Last month, the Tenth Circuit upheld a grant of summary judgment in U.S. ex rel. Janssen v. Lawrence Memorial Hospital, 2020 WL 594508 (10th Cir. Feb. 7, 2020), applying the  “rigorous” and “demanding” standard of materiality for False Claims Act (“FCA”) cases established by the Supreme Court in Escobar.  In Janssen, the relator alleged that Lawrence Memorial Hospital (“LMH”) violated the FCA by (i) falsifying patient arrival times to maximize its Medicare reimbursement and (ii) falsely certifying compliance with Deficit Reduction Act (“DRA”) training requirements.  In a case of first impression on whether quality metrics reported to the Centers for Medicare and Medicaid Services (“CMS”) under certain programs can lead to FCA liability, the Tenth Circuit focused on the government’s “likely reaction” to the falsehoods, and found that the alleged non-compliance did not satisfy Escobar’s materiality standard.

Patient Arrival Times

The relator alleged that LMH intentionally falsified data that it reported under CMS’s Inpatient Quality Reporting (“IQR”), Outpatient Quality Reporting (“OQR”) and Hospital Value Based Purchasing (“HVBP”) programs to obtain higher Medicare reimbursement.  The IQR and OQR programs reward hospitals that report certain inpatient and outpatient quality measures with a market basket index increase, and penalize hospitals that do not report the data with a market basket index reduction.  The HVBP program adjusts payments to hospitals based on their overall performance score on certain quality metrics, including certain IQR measures.  Some of these measures incorporate patient arrival times (e.g., a patient receiving primary surgical intervention within 90 minutes of arrival).  The relator alleged that LMH falsified patient arrival times to maximize its quality scores under the IQR, OQR, and HVBP programs, which would affect its Medicare reimbursement. It did so, according to the relator and witness statements, by manipulating the arrival time to match the time the patient received an EKG.  While the Tenth Circuit agreed that a “reasonable inference” from the evidence was that LMH falsified some patient arrival times and reported inaccuracies to CMS, it determined that these falsehoods were not material under Escobar using a three-part analysis.

First, the court found that the government’s prior conduct in the case weighed in favor of immateriality.  The relator reported the inaccurate quality data reporting to a CMS fraud hotline in 2013, which triggered an investigation by a CMS contractor, NCI AdvanceMed (“NCI”).  In 2014, NCI closed its investigation, stating that “CMS [was] aware of the quality issue.”  The court noted that to date, CMS has not taken any action against LMH and has continued to pay Medicare claims despite knowing of the alleged falsifications.  The court found that CMS’ “inaction in the face of detailed allegations from a former employee suggests immateriality.”

The court continued its materiality analysis by looking at whether the alleged misconduct was “minor or insubstantial” or went “to the essence of the bargain” with the government.  The court noted that the alleged misconduct was limited and “affected only a subset of a subset” of the IQR and OQR data, and had “uncertain effects on a factor of a factor” of LMH’s performance score under the HVBP program.  While the court agreed that accurate reporting was arguably required, the court found that the minimal nature of the inaccuracies in LMH’s reported data did not go to the “essence of the bargain” between the hospital and CMS, and were therefore immaterial.  Importantly, the court noted that CMS’ existing regulatory regime establishes administrative procedures to address noncompliance with requirements of the IQR and OQR programs, and that substituting FCA liability would improperly render the FCA “a tool for policing minor regulatory compliance issues, contrary to the Court’s directive in Escobar.”

Finally, the court considered the relator’s argument that the government requires accurate reporting as a condition of payment under the IQR, OQR, and HVBP programs.  The court found that the statutory and regulatory provisions related to the programs were generic, and even if they did require accurate reporting as an express condition of payment, that alone is insufficient to establish materiality under Escobar.

DRA Compliance

The relator separately argued that LMH falsely certified its compliance with certain DRA training requirements.  The DRA requires entities receiving $5 million or more in annual Medicaid payments to educate employees on the FCA, specifying that any employee handbooks contain a specific discussion of the FCA and other laws.  The relator alleged that LMH’s employee handbooks lacked a detailed discussion of the FCA, and that LMH falsely signed Attestations of Compliance with the DRA.  The Tenth Circuit found this noncompliance to be immaterial as well, and that failure to have specific language in an employee handbook is “precisely the type of garden-variety compliance issue[] that the demanding materiality standards of the FCA are meant to forestall.”

Key Takeaways

The Janssen case provides a helpful framework for challenging FCA allegations using Escobar’s “rigorous” and “demanding” materiality standard, particularly highlighting the importance of the government’s knowledge of the non-compliant behavior and whether that non-compliance goes to the “essence of the bargain” with the government.  The Janssen case demonstrates that under the complex and technical regulatory environment that governs the Medicare and Medicaid programs, “not every regulatory foot-fault” will give rise to FCA liability.