First Circuit denies motion to dismiss Escobar case, finding noncompliance with Medicaid regulations to be “material”

In United States ex rel. Escobar v. Universal Health Services, Inc., No. 14-1423 (1st Cir. November 22, 2016), the First Circuit, on remand from the Supreme Court, held that the qui tam plaintiff had sufficiently alleged that the defendant’s noncompliance with a Massachusetts Medicaid rule was “material.” Consequently, the court held that the plaintiff’s complaint stated a claim for relief under the False Claims Act based on a theory of “implied false certification.”

The First Circuit held that (1) the rule in question was a condition of payment (which the court noted was relevant, though not dispositive), and (2) more significantly, because compliance with the rule went to the heart of the bargain.  The court reasoned that if a reasonable person knew that the personnel providing medical services were “charlatans,” rather than “licensed professionals,” this fact would likely affect that person’s payment decision.  The court said: “Indeed, we struggle to think of a misrepresentation-by-omission that would give rise to a breach more material to the government’s decision to pay.”

Significantly, the First Circuit rejected the defendant’s attempt to argue, at the motion to dismiss stage, a lack of materiality based on its assertion that the Government continued paying the provider’s claims even after learning that the provider was not in compliance with the licensing regulations.  The court reasoned that (a) the operative complaint didn’t allege anything about the Government knowing of the defendant’s noncompliance when the Government paid the specific claims referenced in the complaint, (b) even if it was clear that the Government had actual knowledge of the defendant’s noncompliance at the time the Government paid those claims, such knowledge was not dispositive of the issue of materiality, and (c) this was an issue that the parties could more appropriately develop at later stages of the proceeding, but it wouldn’t make sense to require a qui tam plaintiff, at the pleading stage, to include factual allegations as to the Government’s payment practices.