A confusing or ambiguous statute is no longer a defense when actors know they are submitting false claims for payment to the federal government.
In the consolidated qui tam cases of United States ex rel. Schutte v. SuperValu Inc. and United States ex rel. Proctor v. Safeway Inc., the Supreme Court held last Thursday that the False Claims Act’s knowledge element is based on defendant’s subjective belief when submitting claims.
The cases involved two pharmacies that allegedly violated the FCA by submitting claims to federal programs for covered drugs. The claims reported prescription-drug prices exceeding the pharmacies’ “usual and customary” charges to the public. This increased the reimbursement amounts received from Medicare and Medicaid, which use a formula that considers a pharmacy’s “usual and customary” charge to the public as a cap on reimbursement amounts.
The whistleblowers alleged that the “usual and customary” charges reported by the pharmacies did not account for discount drug programs frequently offered to customers. They also offered evidence that the pharmacies knew they should have factored in the discount programs but submitted their claims anyway and sought to shield the discounts from regulators.
The pharmacies argued that their subjective knowledge was irrelevant, and that it was objectively reasonable to interpret “usual and customary” as referring only to their non-discounted cash prices.
The Seventh Circuit affirmed the district court’s summary-judgment ruling in favor of the pharmacies, endorsing the “objectively reasonable” standard adopted by other circuits and finding no FCA liability where a defendant’s offered interpretation is objectively reasonable and no authoritative guidance instructs otherwise.
As it turns out, the objective standard was the wrong one. The Supreme Court vacated the Seventh Circuit’s decision, finding the FCA’s “knowledge” element refers to a defendant’s “knowledge and subjective beliefs—not to what an objectively reasonable person may have known or believed.” Though the Court acknowledged the “facial ambiguity” of the “usual and customary” requirement, it declined to consider post hoc “legal interpretations that [defendants] did not believe or have reason to believe” when submitting the false claims. “It is enough if [defendants] believed that their claims were not accurate” because “what matters for an FCA case is whether the defendant knew the claim was false.”
Thus, knowledge under the FCA may be established by showing that the actor either (1) had actual knowledge that submitted claims were false or (2) knew of the substantial risk that submitted claims were false yet avoided learning the truth. The decision also affects enforcement of the Stark Law and Anti-Kickback Statute, two complicated statutory and regulatory schemes which often serve as the basis for FCA liability.
Determining intent for FCA liability will now require a highly fact-intensive inquiry into an organization’s subjective beliefs when submitting claims. All health care providers and other entities subject to FCA liability should closely monitor their internal communications regarding regulatory requirements going forward and ensure a uniform approach at all levels. Organizations should also strongly consider creating contemporaneous records regarding their interpretation of any ambiguous rules and regulations, which could be used to show a good-faith subjective belief.
Please contact Nichols Brar Weitzner & Thomas with any questions regarding how you can minimize your organization’s FCA liability when faced with these complex regulations.