The Tenth Circuit affirmed a district court’s dismissal of a qui tam case alleging Medicare fraud, finding that the allegations of falsified reporting did not meet the materiality standard. While the allegations were supported by evidence, the court found the misconduct was the type of administrative noncompliance that did not implicate FCA liability. The government’s inaction after being informed of the allegedly false documentation also suggested the noncompliance was immaterial. The court also rejected the relator’s argument that the Supreme Court’s ruling in Escobar allowed that materiality may be shown through either an objective or subjective showing. Instead, the court held that Escobar focused the materiality inquiry squarely on the likely reaction of the recipient of false information, not the interpretation of a reasonable person or the mindset of the entity that provided the false information.
Relator Stacey Janssen appealed a district court’s decision dismissing her qui tam case alleging that Lawrence Memorial Hospital presented false documents and false claims to Medicare.
In her complaint, Janssen first alleged LMH falsified patients’ arrival times in order to increase its Medicare reimbursement under certain pay-for-reporting and pay-for-performance programs the government uses to study and improve hospitals’ quality of care. To varying degrees, each of these programs rely on measures that incorporate patients’ arrival times. The arrival time data is captured to help the government analyze the timeliness of the care patients receive.
For both programs, providers must report a patient’s arrival time as the earliest time noted on documentation, such as the patient’s triage record or emergency room sheet. Janssen alleged that LMH discarded records that showed patients’ actual arrival time or otherwise falsified documentation to show that a patient’s point of contact with the hospital occurred later than it actually had. For example, a former registration clerk in LMH’s emergency department declared that she was trained and instructed to delay registration of patients until after the administration of electrocardiograms so that the arrival time on the patient’s record was synonymous with their EKG time. She also declared that LMH altered patients’ arrival times to match EKG times in order to obtain Medicare compensation.
The district court found this allegation credible and supported by statistics submitted by the relator. For example, the statistics showed a high percentage of patients whose arrival time was identical to the time of their EKG test. Further, for one period, LMH never reported a medial arrival-to-EKG time lower than three minutes, yet beginning in the first quarter of 2011, the hospital frequently reported a median arrival-to-EKG time of zero or one minute. The court found it reasonable to infer the hospital falsified its documentation of patient arrival times, but found scant evidence the alleged falsification of arrival times affected the accuracy of its reporting to Medicare.
Second, Janssen alleged LMH falsely certified compliance with the Deficit Reduction Act in order to receive Medicare reimbursements to which it was otherwise not entitled. The act requires the hospital to train its employees on False Claim Act requirements and to provide an employee handbook with this information. According to the relator, from 2007 to 2016, LMH’s New Associate Resource Handbooks lacked detailed discussion of the FCA, even though LMH certified that it complied with this requirement.
During the initial litigation, CMS acknowledged that it was aware of the quality issue, but took no action against LMH by ceasing payments or asking the hospital to adjust its reporting. The district court later granted summary judgment in favor of LMH, finding that the allegations—though general supported by evidence—did not satisfy the materiality standard. Janssen appealed.
In her briefing, Janssen argued in favor of a broad interpretation of materiality. Citing the Supreme Court’s decision in Escobar, Janssen argued the court adopted the concept of materiality familiar to contract and tort law and, under such a view, materiality may be shown through either an objective or subjective showing. Under this interpretation, the focus need not be on the recipient of the information.
However, the appeals court noted the Supreme Court did not adopt such a standard. Instead, the Court held that “under any understanding of the concept, materiality ‘look[s] to the effect on the likely or actual behavior of the recipient of the alleged misrepresentation.’” Thus, rather than directing courts to focus exclusively on a reasonable person—as they would under a purely objective analysis—or exclusively on the mindset of the misrepresenter—as they would under a purely subjective analysis—Escobar focused the materiality inquiry on the likely reaction of the recipient.
Adopting that standard of materiality, the appeals court affirmed the district court’s ruling that the relator’s complaint failed to show the alleged misconduct was material to the government’s decision to pay LMH’s Medicare claims.
As an initial matter, the court held that the government’s conduct weighed in favor of materiality. Neither party presented cases concerning CMS reimbursement under the programs at issue, and CMS had not taken action against LMH. The court held the government’s inaction suggested the alleged misconduct was not material to any payment decisions.
The court also held that the alleged misconduct did not speak to the “essence of the bargain” between the hospital and CMH. While the need for accurate reporting is an arguable requirement of the program regulations, the court found this did not mean the requirements were material to payment decisions. The court suggested that an administrative action, rather than an FCA liability, might be the best way to deal with reporting noncompliance.
Going directly to the issue of materiality, the court noted Janssen provided little evidence to demonstrate the extent to which inaccurate arrival times affected the accuracy of LMH’s reporting. For example, patient arrival times are not documented in all reports LMH is required to submit under the programs. Further, the court found that a relatively few records documented in the reports contained false arrival times. Thus, at most, LMH’s alleged misconduct affected only a subset of a subset of the data reported. Overall, the court found the evidence insufficient to raise a fact issue with respect to materiality. The court also found no evidence of a cover-up, which might signal that LMH considered the information material to its ability to obtain reimbursement.
While Janssen argued the government has expressly required accurate reporting as a condition of payment under the programs at issue, the court found the requirement relevant but not dispositive. While the government may believe accurate reporting is important, generic regulatory requirements fall short of establishing the materiality of perfect compliance, especially when encased in a complex regulatory system with separate administrative remedies.
Similarly, the court found the claims about the Defense Reduction Act also failed to meet the materiality standard. While the relator established a fact issue with respect to the hospital’s noncompliance, the court again found the compliance failure did not implicate FCA liability. The court held that the employee handbook requirement was precisely the type of garden-variety compliance issues that the demanding materiality standards of the FCA are meant to forestall. Further, the relator made no connection between the alleged noncompliance and the government’s willingness to pay a claim.
