Molina Healthcare and Implied False Certification
A qui tam relator accused Illinois medical services provider Molina Healthcare of defrauding the state’s Medicaid program in violation of the FCA.[ii] Molina had contracted to provide multiple tiers of medical service based upon scaled capitation rates. The plan carrying the highest rate involved skilled nursing services that Molina subcontracted to a third party, GenMed. But after a dispute caused GenMed to terminate, Molina continued to collect money for the services it did not inform the state it had ceased providing.[iii] The district court in Molina agreed that provision of skilled nursing services was material to the state’s payment of the highest-level rates, but dismissed at the pleading stage on the grounds that the relators had insufficiently pled Molina’s knowledge of that materiality.[iv] The Seventh Circuit, over a strong dissent, reversed the district court’s dismissal, allowing the suit to go forward after emphasizing that Molina was a sophisticated player in the healthcare market.
Explaining that Escobar had “decline[d] to distill one unified approach” for liability, the court held the relator had adequately pled its case even under heightened fraud-pleading standards.[v] As to the requirement that the alleged fraud be material to the government’s payment, it was enough, the court said, that the complaint plausibly alleged Molina to be “a sophisticated player in the medical-services industry” who would have therefore known the state deemed skilled nursing services an integral part of willingness to enroll patients at the highest-tier rates.[vi] Though the court recognized that, under Escobar, the fact that the state continued to pay even after discovering non-provision of these services was strong evidence against materiality, it found that non-dispositive at the motion to dismiss stage given the contract itself was powerful evidence of the provision’s materiality.[vii] Notably, the court stated that “[m]any things could explain the government’s continued contracting with Molina.[viii]
Judge Sykes’s dissent accused the majority of disregarding both Escobar and the Seventh Circuit’s own precedent: “The majority moves our circuit law in a different direction, establishing a new rule that a mere request for payment from the government, coupled with material noncompliance with a contractual condition, is a cognizable FCA violation subject to the full panoply of remedies authorized by the Act, including qui tam suits and treble damages.” Judge Sykes would have affirmed dismissal of the complaint for failure to state a claim, reasoning that because skilled nursing was just one among many services offered within the highest-tier rate, more than the majority’s inference from Molina’s status as a repeat Medicaid-services player was required to meet the standard for pleading materiality.[ix]
Supervalu and Scienter
In Supervalu, the Seventh Circuit handed down an opinion that is more defendant-friendly.[x] Here the issue was a different aspect of the FCA’s knowledge requirements. Two relators sued the Supervalu chain of pharmacies, alleging it had submitted fraudulent claims to Medicare and Medicaid, whose regulations require pharmacies to bill at the “usual and customary price” charged to other consumers.[xi] The problem was that Supervalu had adopted a price-matching program to counter competition from Wal-Mart: upon customer request, Supervalu’s regional stores would match a lower price on generic drugs offered by another pharmacy in the same area. But Supervalu kept billing Medicare and Medicaid at its full retail prices, which it continued to represent as “usual and customary” despite its competitive discounting policy.[xii] The question was whether what Supervalu claimed to be a mere misinterpretation of the regulations could go to the jury as evidence of the knowing presentation of false claims. The district court said no, and the Seventh Circuit agreed.
The Seventh Circuit joined the four other circuits that have applied the Supreme Court’s analysis of the Fair Credit Reporting Act’s “willfullness” standard to resolve this issue. In Safeco Insurance Company of America v. Burr,[xiii] the Supreme Court, according to the Seventh Circuit, “articulated an objective scienter standard … framed in terms of the [] floor for that standard—reckless disregard,” which was also the “baseline scienter definition” encompassed by the term “knowingly” used in the FCA.[xiv] This means that despite the tripartite definition of knowledge in the FCA (actual knowledge, deliberate ignorance, or reckless disregard of truth or falsity)[xv] , failure to establish at least the Safeco recklessness standard “as a threshold matter precludes liability under any of these definitions.[xvi]
Safeco established that misinterpretation of a statute or regulation is not reckless where “(1) the interpretation was objectively reasonable and (2) no authoritative guidance cautioned defendants against it.[xvii] On the first part of this standard, the Seventh Circuit found it reasonable in the circumstances to interpret “usual and customary” as authorizing use of the default retail price despite discount policies.[xviii] On the authoritative guidance prong, the court noted that the circuits were split as to whether Center for Medicaid and Medicare Services manuals qualified as “authoritative,” but held it did not need to decide the question as it found the relevant manual’s guidance insufficiently “specific to the defendant’s incorrect interpretation” in any case, where the manual did not “canvass the issue” or address the program specifically used by the defendant and thus did not put the defendant on notice that the program fell within the definition in the regulations.[xix]
Judge Hamilton’s spirited dissent accused the majority of weakening the FCA by “creat[ing] a safe harbor for deliberate or reckless fraudsters whose lawyers can concoct a post hoc legal rationale that can pass a laugh test.[xx] He would have left both the question of Supervalu’s knowledge and the reasonableness of its interpretation for the jury to decide. And instead of grafting Safeco onto the FCA, he would have looked to the Restatement of Torts’ standard for scienter in a fraud case, which “makes subjective bad faith central.[xxi] The majority for its part insisted that contrary to the dissent’s doomsaying, the Safeco standard would “not shield bad faith defendants that turn a blind eye to guidance indicating that their practices are likely wrong.[xxii]
Looking Ahead
Though the Supreme Court in Escobar warned that the materiality standard in the FCA must be regarded as stringent, it ultimately chose a “holistic"[xxiii] over a formalistic test for materiality, leaving the lower federal courts room to fine-tune their own approaches and tailor decisions to the particularities of cases. But as shown in the two near-contemporaneous Seventh Circuit decisions canvassed above, courts are not automatically applying a stringent materiality standard. Molina suggests that on the “materiality” element the Government and relators may be able to survive Rule 12 or even summary judgment simply with evidence that the defendant was a seasoned and sophisticated operative in the relevant area of federal procurement—which will commonly be the case. Supervalu, by contrast, gives companies leeway to avoid FCA liability despite misinterpreting their statutory or regulatory responsibilities as long as there is no clear and official guidance contrary to their mistaken interpretation.
