The Tenth Circuit recently affirmed the dismissal of a declined qui tam False Claims Act lawsuit filed against Lawrence Memorial Hospital (LMH) by a former LMH employee, reasoning that the materiality inquiry focuses on the likely reaction of the Government. In U.S. ex rel. Janssen v. Lawrence Memorial Hospital, 949 F.3d 533 (10th Cir. 2020), the relator alleged that over a period of years LMH engaged in two fraud schemes:

1. LMH falsified patient arrival times submitted to Medicare under certain programs that tied compensation to quality-of-care metrics; and,
2. LMH falsely certified compliance with a requirement under the Deficit Reduction Act that it educate employees with detailed information about the False Claims Act.

The U.S. District Court for the District of Kansas granted summary judgment for LMH, finding that the relator failed to establish the materiality of either alleged scheme under the standard in Universal Health Services, Inc. v. U.S. ex rel. Escobar, 136 S. Ct. 1989 (2016). The Tenth Circuit affirmed the district court’s ruling on appeal.

In framing the materiality analysis, the relator contended that under Escobar materiality may be established through either an objective or subjective showing. But the Tenth Circuit rejected that broad view, finding instead that “rather than directing courts to focus exclusively on a reasonable person—as they would under a purely objective analysis—or exclusively on the mindset of the misrepresenter—as they would under a purely subjective analysis—Escobar focuses the materiality inquiry on the likely reaction of the recipient.”

Applying that standard, the court considered the following factors in determining that the arrival-time scheme was not material, despite evidence showing that LMH knowingly falsified arrival times:

• Government’s Prior Conduct. The court found that the Government’s conduct weighed against a finding of materiality. Before filing her lawsuit, the relator had reported her allegations to a CMS hotline, which prompted a third-party investigator to investigate the allegations and make CMS aware of LMH’s quality issues. Yet, the court found, “to this day, CMS has done nothing in response and continues to pay LMH’s Medicare claims.” According to the court, CMS’s “inaction in the face of detailed allegations from a former employee suggests immateriality.”
• Essence of the Bargain. The court reasoned that “substituting FCA liability for every failure to achieve perfect compliance with Medicare regulations would not only undermine the Government’s administrative program, but would render the FCA a general antifraud statute and tool for policing minor regulatory compliance issues, contrary to the Court’s directive in Escobar.” The court thus considered not “simply whether [the relator] has shown some inaccuracies in LMH’s reporting,” but whether the relator has shown “sufficiently widespread deficiencies that they would likely affect the Government’s payment decision.” The court found the relator failed to make that showing because patient arrival times were only a small component of the quality of care data LMH reported, and further because only a subset of the arrival-time data had been falsified. The court also noted there was no sign of a cover up by LMH, which could have signaled materiality.
• Express Condition of Payment. The court found that generalized, boilerplate regulations stating that compliance is a condition of payment cannot establish materiality.

The Tenth Circuit similarly found that the allegedly false Deficit Reduction Act certifications were not material because they were “precisely the type of garden-variety compliance issues that the demanding materiality standards of the FCA are meant to forestall.”

For more coverage of the FCA’s materiality requirement, see parts one and two of our analysis of recent developments in materiality case law or contact a member of the Bass, Berry & Sims Healthcare Fraud Task Force.