When Can Violation of a Condition of Participation Result in False Claims Act Liability? Update on Escobar’s Materiality Standard

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November 17, 2016

In June, I published a blog article on a decision of the United States Supreme Court that appeared to change the law applicable to “false certification” in the 7th Judicial Circuit Circuit.  The Supreme Court decision in Universal Health Services v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), (“Escobar”) opened the door to finding liability under the Federal False Claims Act for certain violations of the conditions of participation applicable to a provider under the Medicare program.  Before the Escobar decision, 7th Judicial Circuit Courts maintained that a violation of conditions of participation alone could not support a False Claims Act case.  Only a violation of separate “conditions of payment” could result in those penalties.  These cases are important because they define when the failure to meet a simple “conditions of participation” can lead to imposition of False Claims Act damages and a potential whistleblower suit.

The Escobar case rejected the distinction between conditions of payment and conditions of participation.  Instead, the Escobar Court found that the Government’s decision to expressly identify a provision as a condition of payment is relevant, but not automatically dispositive.  Instead, in the Court’s opinion “what matters is not the label that the Government attaches to a requirement, but whether the defendant knowingly violated a requirement that the defendant knows is material to the Government’s payment decision.”  The Court replaced the “bright line” distinction between conditions of payment and conditions of participation with a less certain “materiality” requirement.  The Escobar Court stated that the “materiality” standard is “rigorous” and “demanding” and requires some indication that the government would not have paid the claim had it known of the deficiency.  Providers were given very little further guidance on how to apply the new “materiality” standard.

Since Escobar was decided, various Federal courts have issued decisions interpreting the “materiality” requirement.  Previous law in the 7th Judicial Circuit Court was based on United States v. Sanford–Brown, Ltd., which was decided shortly before the Escobar case.  Sanford-Brown created a strict distinction between conditions of payment and conditions of participation; finding that only a breach of a condition of payment could lead to imposition of a penalty under a false implied certification theory.  After the Escobar case was decided, the U.S. Supreme Court remanded Sanford-Brown back to the 7th Judicial Circuit Court for further consideration consistent with the Escobar holding.

When the 7th Judicial Circuit Court considered the case again, it found that no proof had been presented to indicate that the government’s decision to pay the applicable claim would have been any different if the applicable condition had been met.  The Court rather strictly applied the Escobar materiality standard and found that it is not enough to only show that the government would have been entitled to decline payment.  Apparently, the Court considered it important that providing accurate information was not likely to have changed the government’s payment decision.  United States v. Sanford-Brown , No. 14-2506, 2016 WL 6205746 (7th Cir. Oct. 24, 2016).

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