SCOTUS to Decide Monumental Question Affecting Providers’ FCA Liability
It’s not just billions of dollars on the line, but the very future of whistleblower lawsuits and FCA enforcement.
On April 18, the US Supreme Court was set to hear oral arguments in a federal False Claims Act (FCA) case of pivotal importance: United States v. SuperValu Inc. v. Safeway Inc. It’s not just billions of dollars on the line, but the very future of whistleblower lawsuits and FCA enforcement. The stakes are so high that the American Hospital Association (AHA) and America’s Health Insurance Plans (AHIP) have set aside their historical differences to oppose the federal government’s argument in the case to head off what they contend would be a “Wild West of [legal] ramifications” that would force their members “to spend more on litigation and less on patient care.”1 Here’s a briefing on the case and its potential significance to labs and other healthcare providers.
The FCA & the “Knowingly” Controversy
The FCA remains the federal government’s primary and most potent civil healthcare fraud enforcement tool. (See the related story about 2022 FCA recoveries.)2 Conviction for FCA violations can lead to a host of penalties, including treble damages (i.e., three times the damages that the government sustains) along with exclusion from federal healthcare programs.
DOJ Increases FCA Penalties
The U.S. Department of Justice (DOJ) recently announced inflationary increases to civil monetary penalties under the FCA, the second such adjustment in less than one year. The adjustments are based on the Bureau of Labor Statistics’ Consumer Price Index for October 2022, and the applicable inflation factor for the adjustment is 1.07745.
The minimum FCA penalty increased from $12,537 to $13,508 per claim, while the maximum penalty increased from $25,076 to $27,018 per claim, based on that inflation factor adjustment of 1.07745. The newest increase comes right after the minimum penalty went from $11,803 to $12,537 at the end of 2022, based on a 1.06222 inflation factor.
Program Fraud Civil Remedies Act violations that involve a false claim or false statement have also increased to $13,508 from $12,537. Fines relating to the Federal Property and Administrative Services Act and involve a violation related to surplus government property increased to $6,891 from $6,396, while fines for violations involving kickbacks under the Anti-Kickback Act increased from $25,076 to $27,018.3
Adding to its impact is that the FCA empowers private individuals to file qui tam whistleblower lawsuits on the government’s behalf and collect a share of the proceeds the government recovers if the case is successful.
The FCA makes it illegal for a person to “knowingly” present, or cause to be presented, a false or fraudulent claim for payment or approval. The Supreme Court case—technically, combined appeals of two Seventh Circuit cases, United States ex rel. Schutte v. SuperValu Inc. and United States ex rel. Proctor v. Safeway Inc—addresses the longstanding controversy over what it means to submit false claims “knowingly.”4,5 Specifically, what does it mean to know that a claim for payment is false or fraudulent?
Reasonable Mistake Is a Defense: The Safeco Case
The issue is particularly significant when the rules governing payment of the claim submitted to the federal government are intricate and confusing. Labs and other providers charged with FCA violations may seek to avoid liability for any violations they might have committed by arguing that they didn’t understand the rules and thus didn’t act “knowingly.”
Federal courts are currently divided on whether this argument constitutes a valid defense. The FCA defines “knowingly” as “actual knowledge,” “deliberate ignorance,” or “reckless disregard.” Historically, misunderstanding a confusing federal coverage or billing regulation has been interpreted as falling into the “reckless disregard” category of “knowingly.” However, in a 2007 case called Safeco Insurance Co. of Am. v. Burr, the Supreme Court ruled that misinterpretation may be a defense to the “knowingly” requirement provided that:
- The defendant’s interpretation was objectively reasonable
- “Authoritative guidance” didn’t warn the defendant away from its interpretation
The court found that the defendant’s interpretation was reasonable and that there was no case law nor guidance from the agency enforcing the law, the US Federal Trade Commission, that “might have warned it away from the view it took.”6
Does the Safeco Rule Apply to Healthcare?
