In Janssen, the relator alleged two fraudulent healthcare schemes perpetrated by the defendant, Lawrence Memorial Hospital (LMH). First, the relator alleged that LMH falsified patient arrival times in order to increase its Medicare reimbursements under certain pay-for-reporting and pay-for-performance programs where the government used the reported information to study and improve hospitals’ quality of care. Second, the relator alleged that LMH falsely certified compliance with the requirements of the Deficit Reduction Act, which requires, among other things, hospitals to educate their employees with detailed information regarding the False Claims Act. LMH allegedly falsely certified its compliance in order to receive Medicare reimbursements to which it was not entitled.
Focusing heavily on the Supreme Court’s Escobar decision, the Tenth Circuit affirmed summary judgment in favor of LMH, finding that the relator failed to show the alleged falsehoods were material to the government’s payment decision. One area of focus by the Tenth Circuit under its materiality analysis was the government’s inaction following knowledge of the claims alleged. In 2013, the government was informed of LMH’s alleged fraudulent conduct when the initial relator called the Centers for Medicare & Medicaid Services’ (CMS) hotline. A third-party investigative service for CMS began an investigation, which ended approximately one year later and noted that “CMS is aware of the quality issue.” CMS never took action with respect to LMH and continued paying LMH’s Medicare claims without asking LMH to adjust its reporting practices under the relevant programs. Because of this inaction—but despite the record being admittedly unclear whether CMS had “actual knowledge” of LMH’s infractions—the Tenth Circuit found that such “inaction in the face of detailed allegations from a former employee suggests immateriality.”
Another area of focus by the Tenth Circuit in its materiality analysis was the availability to the government of administrative procedures in the face of non-compliance by reporting hospitals. The Court found that because the administrative programs at issue had procedures designed to address noncompliance, substituting the FCA for every failure to achieve compliance with Medicare regulations would undermine the administrative program and render the FCA a general antifraud statute that Escobar rejected.
Finally, the Court found that LMH’s false certifications of compliance with the Deficit Reduction Act were immaterial, even though the certifications stated, among other things, that “as a condition for receiving payments” the signatory had “examined” LMH’s policies and procedures. The signatories of the certifications—the hospital’s CFO and COO—testified that they signed the certifications without reviewing any of the underlying educational materials distributed to LMH’s employees that were being certified as compliant with the requirements of the Deficit Reduction Act. In finding these false certifications immaterial, the Tenth Circuit again stated that the FCA should not be a tool to police everyday regulatory noncompliance, especially where “complex regulatory schemes are managed by specific agencies with extensive technical experience.” Notably, the Court stated that “not every regulatory foot-fault will enable Relators to avail themselves of the FCA’s potentially costly damages awards.”
This recent decision by the Tenth Circuit is another reminder that Escobar’s rigorous materiality standard is being strictly applied by district and appellate courts. Relators must focus on building a strong record to overcome arguments by defendants that their fraudulent conduct, although established, is simply immaterial.
