly represented that it was in compliance with all relevant state requirements. A district court dismissed the suit but the First Circuit reversed, taking a very broad view of the scope of implied certification. On appeal, UHS asked the Court to reject the implied certification theory, arguing that a failure to disclose noncompliance should not be considered fraudulent in the absence of an affirmative duty to disclose. Respondents, supported by the United States as amicus curiae, countered that a defendant who knowingly bills the government for services without disclosing a failure to meet material conditions has submitted a false claim. While few observers expected the Court to entirely abolish implied certification, at oral argument the Justices appeared deeply divided as to the scope of the theory and the source of any limiting principle.

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Implied Certification and the Problem of Interpretation Under the False Claims Act

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By Joan H. Krause

[Cross-posted from Hamilton and Griffin On Rights]

In a recent post, I explained the contours of the False Claims Act (FCA) implied certification theory of falsity, the subject of the recent Supreme Court argument in Universal Health Services v. United States(UHS). In this post, I will address an issue largely overlooked by most commentators: the potential for differing interpretations of what is required by the underlying Medicare and Medicaid provisions that form the basis for the certification.

Recent years have seen an expansion of FCA cases from “factually false” misrepresentations to those involving “legally false” claims, where items or services were provided but the claimant also violated an underlying legal requirement. For example, UHS involves an allegation that the defendant clinic violated the FCA because, by submitting a claim for payment under MassHealth, it implicitly certified that it was in compliance with all relevant Massachusetts regulations – including the staffing and supervision requirements it later was found to have violated.

Courts have taken two broad approaches to defining the universe of regulatory provisions with which certification will be implied. Some courts, notably the Second Circuit in Mikes v. Straus, 274 F.3d 687 (2d Cir. 2001), limit the theory to violations of statutes or regulations clearly identified as conditions of payment. Other courts, such as the First Circuit in UHS, instead ask whether the claimant “knowingly represented compliance with a material precondition of payment,” which need not be “expressly designated.” The tests may sound similar, but differ both theoretically and functionally. First, defining implied certification by reference to “materiality” is curious in light of the fact that, since 2009, materiality has been an express – and distinct – element of the FCA false records provision in 31 US.C. § 3729(a)(1)(B). Yet implied certification cases such as UHS usually arise under the false claims provision in § 3729(a)(1)(A), which Congress did not amend to require materiality.

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Implied Certification and the Quest for Fraud that “Counts” Under the False Claims Act

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By Joan H. Krause

[Cross-posted from Hamilton and Griffin on Rights]

Sometimes, we lie when we speak; other times, we lie when we don’t. Striking the right balance is the essence of the Universal Health Services (UHS) case recently argued before the Supreme Court, which challenged the applicability of the False Claims Act (FCA) to situations in which a claimant falsely “implies” compliance with underlying regulatory requirements.

UHS was brought by the parents of a young woman who died after receiving Medicaid-covered (MassHealth) mental health treatment from a clinic that did not satisfy state licensing and supervision regulations. The parents alleged that the claims for payment were fraudulent because they implicitly represented that the clinic was in full compliance with relevant state requirements. The district court dismissed the suit, finding that the staffing and supervision regulations were not “conditions of payment” whose violation would render subsequent claims false under the FCA. The First Circuit reversed, focusing instead on whether UHS had “knowingly represented compliance with a material precondition of payment.” Noting that preconditions need not be “expressly designated,” the court identified a set of regulations that, read together, appeared to limit MassHealth payment to properly supervised care. While such a fact-intensive dispute might at first appear an unlikely candidate for certiorari, UHS was one of several such “implied certification” opinions issued by the federal appellate courts in 2015. Perhaps because of its emotionally compelling facts – the other cases involved, inter alia, the recruitment practices of a for-profit college and a military contractor that falsified marksmanship scores – UHS was chosen as the vehicle to resolve a growing circuit split. Read More

The Amarin Settlement: Watershed or Sinkhole?

