Proposed False Claims Act Amendments of 2021: Materiality (Part Deux)

In October 2021, we shared the first part of our discussion on materiality and proposed amendments to the False Claims Act.

However, in late November, those proposed amendments were updated. Below we discuss these updates as well as provide a summary of how we have arrived at the current landscape related to “materiality” under the False Claims Act (FCA).

“Materiality” under the FCA?

The False Claims Act imposes civil liability on “any person who . . . knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval” or “knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim” paid by the government. 31 U.S.C. § 3729(a)(1)(A) & (B).

The basic elements of a False Claims Act claim are: (1) a false statement or fraudulent course of conduct that was (2) knowingly made or carried out (called “scienter” in legalese), (3) that was material, and (4) caused the government to pay out money or not collect money due to it.

Since the 2016 Supreme Court case of United Health Servs., Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), materiality has become one of the most litigated elements of an FCA claim.

The False Claims Act itself defines “material” as something that has a “natural tendency to influence or be capable of influencing” the government’s decision to pay a claim (31 U.S.C. § 3729(a)(4)).  Escobar held that a false certification is material only if (1) “a reasonable man would attach importance to [it]” or (2) “the defendant knew or had reason to know that the recipient of the representation attaches importance to the specific matter ‘in determining his choice of action,’ even though a reasonable person would not.”  Escobar, 136 S. Ct. at 2002-03.

The Supreme Court in Escobar made clear that no one factor can determine whether the false certification is material.  Instead, courts should consider all of the facts to determine “the effect on the likely or actual behavior of the recipient of the alleged misrepresentation.”  Id. at 2002.

The Proposed FCA Amendments’ Attempts to Solve Escobar’s Materiality Problem

Escobar created the issue that Congress is legislatively trying to correct with the 2021 amendments to the FCA. The ambiguous language in Escobar regarding materiality has made it a darling of the defense bar.

One of the frequent defense-side arguments is that “continued payment = no materiality.” The gist of this argument is that if the government somehow knew of the potential fraud and kept paying for the goods or services at issue, the fraud must not have been material to the government’s decision to pay.

Courts have split on this issue, which resulted in materiality-related changes becoming the centerpiece of the proposed FCA Amendments, which enjoy rare bipartisan support:

The False Claims Amendments Act of 2021 (S.2428) clarifies the current law following confusion and misinterpretation of the Supreme Court decision in United Health Services v. United States ex rel. Escobar, which has made it all too easy for fraudsters to argue that their obvious fraud was not material simply because the government continued payment. It also ensures that anti-retaliation provisions from the False Claims Act apply to post-employment retaliation and makes fraudsters liable for reimbursing the government for costs associated with a burdensome discovery process. The bill is cosponsored by Sens. Patrick Leahy (D-Vt.), John Kennedy (R-La.), Dick Durbin (D-Ill.), and Roger Wicker (R-Miss.).

The previous version of the 2021 amendments attempted to correct Escobar by shifting the burden of proof on materiality-based dismissals to defendants, requiring proof by “clear and convincing evidence” that the alleged false claims act violation was not, in fact, material to the government’s payment of the claims. The current version of the 2021 amendments does away with this burden-shifting regarding proof of materiality.

Instead, the current version of the amendment states “[i]n determining materiality, the decision of the Government to forego a refund or to pay a claim despite actual knowledge of falsity shall not be considered dispositive if other reasons exist for the decision of the Government with respect to such refund or payment.”

This language is much different than the burden-shifting language previously suggested. However, the new language proposed in the amendments, in practice, may be more whistleblower-friendly while correcting the Escobar problem.

The main problem with Escobar and how certain courts are interpreting it is that it oversimplifies the government’s payment process. The U.S. government pays private businesses for a whole host of things through all of its various executive agencies. If, to half fraud under the FCA, the government had to delay payments in every instance of questionable behavior by government contractors, the gears of our bureaucracy would halt. Thus, it is a vast oversimplification to say that if the government paid a claim it may have reason to know is fraudulent, then it must not be material to that decision.

Instead, as the amendment contemplates, the government has its own reasons for why it would pay such claims and still believe that fraud is material to that payment decision.

Government Payment Decisions: The Medicare Example

Government Healthcare payors (Medicare, Medicaid, Tricare, etc.) are a perfect example of how Escobar’s materiality rationale and how actual payment decisions are made differ.

Medicare is structured as a reimbursement regime. Therefore, providers get reimbursed for services provided. Medicare will pay properly submitted claims for reimbursement from providers regardless of whether that claim was false or not.

However, Medicare’s regulations make it clear that it does not pay for fraudulent services/claims (medically unnecessary services, services not actually provided, etc.). There is no way under Escobar to reconcile this payment regime with how it interprets materiality.

Yet, the 2021 amendments do just that.

Using the Medicare example, under the new amendments, if Medicare pays a fraudulent claim, that payment will not be dispositive proof of materiality. In other words, the fact that Medicare paid a claim – because it is Medicare policy to pay submitted claims – even though it knew the claim was false is not the end of the materiality story.

Under the amendments, if Medicare pays a fraudulent claim with knowledge it can still be material to that payment decision, “if other reasons exist for the decision of the Government with respect to such… payment,” which in the context of Medicare, there certainly is such a reason.

The Medicare program has a strong interest in promptly reimbursing providers so that Medicare beneficiaries receive timely and efficient medical care. If Medicare payments were delayed because each claim needed to be scrutinized for potential fraudulent conduct prior to payment, the health care system would be even more chaotic than its current form.

Not to mention, providers would likely reconsider even treating Medicare patients because of the extreme delay in payment.

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As this writer views it, as long as the paying government agency has a rational reason for its payment process, the fact that a fraudulent claim may have been knowingly paid does not foreclose the materiality element of the FCA as Escobar wrongly generated.

We are very invested in seeing how these amendments move forward through Congress and how courts ultimately interpret them.

If you have questions about the FCA amendments of 2021 or any other whistleblower matter, please contact the Atlanta whistleblower attorneys at Bracker & Marcus LLC.