Under the federal False Claims Act (FCA), a healthcare provider can face severe consequences for submitting a false claim for reimbursement to government programs such as Medicare and Medicaid. There are two essential elements of an FCA violation: (1) the falsity of the claim and (2) the defendant’s knowledge of the claim’s falsity. The second element—whether the provider acted “knowingly”—is a central issue in most FCA cases and often turns on the specific facts of a case. The FCA defines “knowingly” as acting with actual knowledge, deliberate ignorance or reckless disregard.
Until recently, it was unclear whether the standard for determining knowledge was objective or subjective. Defendants in FCA cases often argue that their conduct was consistent with what an objectively reasonable person may have known or believed, and a growing body of courts have been applying the objective standard.
Recently, the U.S. Supreme Court rejected the objective standard. In U.S. ex rel. Schutte v. SuperValu Inc., the Supreme Court held that it is sufficient for the government to prove that the healthcare provider or entity knew or suspected the submission of the claim was false, even if an objectively reasonable person may not have known or believed otherwise.
In the SuperValu case, the government alleged that two pharmacies, SuperValu and Safeway, violated the FCA by overcharging Medicare, Medicaid and the FEHBP for prescription drugs. Under those programs, pharmacies cannot collect more from the government than the “usual and customary” price for a drug, which is defined as the cash price charged to the general public. The pharmacies allegedly overbilled the government when they began offering discounted prices to customers under a price-match program designed to compete with other pharmacies and a membership discount program, but they did not adjust their “usual and customary” price calculation and continued to charge the government the higher prices.
The trial court found that the discounted prices were the “usual and customary” prices, therefore the claims submitted to the Medicare and Medicaid programs at the higher price were false claims. However, the trial court ruled in favor of the pharmacies on the knowledge element and found that there was no FCA violation. Despite evidence that the pharmacies subjectively knew or suspected that the usual and customary prices were the discounted prices, both the trial court and the Seventh Circuit Court of Appeals concluded that because the pharmacies’ conduct was consistent with an objectively reasonable interpretation of “usual and customary,” there was no violation of the FCA.
The Supreme Court rejected the application of the objectively reasonable person standard and reversed the lower court decisions. The Court concluded that “[w]hat matters for an FCA case is whether the defendant knew the claim was false. Thus, if [the defendants] correctly interpreted the relevant phrase and believed their claim was false,” then the defendant acted knowingly for purposes of the FCA. The Court explained further that the pharmacies’ submission of the false claims “might have been a forgivable mistake if [they] had honestly read the phrase as referring to retail prices, not discounted prices,” but the lower courts were wrong to look at whether “other people might make an honest mistake,” rather than whether the pharmacies had made a mistake.
From this decision, there are several key take aways for healthcare providers and organizations:
· Going forward, the knowledge element in FCA cases will focus on the defendant’s subjective knowledge and belief. Defendants can no longer rely on the “objectively reasonable person” defense.
· The focus on subjective knowledge and belief will necessarily result in, and require discovery of, the healthcare provider’s or entity’s internal communications regarding the defendant’s knowledge and interpretation of regulatory requirements. Healthcare providers and entities should operate their business under an assumption that internal communications may be required to be produced under a future audit or investigation.
· Despite the ruling in the SuperValu case, healthcare providers and entities should not deliberately ignore regulatory guidance and requirements to avoid having the subjective knowledge and belief that a claim is false. In addition to having actual knowledge, the knowledge element can be established if the provider recklessly or intentionally avoids taking steps to confirm that submitting a claim is appropriate.
· Healthcare providers and entities that submit claims to government programs such as Medicare and Medicaid should review their policies and procedures for submitting claims. They should consider how to best document the factual and legal basis for submitting claims.
· Healthcare providers and entities who are subjected to an FCA investigation or enforcement action should consult with competent legal counsel who can advise regarding the best strategy for engaging with the government.
 Notably, the first element is a threshold determination of whether a claim was false and does not consider the defendant’s knowledge or intent. Only if it is determined that the claim was false will the court proceed to consider the second element – whether the defendant had the requisite “knowledge” that they were submitting a false claim.
Andrew Alder is a shareholder and skilled litigator who focuses his practice in healthcare law, representing medical providers in medical malpractice lawsuits, licensure board disciplinary matters, billing audits and investigations and Section 1983 civil rights actions. He also handles litigation in other areas, including employment law and products liability. To contact Andrew call 208.562.4900 or send an email to firstname.lastname@example.org.