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By Joan H. Krause

The latest development in the simmering war over off-label drug promotion came on March 8, when Amarin Pharma reached a proposed settlement with the FDA that would allow the company to market its cardiovascular drug, Vascepa, for certain unapproved uses.  While the settlement must be approved by the district court, it already has fueled speculation about ever-broader challenges to off-label restrictions.  The unique set of facts at issue in Amarin, however, likely will limit the ability of other pharmaceutical companies to follow suit, at least in the short term.

Amarin sued the FDA in May 2015, relying on the Second Circuit’s 2012 opinion in United States v. Caronia, which held that the Food, Drug and Cosmetic Act did not prohibit a pharmaceutical sales representative’s truthful statements about off-label use of his company’s drug, Xyrem.  Procedurally, the Amarin dispute was unusual.  Vascepa was approved in 2011 for the treatment of patients with very high triglyceride levels.  Before the approval, Amarin entered into a special protocol assessment (SPA) with the FDA under which Vascepa would be studied (the ANCHOR study) in patients with slightly lower triglyceride levels, with the expectation of additional approval if the drug met study benchmarks.  In 2013, Amarin filed for such approval.

Subsequent to the SPA, however, studies of other cardiovascular products suggested that reducing triglyceride levels in high-risk patients did not lead to real clinical benefits for patients in terms of reducing events such as heart attack and stroke.  An FDA Advisory Committee found “substantial uncertainty” as to whether Vascepa would reduce such real-life risks, and the agency rescinded the SPA.  While acknowledging that the drug had met the ANCHOR study goals, the agency refused to approve the new indication until a second study confirmed Vascepa was able to reduce major cardiac events in such patients.  The FDA refused to allow Amarin to add the ANCHOR study results to Vascepa’s label, and warned that the drug might be misbranded if marketed for the new use.

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Some Thoughts from a Health Lawyer on King v. Burwell

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By Joan H. Krause

[Cross-posted from Hamilton and Griffin on Rights]

The long-awaited and much-debated opinion in King v. Burwell is here. In an opinion written by Chief Justice Roberts – who almost single-handedly saved the ACA with his 2012 opinion in N.F.I.B. v. Sebelius – and newly joined by N.F.I.B. dissenter Justice Kennedy as well as the more liberal Justices, the Court agreed with the Fourth Circuit that the ACA’s tax credits (or “subsidies”) are available to individuals who purchase insurance through both State and Federal health insurance Exchanges. The Petitioners, four Virginia residents who did not wish to purchase health insurance, had argued that Virginia’s Federally-run Exchange did not constitute “an Exchange established by the State” under the ACA tax credit provision; because unsubsidized coverage would cost more than 8% of the Petitioners’ incomes, they would be exempt from the Act’s individual mandate and would not be required to purchase health insurance. While acknowledging that the Petitioners’ arguments regarding the “plain meaning” of the phrase were strong, the majority nonetheless sided with the Government, holding that the context and structure of the overall statute led to the conclusion that the statute permitted tax credits for insurance purchased on “any Exchange created under the Act,” whether State or Federal (slip op. at 21). Justice Scalia penned a scathing yet witty dissent (“We should start calling this law SCOTUScare,” slip op., Scalia, J. dissenting, at 21), arguing that the plain meaning of the language made clear that tax credits were available only on State exchanges, and that any flaws in the Act’s design should be left to Congress to fix.

Despite the attention it received, King was something of a stealth ACA case. Lacking the Constitutional controversies of N.F.I.B., it was in many ways a run-of-the mill statutory interpretation case focusing on four words in a massive document containing, in the words of the Chief Justice, “more than a few examples of inartful drafting” (slip op. at 14).   And yet the potential effects of the decision were perhaps even more far-reaching, in large part because of the timing. N.F.I.B.’s Commerce Clause analysis may have more precedential value in the long-run, but far fewer of the Act’s provisions had gone into effect in June of 2012. With approximately 7 million individuals now receiving insurance through the Federal Exchange, and the majority of them (an estimated 87%) receiving subsidies, the decision in King could have led to the devastating loss of insurance for millions of Americans.

