Coffey Modica’s Joelle Duval shares valuable insights in the May issue of Healthcare Risk Management about the U.S. Supreme Court’s June 2023 decision in United States ex rel. Schutte v. SuperValu Inc., which affected healthcare compliance.
May 2024, Vol. 46, No. 5; p. 49-60
A Supreme Court ruling is changing how a defendant’s knowledge of wrongdoing and intent to commit fraud is viewed in civil cases. The ruling has significant implications for healthcare cases in which the False Claims Act (FCA) is involved.
The decision in U.S. ex rel. Schutte v. SuperValu Inc. unanimously held that liability under the FCA depends on a defendant’s subjective belief regarding whether a claim was false. Before this landmark ruling, it was unclear whether the standard for determining knowledge in an FCA claim was objective or subjective.1
The Supreme Court held a defendant can be held liable for “knowingly” submitting a false claim by demonstrating that the defendant knew or suspected the submission was false, even if an objectively reasonable person would not have known the claim was false. The decision means the healthcare industry is now grappling with the FCA’s “scienter” test, says George B. Breen, JD, an attorney with Epstein Becker Green in Washington, DC. “Scienter” is a legal term involving a culpable state of mind or a defendant’s knowledge that an act or conduct is wrongful and commits the act, anyway.
In Schutte, private parties sued retail pharmacies, claiming violations of the FCA through alleged fraud on Medicare and Medicaid, Breen says. Those government programs provide prescription drug coverage to their beneficiaries and usually limit the reimbursement to the pharmacy’s “usual and customary” charge to the public. However, the respondent pharmacies reported their higher retail prices to Medicare and Medicaid — as opposed to the lower discounted prices they offered customers through programs such as price matching, Breen explains.
The U.S. District Court for the Central District of Illinois held that the pharmacies’ “usual and customary” prices were its discounted prices, as opposed to the higher retail prices, and concluded that the pharmacies submitted false claims on that basis, Breen says. The district court held pharmacies could not have acted “knowingly” under the statute.
Breen notes that the two essential elements of an FCA violation are the falsity of the claim and the defendant’s knowledge of the falsity or scienter. The U.S. Court of Appeals for the Seventh Circuit affirmed in August 2021, finding that “there is no statutory indication that Congress meant its usage of ‘knowingly,’ or the scienter definitions it encompasses, to bear a different meaning than its common law definition,” Breen explains. “The Supreme Court, however, held in Schutte that the FCA’s scienter element refers to the defendant’s knowledge and subjective beliefs — not to what an objectively reasonable person may have known or believed. While the FCA clearly imposes liability on those who purposely intend to defraud the government, other cases might involve, by way of example, doctors who honestly mistake what ‘customary’ means — or who might correctly understand ‘customary’ but submit inaccurate claims, anyway.”
Justice Clarence Thomas wrote for the Supreme Court as it vacated and remanded the case to the Seventh Circuit that, “What matters for an FCA case is whether the defendant knew the claim was false. Thus, if respondents correctly interpreted the relevant phrase and believed their claims were false, then they could have known their claims were false.”1
In Schutte, the qui tam petitioners presented evidence that the companies believed that their “usual and customary” prices were their discounted prices — and took steps to prevent regulators and contractors from finding out about those discounted prices, Breen explains. For example, a pharmacy might charge $10 for a drug under a pricematch program but report $108 to the government for reimbursement. This kind of evidence could eventually help establish the scienter requirement for an FCA violation on remand.
“Schutte is a disappointing decision for the defense bar, and one likely to impact the ability to secure dismissal at the early stages of litigation. Healthcare providers must understand that the obligation of a relator or the government to show scienter is not dead as a result of Schutte,” he explains. “Recklessness means defendants being ‘conscious of a substantial and unjustifiable risk that their claims are false but submit[ing] the claims anyway.’ The focus will be on how providers can demonstrate their understanding at the time of claims submission and show that they were not acting with reckless disregard.”
This also might mean more scrutiny of attorney guidance on those complex, significant regulatory issues upon which FCA claims are based and the real-time documentation of a defendant’s understanding at the time of claims submission, Breen says.
Smoking Gun Is Rare
In the context of litigation, it is somewhat unusual that a healthcare provider or healthcare organization that knowingly, ignorantly, or recklessly submits false claims will all face the same liability and consequences, says Joelle Duval, JD, an attorney with Coffey Modica in White Plains, NY.
The practitioner or organization that knowingly submits false and excessive claims for monetary gain, the practitioner/organization that deliberately ignores or turns a blind eye to illegal practices occurring within its billing practices, and the practitioner/organization that with reckless disregard continues using an accounting service that is known to file false and misleading bills to insurance companies will all be charged with having the requisite scienter, Duval says.