Safeco was an interpretation of the Fair Credit Reporting Act (FCRA), rather than the FCA, and the scienter standard, that is, the guilty mind a defendant must possess when committing an act banned by the FCRA is “willful” rather than “knowingly.” However, the same “reckless disregard” phrase contained in the FCA definition of “knowingly” also appears in the FCRA definition of “willful.” This seems to suggest that the logic of Safeco applies to FCA claims. In fact, six different federal circuit courts—the Seventh, D.C., Third, Fourth, Fifth, and Eighth Circuits—have ruled that the Safeco defense does constitute a defense against “knowingly” submitting false claims under the FCA.
One of those rulings, the SuperValu case, is part of the combined Seventh Circuit appeals that the Supreme Court will rule on. The case began when a pair of pharmacists filed a whistleblower lawsuit accusing the SuperValu grocery chain of knowingly submitting false claims. At issue were Medicare Part D regulations limiting drug reimbursement to a pharmacy’s “usual and customary” (U&C) costs. The whistleblowers claimed that SuperValu listed its pharmacies’ retail cash prices charged to uninsured cash customers as its U&C price, rather than lower, price-matched amounts charged to qualifying customers under its discount program.
The lower court agreed that the Medicare Part D regulations required SuperValu to report its lower, price-matched prices because that’s what the definition of U&C price in the regulations required. However, it tossed some of the whistleblowers’ claims for failing to prove that SuperValu submitted the false claims “knowingly.” The Seventh Circuit upheld the lower court’s ruling and reliance on Safeco, concluding that the defendant pharmacies’ interpretation of the Part D regulations was reasonable and didn’t go against any authoritative guidance from the government. Indeed, the Centers for Medicare & Medicaid Services (CMS) didn’t issue any guidance explaining the requirement, nor were there any circuit court rulings on the issue.
Less than a year later, in April 2022, the Seventh Circuit reached the same conclusion in a similar case called United States ex rel. Proctor v. Safeway, Inc. Proctor is the second of the combined Seventh Circuit appeals before the Supreme Court.
Meanwhile, other circuit courts have relied on Safeco to dismiss FCA claims. For example, last September, the Fourth Circuit upheld dismissal of a case against drug manufacturer Forest Laboratories, LLC, holding that a defendant doesn’t act “knowingly” when it applies an objectively reasonable interpretation to ambiguous laws for which there’s no clear administrative or legal guidance [United States ex rel. Sheldon v. Allergan].7
What’s at Stake
Before Safeco, misunderstanding regulatory requirements was no defense against “knowingly” submitting false claims to Medicare and other federal health programs. But Safeco and its progeny have created a cushion. In the larger context, the question of whether those who submit claims to the federal government have a degree of FCA-related leeway in interpreting complex regulations for which there’s no authoritative guidance has enormous practical implications for labs and other healthcare providers. Medicare coverage and billing rules are what a court once described as “the most completely impenetrable texts within human experience” [Rehab. Ass’n of Va., Inc. v. Kozlowski].8 Moreover, there’s often little authoritative government guidance and case law that providers can rely on in interpreting the rules. Consequently, holding providers accountable for reasonable interpretations that prove wrong would vastly expand their FCA liability risks and make providers an easier target for government enforcers and whistleblowers.
That’s why the Supreme Court’s January decision to rule on the combined Seventh Circuit appeals is so important. It’s also why the case has forced historic enemies—the AHA and AHIP—into a most unusual alliance. On March 28, the organizations jointly filed an amici curiae (Latin for friends of the court) brief calling on the court to uphold the Seventh Circuit cases applying the Safeco defense to the FCA.9
Congress Mulls FCA Changes
Big FCA changes may be afoot in not only the US Supreme Court but also Congress. Earlier this year, influential Republican senator Chuck Grassley announced his plans to reintroduce a bipartisan bill to amend the FCA in response to Universal Health Servs., Inc. v. United States ex rel. Escobar, a landmark 2016 Supreme Court ruling on the “materiality” requirement of the law.11,12,13 Explanation: The FCA bans knowingly presenting, or causing to be presented, a false or fraudulent claim to the government for payment or approval or knowingly making, using, or causing to be made or used, a false record or statement material to a false or fraudulent claim (emphasis added). Escobar sets out the factors for courts to consider in deciding whether a false statement or omission was material to the government’s decision to pay an allegedly false claim, including:
• Whether the government expressly identified compliance with a specific statutory, regulatory, or contractual requirement as a condition of payment
• Whether the government generally refuses to pay claims that fail to meet the specific statutory, regulatory, or contractual requirement
• Whether the government has continued to pay claims despite actual knowledge of noncompliance with the requirement
• Whether the alleged noncompliance is considered minor or insignificant, or if it goes to the “very essence of the bargain”
Grassley’s reintroduced bill, the Administrative False Claims Act, was passed unanimously by the Senate on April 3.14 If it passes in the House of Representatives, the bill would tweak the Escobar test by clarifying that the decision of the government “to forego a refund or pay a claim despite actual knowledge of fraud or falsity shall not be considered dispositive [to the question of materiality] if other reasons exist” for the government’s refund or payment decision. The upshot would be to make it easier for the government and whistleblowers to prove materiality.