While commentators will no doubt parse every sentence of the opinion (including the Court’s refusal to defer to the IRS’s interpretation of the statute under Chevron), as a health lawyer I found two aspects of the opinion notable. First, the Chief Justice drafted a very nuanced (and mercifully succinct) description of the health insurance market flaws the ACA was designed to address. The Chief Justice understood the ACA’s “three key reforms” – guaranteed issue and community rating of insurance policies, the individual mandate, and tax credits – as well as the ways in which the three were “closely intertwined” (slip op. at 3-4). The first few pages cite multiple horror stories from states where some, but not all, of these reforms were enacted; for data, the opinion cites liberally to the Brief for Bipartisan Economic Scholars as Amici.   In its depth (not to mention brevity), the analysis is completely different from the tortured description of health insurance found just a few years ago in N.F.I.B., evincing a far more sophisticated understanding of both the legal issues and the legislation itself.

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The Right to Try Meets the Reality of Drug Approval

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By Joan H. Krause

[Cross-posted at HealthLawProf Blog]

Whether it be a social media campaign to convince a company to provide an experimental anti-viral drug to a young cancer patient suffering from a life-threatening infection or the debate over appropriate treatment for high-profile Ebola cases, access to potentially life-saving but unapproved medications remains a controversial issue. Two recent articles, published on the same day, illustrate the difficulty of trying to balance desperate patients’ willingness to try unproven therapies with the very real concerns faced by manufacturers undergoing the drug approval process. The first was a Kaiser Health News article describing the passage of “Right to Try” laws in five states. The second was a brief note in the Los Angeles Business Journal that shares of CytRx Corporation, a biopharmaceutical R&D company, had fallen 9% after the company announced that the FDA had placed a partial clinical hold on its clinical trials after a patient’s death.

Right to Try laws are designed to give patients who have exhausted all other treatment options the right to access investigational medications, devices, and biological products that have met Phase I safety milestones. Right to Try legislation has been enacted in Colorado, Louisiana, Michigan and Missouri, and voters recently approved it by initiative in Arizona. The laws are based on model legislation drafted by the Goldwater Institute, which issued a detailed report on the issue in February 2014. While prohibiting states from blocking patient access to such medications, however, the model legislation does not require manufacturers to provide the products, nor does it require insurance companies to cover the costs. Read More

Introducing Joan H. Krause

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We are pleased to introduce our newest contributor, Joan H. Krause, to Bill of Health.

Joan Krause PhotoProfessor Joan H. Krause is Associate Dean for Faculty Development and Dan K. Moore Distinguished Professor of Law at the University of North Carolina School of Law; professor (secondary appointment) in the Department of Social Medicine, UNC School of Medicine; and adjunct professor of health policy and management in the UNC School of Public Health. She previously served as George Butler Research Professor of Law and Co-Director of the Health Law & Policy Institute at the University of Houston Law Center, where she joined the faculty in 2001. From 1997-2001, Professor Krause was a member of the health law faculty at Loyola University Chicago School of Law. Before attending law school, Professor Krause worked as a medical writer/editor in the pharmaceutical industry. After law school, she served as a law clerk for the Honorable Dorothy W. Nelson of the United States Court of Appeals for the 9th Circuit. Following her clerkship, Professor Krause was an associate in the Health Practice Group of Hogan & Hartson in Washington, D.C., where her work focused on regulatory and administrative health care matters with an emphasis on health care fraud and abuse. She teaches a variety of health law courses, as well as Criminal Law for first-year students. Her research interests include Health Law, Criminal Law, and Women and the Law. Her co-authored book, HEALTH LAW AND BIOETHICS: CASES IN CONTEXT, was published in 2009.

Professor Krause received her B.A. with Honors in Political Science from Yale University, where she graduated summa cum laude. She received her J.D. with distinction from Stanford Law School, where she was elected to the Order of the Coif and served as Senior Articles Editor of the Stanford Law and Policy Review, as well as a Writer and Copy Editor for the Stanford Law Journal.

Representative Publications:  Read More