“In the law, the state of mind of the defendant is generally important in considering not only liability or culpability but also the appropriate level of punishment or damages,” she says. “But with scienter, this appears not to be the case.”
While a healthcare practitioner or organization will be held liable regardless of the intent, Duval contrasts that with three individuals charged with murder. One defendant killed with deliberate premeditation, garnering the highest available punishment. The second defendant remained a bystander, neither participating in nor taking steps to stop a killing by members of his group, perhaps out of fear, which may mitigate the level of punishment. A third defendant who took a life after running a red light due to reckless but wholly unintentional and out of character conduct may be further mitigated to a minimum or alternative punishment.
“The bottom line is that healthcare providers and healthcare organizations should strive to always bill patients, private insurance companies, and government insurance programs fairly and honestly and in a way that a provider can justify the amount being billed if asked to do so,” Duval says. “Period. End of story.”
The Department of Justice’s (DOJ’s) recent announcement of the latest FCA settlements suggests that healthcare organizations were waiting to see how the Supreme Court ruled, says Brett W. Johnson, JD, partner with Snell & Wilmer in Los Angeles.
“One of the reasons why the settlements were so high was that a lot of companies were waiting for that opinion to come down to determine which way they were going to go — settlement, or do we have grounds to argue it,” Johnson says. “They realized when the Supreme Court issued its opinion that it was going to be changing the standard that had been more recently applied.”
Discovery costs related to the FCA cases are so extreme that it is often cheaper and more expedient to resolve them with a settlement, Johnson notes. “These cases sometimes take two to four years to process, and then all of a sudden you saw this pretty big spike in settlements. The ruling is a significant win for the whistleblower community because it allows for them to have more discovery, and that forced folks into settlement for the healthcare industry,” he says. “They also always have to worry about their licensure, and with that kind of threat hanging out over their heads, there is always more willingness in the healthcare world to settle.”
Knowing Right and Wrong
The Schutte decision hinged on whether the defendant knew it was wrong. That can be a complex question for healthcare organizations, says Jonathan A. Porter, JD, partner with Husch Blackwell in Washington, DC.
“When it comes to companies, there is all sorts of evidence that you can find that suggests someone should have known something. It gets really, really complicated, and then the problem with knowledge is it’s very rarely going to be one of those issues where there is a clear answer,” Porter says. “There are always going to be shades of gray when it comes to knowledge, especially when you live in what someone should have known, which by definition is part of the knowledge inquiry under the False Claims Act. It’s reckless disregard as well as actual knowledge.”
That type of fact inquiry can be difficult for a court to figure out on summary judgment, so these cases can end up going to trial. “That’s where healthcare providers are in pretty bad spot,” Porter says. “Even if they are confident they did no wrong, they can end up settling because the False Claims Act has some astronomical penalties for going to trial.”
The FCA implications of Schutte are important, but Patric Hooper, JD, partner with Hooper, Lundy & Bookman in Los Angeles, points out that the underlying case also holds compliance lessons. The moral of the story is that if you are a compliance officer or risk manager and find out that the company is submitting claims that it knows are false — in this case, because the price charged to the government was higher than the usual and customary charge — the submissions must be stopped immediately, Hooper says. If false claims have been submitted, the company must immediately disclose that fact to the government to head off an FCA investigation prompted by a whistleblower.
“That would be a rare smoking gun in one of these cases where someone finds some internal document or some employee says, ‘Yeah, we looked at this issue and realized we were charging higher than the usual and customary charge, but we did it anyway,” Hooper says. “Not only could that be potential liability under the False Claims Act, but that could be a criminal act.”
The Schutte decision can be seen as a good result for healthcare organizations, says Sean B. O’Connell, JD, an attorney with Baker Donelson in Washington, DC.
“The big takeaway of the case is that willfulness and knowledge matter. What you intended matters when it comes to violating the False Claims Act — and that’s a win,” O’Connell says. “That’s absolutely a win for people in the industry, because it requires you to know that you’re doing something that was wrong or have a reckless disregard for whether it was wrong in order to violate the statute.”
That is a pretty big hurdle, O’Connell notes. It means that the FCA is no longer a negligence statute or a strict liability statute.
“This is a statute that requires some level of knowledge to violate it, and the burden of proof is going to be either the government or a relator that has to prove that,” O’Connell says. “It can’t just rely on, ‘Well, other people are doing it this way,’ or ‘They should have known that they were doing something wrong.’”
REFERENCE
- U.S. ex rel. Schutte v. SuperValu Inc. Decided June 1, 2023. https://www.supremecourt.gov/ opinions/22pdf/21-1326_6jfl.pdf