Universal Health Services v. U.S. ex rel. Escobar

Supreme Court Unanimously Supports Whistleblower under False Claims Act

In Universal Health Services v. United States, ex rel. Escobar, the Supreme Court upheld a whistleblower’s claim and affirmed the “implied certification theory” of liability under the False Claims Act (FCA).  This theory permits contractors to be liable for fraud when they fail to disclose material non-compliance with regulatory requirements.

Julio Escobar and Carmen Correa exposed the illicit conduct of the Universal Health Service (“UHS”) following the death of their teenage daughter, Yarushka Rivera. Rivera suffered from known behavioral issues and began visiting a counselor at Arbour Counseling Services (Arbour), a mental health service provider operated by UHS. Arbour is a member of the state Medicaid program ‘MassHealth’, and must therefore abide by the regulations specifically set out for medical facilities of this nature. Escobar and Correa became concerned that Rivera’s counselors were not following the rules of the facilities. Rivera began experiencing adverse effects of the prescribed medication which culminated in a fatal seizure. Escobar and Correa sued UHS under both state and federal False Claims Acts.

The instant case raised two questions: First, whether an implied certification test is valid in determining the purposes of the FCA. Second, whether the statute in question needs to explicitly state the conditions of payment.

The amicus brief submitted by the National Whistleblower Center (“NWC”) tackles the second question. In its brief, the NWC argues that the original drafters of the FCA do not require that express conditions to be stated in a contract to impose liability. The brief highlights that abiding by this notion goes against Congress’s intent. It further debunks the idea that the FCA is abused for self-interest purposes. The brief reminds us that the FCA has been immensely successful in protecting valuable whistleblowers in society and that without it, the government’s ability to recover money lost dishonest contractors would be severely hampered.

On June 16, 2016, justice for whistleblowers was served when the Supreme Court unanimously voted in favor of Escobar’s case. The Court rejected the claims of the US Chamber of Commerce who argued that the False Claims Act only prohibited fraud that was “expressly designated” as a “condition of payment.” Stephen M. Kohn, former Executive Director of the NWC, explains,

“The arguments raised by the healthcare industry were particularly troubling because they would have permitted low-income persons who obtain medical services through Medicaid to obtain inferior and even life-threatening treatment.” and further adds, “The Supreme Court got it right. The legal position taken by the Chamber of Commerce and the healthcare industry, in this case, was dumbfounding.”

However, as time has gone on, the Escobar case has also highlighted a loophole in the False Claims Act. In their decision, the Supreme Court provided a list of factors that courts could use when determining whether fraud under the FCA was material. One of these factors was government knowledge of the fraud. Regarding this factor, the Supreme Court wrote: “[I]f the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material.”

Effectively, this has allowed government contractors to escape liability for fraud by claiming that the government had acquiesced to the fraud and it is therefore not material. Even more concerning, NWC board chair Stephen Kohn states in a National Law Review article that lower federal courts have greatly expanded upon the government knowledge factor that the Supreme Court described in Escobar.

He writes, “Specifically, even though the Supreme Court only discussed “actual knowledge” of the fraud, many courts have used “government knowledge” of mere allegations of fraudulent conduct as grounds to dismiss FCA cases… Specifically, a recent Tenth Circuit FCA opinion relied on the fact that the government was aware only of “detailed allegations” of fraud while admitting the government “may not have obtained ‘actual knowledge’ of the alleged infractions,” as grounds to dismiss a FCA case.” (The Tenth Circuit case was recently overturned for other reasons.)

The FCA materiality standard must be clarified by Congress in order to prevent future lawsuits from being dismissed along these lines. NWC continues to work to protect whistleblower rights and defend the FCA; learn more here.

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