The Grassley Amendments
Early this month Senator Grassley proposed amending the FCA. He sought to include his proposal in the Infrastructure Amendment and Jobs Act.[xxiv] Most notably, the Grassley amendments would establish new procedures for litigating the materiality standard such that the Government or a relator could establish materiality by a “preponderance of evidence” but a defendant could only rebut materiality through “clear and convincing evidence” while at the same time making it harder for defendants to secure the discovery from government agencies that is often necessary to make that rebuttal proof. Since Senate Democrats rejected all amendments to the Infrastructure legislation, the Grassley amendments were not debated on the floor nor have they been heard in Committee. Nevertheless, the Grassley amendment evinces an intent on the part of some legislators to tip the scales on the issue of materiality, and bolster the ability of the Government and relators to proceed with FCA cases. It could be revived through any number of legislative vehicles in the coming months.
References
i. Universal Health Servs., Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989, 2003 (2016).
ii. United States ex rel. Prose v. Molina Healthcare of Illinois, Inc., No. 20-2243, 2021 WL 3671433 (7th Cir. Aug. 19, 2021).
iii. See id. at *3.
iv. See United States ex rel. Prose v. Molina Healthcare of Illinois, Inc., No. 17-CV-6638, 2020 WL 3050342, at *7 (N.D. Ill. June 8, 2020).
v. 2021 WL 3671433, at *4, *6. Federal Rule of Civil Procedure 9(b), which applies to the FCA, directs that while “[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake[, m]alice, intent, knowledge, and other conditions of a person's mind may be alleged generally.” The relator had pled three different theories of fraud: (1) factual falsity (by not telling the government new enrollees would not be provided skilled nursing services); (2) fraud in the inducement (by affirmatively misrepresenting continued provision of skilled nursing services during renegotiation); and (3) implied false certification (by failing to disclose noncompliance with contractual responsibilities during renegotiation).
vi. 2021 WL 3671433, at *1, *8.
vii. Id. at *7.
viii. Id.
ix. See id. at **13-15.
x. United States v. Supervalu Inc., No. 20-2241, 2021 WL 3560894 (7th Cir. Aug. 12, 2021).
xi. Id. at *1.
xii. Id. at *3.
xiii. 551 U.S. 47 (2007). For previous applications of Safeco to the FCA, see United States ex rel. Streck v. Allergan, 746 F. App’x 101, 106 (3d Cir. 2018); United States ex rel. McGrath v. Microsemi Corp., 690 F. App’x 551, 552 (9th Cir. 2017); United States ex rel. Donegan v. Anesthesia Assocs. of Kan. City, PC, 833 F.3d 874, 879–80 (8th Cir. 2016); United States ex rel. Purcell v. MWI Corp., 807 F.3d 281, 284 (D.C. Cir. 2015).
xiv. Supervalu, 2021 WL 3560894, at *6.
xv. See 31 U.S.C. § 3729(b)(1).
xvi. Supervalu, 2021 WL 3560894, at *1.
xvii. Id. at *5, **8-9.
xviii. See id. at *9 (“‘Usual and customary’ might mean the price that is ‘charged’ most frequently for a drug, but it could also indicate the retail rather than discount price. ‘General public’ may mean that discount prices qualify only if applied to all consumers or, alternatively, if they constitute the price most frequently charged to consumers. But it just as easily might encompass any discount program offered to the public, regardless of whether all consumers take advantage of it.”).
xix. Id.at *11.
xx. Id. at *13.
xxi. Id. at **16-17 (citing Restatement (Second) of Torts § 526 (1977)).
xxii. Supervalu, 2021 WL 3560894, at *8.
xxiii. A “holistic” test “with no one factor [] necessarily dispositive” was the First Circuit’s gloss on its new mandate in the remanded case. United States ex rel. Escobar v. Universal Health Servs., Inc., 842 F.3d 103, 109 (1st Cir. 2016).
xxiv. See 117 Cong. Rec. at S5776 (Aug. 3, 2021), available online here. Senator Grassley also proposed the same changes in the standalone “False Claims Act Amendment of 2021,” introduced on July 22, 2021, as S.2428, but no action on the bill has occurred yet.