The FCA reform bill would also clarify the standard for courts to use in deciding whether to grant the government’s motion to dismiss what it deems to be a meritless qui tam case over the whistleblower’s objections, as well as specify that FCA whistleblower protections cover both current and former employees.15
“No amount of compliance efforts could independently resolve ambiguity or safeguard a hospital or health insurance provider from adopting a reasonable interpretation of an unclear legal obligation,” the brief states. “Accordingly, by merely participating in Medicare and Medicaid, [providers] are exposed to substantial FCA risk in the event that a court, CMS, or the U.S. Department of Justice later construes an ambiguous regulatory obligation in a manner contrary to their otherwise reasonable construction.”
Doing away with the Safeco defense would threaten the legitimate business activities of and create tremendous and unnecessary legal costs, distractions, and burdens for “every government contractor, hospital, healthcare provider, health insurance provider, and grant recipient in the nation” that participates in Medicare and other federal health programs, the brief adds.
AHA and AHIP have powerful allies, including the American Medical Association, Pharmaceutical Research and Manufacturers of America, the U.S. Chamber of Commerce, defense contractors, and business lobbies. However, an equally powerful array of groups, including the DOJ, US Solicitor General, the National Whistleblower Center, and Senator Chuck Grassley (R-IA) have lined up to support overturning the Seventh Circuit rulings, claiming they take the teeth out of FCA enforcement.
What the Safeco detractors find particularly troublesome is that the “reasonable” standard is objective, rather than subjective. Result: It doesn’t matter whether the provider that submits the false claim actually believes that its misinterpretation of the regulatory requirement is or may be wrong, as long as it can show that it’s one that a reasonable third party would have made. In her own amicus brief, the US Solicitor General argues that upholding the Seventh Circuit rulings “would allow defendants who intentionally submit false claims for payment to the government to escape FCA liability based on concededly incorrect post hoc justifications.”10
Whatever the outcome of the Seventh Circuit appeals, labs will have to be very careful when submitting claims to Medicare for tests without a full understanding of the coverage and billing regulations involved.
If the Supreme Court upholds the Seventh Circuit rulings, the fact that the regulations are intricate, ambiguous, complicated, or confusing won’t be enough. To make out a “knowingly” defense in FCA cases, labs will also have to satisfy the “authoritative guidance” prong of the Safeco test. Although no court has yet offered an official definition, it’s clear that in interpreting regulatory requirements, labs and other providers must look not only at the regulations themselves but also guidance from CMS, OIG, and other government agencies, as well as court rulings on and above the circuit court level.
If the Supreme Court overturns the Seventh Circuit rulings, the Safeco defense won’t be available and labs will be liable if their interpretation of the Medicare rules is wrong, regardless of how reasonable it is.
Either way, labs struggling to understand billing and coverage requirements would be well advised to proactively seek guidance from CMS or their Medicare Administrative Contractor. This may enable the lab to get the information it needs to resolve the question and ensure compliance with the regulatory requirements. It’s crucial to document the questions you ask, and the answers and advice you receive, to justify reliance on the information. Even if CMS or the MAC doesn’t furnish a clear answer or respond at all, documenting your efforts to reach out and seek guidance can help you show that you acted reasonably, which may help you build a Safeco defense should the Supreme Court uphold the Seventh Circuit appeals.
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