The Supreme Court is supposed to take appellate cases to make the law clearer. Last week’s opinion on healthcare fraud had the opposite effect. Instead of spelling out exactly when a misrepresentation in healthcare billing counts as a legal violation, the court said that sometimes it is and sometimes it isn’t. The result introduces new uncertainty in the law instead of greater clarity.
The case name is a mouthful: Universal Health Services Inc. v. U.S. ex rel. Escobar. But the three parts of the name all matter. Universal Health Services, the defendant, owned a clinic that delivered mental health services in Massachusetts. The only problem was that many of its employees weren’t licensed or trained to provide the services.
Escobar is the name of the family whose daughter, Yarushka, tragically died after receiving substandard care from the unqualified providers.
The United States appears in the case because, under the False Claims Act, the Escobars are permitted to bring a civil suit against the healthcare provider for lying to the federal government when it submitted bills. Such a suit, known by the Latin tag “qui tam,” is one brought by a civilian acting as a private attorney general on behalf of the U.S.
The legal question before the Supreme Court was whether in order to win, the Escobars had to do any more than prove the healthcare provider had submitted bills for services that it had delivered while violating regulations. The justices sent the case back to the lower court to reconsider based on the new confusing guidelines.
The case matters because the whole healthcare industry has a stake in the outcome. All healthcare is closely regulated by state and federal rules. If it amounted to a false claim every time one of those rules was broken and a bill was submitted, it would expose the industry to extensive liability.
In an opinion for the unanimous court, Justice Clarence Thomas broke the issue into two parts. The first issue was whether a provider could be said to have committed fraud just by submitting a bill, which ordinarily does not contain any statements or representations to the effect that all regulations have been followed.
Thomas resolved this issue simply, holding that it didn’t matter that an ordinary bill doesn’t contain an express statement that all rules have been followed. At common law, he explained, a deliberately partial statement can count as a fraudulent misstatement. He cited a classic 1931 decision written by then-Judge Benjamin Cardozo when he served on the New York Court of Appeals.
In that case, Junius Construction v. Cohen, Cardozo consider the case of a seller who disclosed that two new roads might be built near a property he was selling, but neglected to mention a third road that might run through the property, cutting it in half. One of the most influential common-law judges in U.S. history, Cardozo said that the seller had misrepresented the facts: by mentioning two possible roads, he implied that there wasn’t a third in contemplation.
Applying Cardozo’s principle to healthcare bills, Thomas concluded that stating that services had been provided could amount to a misrepresentation if those services were provided in violation of regulations.
That left the second, more complicated issue: was the provider’s misrepresentation “material”? According to the Supreme Court, the False Claims Act requires that the lie you tell the government in your invoice be “material” to the government’s decision to pay you.
The Department of Justice argued to the Supreme Court that any violation of the rules should count as material, for a simple reason. The government has the authority to refuse payment to a provider if any of the rules have been violated. Thus, any information about failure to follow the rules could affect the government’s decision to pay — and would therefore count as material.
Thomas refused to adopt this standard, which would make providers liable for any and all billing mistakes. But instead of providing a substitute definition for what would be considered material, he entered into an analysis of what materiality is not.
“A misrepresentation,” he wrote, “cannot be deemed material merely because the Government designates compliance with [a rule] … as a condition of payment.” In other words, even if the government says it won’t pay unless a given rule has been followed, that doesn’t make noncompliance material grounds for liability.
It also isn’t enough, Thomas said, when the government has the legal option of not paying if a rule isn’t followed.
Finally, he said, materiality “cannot be found where noncompliance is minor or insubstantial.” That implies the provider’s noncompliance would have to be substantial and more than minor. But he did not say exactly what those terms mean.
If this wasn’t confusing enough, Thomas summed up by saying that the government’s determination that following a given rule is a condition of payment should be “relevant, but not automatically dispositive” as to materiality.
Thomas tried to give a little bit of guidance to lower courts. In practice, he said, evidence of materiality could include the fact that the government usually won’t pay a certain kind of claim if a given rule hasn’t been followed; and if the government routinely pays claims regardless of violation of a certain rule, then that would also count as evidence in the other direction.
The thrust of the opinion is clearly that lower courts should try to figure out what kinds of rule breaking the government usually ignores when it comes to making payments, and what kinds of rule breaking are substantial enough to block payment.
But although this might seem sensible in theory, it will leave the lower courts with little or no guidance as to how they are supposed to make this determination. Is statistical evidence the answer? If so, how can it be gathered? And what if the government says that from now on, it intends to require compliance with all rules before making payments?
The result is that, when it comes to healthcare billing, the court has made the legal meaning of the False Claims Act murkier, not clearer. That isn’t the court’s purpose — at least not when it’s doing its job right.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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