In one of the most watched False Claims Act (FCA) cases in years, the Supreme Court unanimously ruled on June 1 that in determining intent under the statute, courts must consider the state of mind of the defendant at the time of filing a claim with the government, and not on some objective standard of reasonableness. This article will briefly outline the facts, arguments, and claims in these established cases and then focus on tips for those in the healthcare industry to navigate claims filing in the face of legal and regulatory ambiguity.
The two cases—United States ex rel. Schutte vs. SuperValu Inc. AND United States ex rel. Proctor v Safeway, Inc., The cases no. 21-1326 and 22-111, respectively, required retail pharmacies to report and charge the lower of two numbers, one of which was their “usual and customary” price to Medicare and state Medicaid agencies. Pharmacies routinely provided discounts to customers as part of a program to match competitors’ lower prices, and also to uninsured customers who paid in cash. The panelists argued that those discount prices made up the majority of pharmacies’ sales and therefore those discount prices were the “usual and customary” prices and not the significantly higher “official rate” that the pharmacies were charging Medicare and Medicaid. The pharmacies argued, and the Court did not dispute, that the meaning of “usual and customary” was ambiguous and subject to various interpretations. In the discovery, the panelists developed significant evidence to support their claims; the emails indicated that retail pharmacy executives instructed employees that while discounts were provided, it was the pharmacy’s policy not to provide discounts, in an effort to hide their discount prices from state and federal agencies. The district court, while holding that the discounted prices were indeed the “usual and customary” prices and, therefore, that the statements were false, ruled in favor of the defendants on the scienter element, holding that due to the ambiguity of ” usual and customary, Pharmacies could not have had the necessary knowledge of the forgery.The Seventh Circuit upheld the District Court’s grant of summary judgment to the defendants, holding that the Supreme Court’s opinion in Safeco Ins. Co. of America v. Burr551 US 47 (2007), provided that, if defendants had acted consistent with an objectively reasonable interpretation of an ambiguous law or regulation, they could not have “knowingly” made a false claim.
The Supreme Court granted the speakers’ certificate petition describing the question presented as “whether respondents could have the scientist required by the FCA if they correctly understood that standard and believed their claims were inaccurate.” In a unanimous opinion drafted by Judge Thomas, the Supreme Court struck down. Focusing on the threefold definition of “knowledge” as set out in the FCA, the Court noted that each pole – actual knowledge, reckless contempt and willful ignorance – focuses on what the defendant thought and believed at the time the claim was made . The Court then rejected each of the defendants’ main arguments that the ambiguity of the phrase “usual and customary”, without more, precluded the conclusion that the defendants had acted “knowingly” in making false complaints. Firstthe Court found that the defendants had not sought clarification of any ambiguities and, indeed, were aware that their claims were not supported by any reasonable interpretation and therefore sought to hide their higher prices from CMS and state agencies. Secondthe Court rejected the Seventh Circuit’s reading Safeconoting that he interpreted a different statute, the Fair Credit Reporting Act, with a “willedness” as opposed to a “knowledge” Mens rea standard. Furthermore, the Court observed that nothing in Safeco courts authorized to acquit defendants on the basis of facts or legal interpretations not known to defendants at the time the applications were filed. Third, the Court addressed the defensive argument that a claim based on a misinterpretation of an ambiguous law or regulation cannot be the basis of a false claim, since under common law a misrepresentation of the right could not be the basis of a claim for fraud. The Court rejected this position, noting that the statements here were not purely of law but rather a mixed statement of law and fact: not “usual and customary means X” but rather “these are our usual and customary prices”.
The Court, having rejected an objective Mens rea standard for the FCA, said such investigations would continue to be highly factual. Given this landscape, what can those in the healthcare industry do to protect themselves when filing claims with federal and state agencies under regulations that aren’t always 100% clear? The Court’s ruling, as well as the memoirs of the parties and friends, suggest several prudential passages:
- Ask for clarification. As the Court noted, not only did the defendants here fail to seek clarification on the meaning of “usual and customary” from the relevant state and federal agencies, but they also actively sought to conceal their selfish interpretation in support of their claims. Amici noted that often the government either does not respond to such requests for clarification or gives vague or contradictory answers that only aggravate the matter. But the lesson of the Court’s opinion is that a defendant acting in good faith would seek such clarification, even if such efforts are futile.
- Show your work. If possible, with each request, or through some separate communication channel, disclose to the government that your statements are based on a particular interpretation of an ambiguous law or regulation. In this way, the government can judge whether the request has been submitted correctly or not.
- Seek and rely on competent and knowledgeable legal advice. For an interpretation of an ambiguous law or regulation to be reasonable at the time claims are made, the interpretation should be based on the legal advice of a competent and knowledgeable lawyer, after disclosure of all relevant facts. While this may not translate into perfect legal defense advice, it could go a long way in establishing that such claims were made in accordance with that legal advice. To the extent that there is a concern about a material waiver in relation to the disclosure of such advice, the advice should be sought narrowly so that such waiver is limited.
- Document, document, document. Each of the above steps, and any others taken to establish good faith, must be carefully documented in a non-privileged manner in order to support good faith should there be any issues regarding the legitimacy of the claims. This also applies to obtaining legal advice to support an ambiguous legal position. In the Supreme Court, the defendants argued that adopting a subjective standard would require routine waivers of attorney-client privilege. But if that legal advice is sought in advance and in a way that can be disclosed in an off-the-shelf manner without a further waiver of the matter, it provides additional protection.
As noted in the introduction, while these cases were highly anticipated, the outcome shouldn’t really come as a surprise. And the suggestions above are simply prudent ways to reduce the risk that FCA’s liability could arise from filing claims in a legally ambiguous environment.
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