Last week, the Tenth Circuit, in a detailed analysis of the False Claims Act's materiality requirement, affirmed the grant of summary judgment to a hospital accused of misreporting patient arrival times and falsely certifying that its employee handbooks discussed the FCA. Putting Escobar to work, the court found no materiality despite evidence that could show the hospital knowingly reported false patient arrival times and signed certifications without basis. Key to the court's analysis was that the government had investigated relator's allegations and "has done nothing in response." United States ex rel. Janssen v. Lawrence Memorial Hospital, No. 19-3011, 2020 WL 594508, at *6 (10th Cir. Feb. 7, 2020).
The case concerned allegations that a hospital deliberately falsified patient arrival times so that it could receive enhanced payments from the Centers for Medicare and Medicaid Services (CMS). The allegations were backed by testimony and other evidence suggesting that some reports may have been falsified. The relator also asserted that the hospital's employee handbooks did not discuss the FCA, rendering false certifications of compliance with the Deficit Reduction Act (which required handbooks to contain such information).
The Tenth Circuit focused on the materiality of this alleged noncompliance, observing that "Escobar focuses the materiality inquiry on the likely reaction of the recipient." Janssen, 2020 WL 594508, at *6. It articulated three factors applicable to this "holistic" inquiry: (1) whether the government refuses to pay claims based on the noncompliance (or pays despite knowledge of the noncompliance); (2) whether the noncompliance goes to the "very essence of the bargain"; and (3) whether the government expressly identifies a regulatory provision as a payment condition. Id.
As to patient arrival times, the court noted that CMS investigated relator's claims after she called the CMS hotline, but neither stopped paying the hospital's claims nor asked it to change its reporting practices. Significantly, the court held that awareness of allegations of noncompliance—as opposed to knowledge of actual violations—could demonstrate immateriality. The court acknowledged the First Circuit's decision on remand in Escobar, which held that "awareness of allegations concerning noncompliance with regulations is different from knowledge of actual noncompliance," but found it distinguishable based on the procedural posture in which the materiality question was presented. Id. at *7 n.13 (quoting United States ex rel. Escobar v. Univ. Health Servs., Inc., 842 F.3d 103, 112 (1st Cir. 2016)). The Tenth Circuit reasoned that while "knowledge of allegations, . . . alone" might be insufficient to warrant dismissal under Rule 12(b)(6), it was evidence of immateriality on summary judgment where the undisputed facts showed continued payment by CMS and no request that the hospital change its reporting practices despite years of "ongoing litigation." Id.
The court also held that accurate reporting did not go to the essence of the bargain and that the government had not expressly conditioned payment on accurate reporting regarding the specific programs at issue. The court dispensed with the employee handbook claim more easily, terming it a "garden-variety compliance issue" of no real significance, as relator could not dispute that the hospital otherwise educated its employees about the FCA. Id. at *10.
This case is a good primer on a materiality-based defense beyond the motion to dismiss stage. This was the hospital's second summary judgment motion (the first having been denied because discovery was ongoing). It serves as a strong reminder that as a case progresses FCA defendants should continue to focus on putting plaintiffs to the test of demonstrating facts that alleged falsehoods matter to actual government payment decisions.
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