AN IMPLIED DEFENSE: SELF-DISCLOSURE OFFERS A DEFENSE TO THE EXPANDED FALSE CLAIMS LIABILITY AFTER UNIVERSAL HEALTH SERVICES V. ESCOBAR.

• Author: Italiano, Megan E.

INTRODUCTION 1944 I. OVERVIEW OF THE FALSE CLAIMS ACT 1947 A. General Liability Under the False Claims Act 1947 B. The Implied False Certification Theory of Liability 1949 II. THE IMPLIED FALSE CERTIFICATION THEORY IN THE COURTS 1951 A. The Lower Court Debate 1952 B. The Supreme Court's Decision in Universal Health 1955 Services v. United States ex rel. Escobar C. Materiality in the Post-Escobar Courts 1958 III. GOVERNMENT PAYMENT PRACTICES AS A DEFENSE TO LIABILITY 1961 A. The Demand for Increased Compliance Procedures and 1961 Self-Disclosure B. Government Payment Practices Allow for Liability 1964 Avoidance at the Pleading Stage IV. THE RISKS AND BENEFITS OF VOLUNTARY DISCLOSURE 1967 A. Voluntary Self-Disclosure Is Not Without Risk 1968 B. The Benefits of Voluntary Self-Disclosure 1971 1. Reduction in Costs and a Streamlined Process 1971 2. Avoiding Permissive Exclusion and Corporate 1972 Integrity Agreements 3. Avoiding Additional Liability Under the ACA's Sixty-Day 1974 Rule C. To Disclose or Not Disclose 1975 CONCLUSION 1977 INTRODUCTION

Congress enacted the False Claims Act (FCA) in 1863 to combat fraud during the Civil War. (1) Since its enactment, the FCA has served as the federal government's primary tool for imposing liability on persons and organizations who defraud government programs. (2) Recently, the government ramped up FCA enforcement, prioritizing FCA claims in specific industries, including health care, where the ability to defraud is prevalent and cost recovery is significant. (3)

Since 1986, the Department of Justice (DOJ) has recovered more than $56 billion from civil FCA enforcement actions. (4) In 2017 alone, the DOJ recovered more than $3.7 billion; $2.4 billion of this recovery stemmed directly from the health care industry, marking the eighth consecutive year that health care recoveries have totaled over $2 billion. (5) One health care company paid a settlement of $145 million after allegations surfaced that its skilled nursing facilities had submitted claims for services that were unreasonable and unnecessary. (6) A health records software company paid $155 million after allegations that it falsely obtained certification for its software. (7) While the FCA aids the federal government in recovering money for fraudulent claims, it also imposes enormous risk and liability on health care providers (8) struggling to understand and weave through the minefield of government regulations. (9)

In 2016, the FCA landscape was altered. After debate among the lower courts, the United States Supreme Court held in Universal Health Services, Inc. v. United States ex rel. Escobar that implied false certification was a viable FCA liability theory. (10) Under this theory, FCA liability can attach to a health care provider who fails to disclose noncompliance of any regulatory, contractual, or statutory requirement--as such failure may constitute presentation of a "false or fraudulent claim." (11) By validating this theory, the Supreme Court expanded the scope of the FCA, an Act that was already formidable in magnitude and risk for health care providers faced with constantly evolving and complex regulations. (12) Additionally, the post-Escobar uncertainty of the implied false certification theory's implications heightened the concern for liability under the FCA. (13)

While Escobar increased the scope of liability for health care providers, it also developed a potential defense for defendants facing FCA liability. (14) The Court focused on materiality as a basis for liability, stating that the government's payment practices after obtaining actual knowledge of any noncompliance can be used to determine whether such noncompliance qualifies as a material violation. (15) Thus, the Supreme Court effectively created a defense for FCA violators in situations in which the government has knowledge of a violation but continues to make reimbursements or payments. (16)

This Note provides health care providers and others facing potential FCA liability under the implied false certification theory with a strategy for reducing or negating liability. The Escobar decision examined the interplay between potential FCA violations and the government's conduct--specifically, its payment practices. (17) Voluntary self-disclosure is the process by which individuals or companies disclose potential violations to the government (18) in order to qualify for reduced penalties under the FCA. (19) This Note argues that such disclosure can be used in certain circumstances to formulate a defense against FCA liability by providing the government with actual knowledge of noncompliance and using the government's subsequent payment practices to determine whether the noncompliance was material. (20)

Part I of this Note introduces the FCA, including the breadth of the Act and the various theories of liability that fall under it, focusing considerably on the implied false certification theory. Part II reviews the debate over the implied false certification theory among the courts, which wrestled with the viability and the scope of the theory but ultimately held the implied false certification theory is valid. Part II then elaborates on the materiality standard developed by the Supreme Court and discusses how courts have interpreted this standard in subsequent cases. (21) Part III of this Note presents a strategy for defending against FCA liability. Specifically, Part III demonstrates that voluntary self-disclosure provides the government with actual knowledge of noncompliance and argues that observations of the government's subsequent payment practices can be used as evidence to potentially negate liability for FCA violations at the pleading stage. Lastly, Part IV details the risks and benefits of voluntary self-disclosure and offers guidance on determining when disclosure is in fact the best option.

1. OVERVIEW OF THE FALSE CLAIMS ACT

   The FCA--a Civil War "relic"--is now one of the government's most powerful tools against modern fraud and abuse. (22) To better understand its scope and complexity, this Part provides a basic introduction to the FCA, specifically discussing the implied false certification theory of liability.

   1. General Liability Under the False Claims Act

      The FCA, coined "Lincoln's Law," (23) was enacted during the Civil War. (24) At that time, fraud was rampant throughout the United States--government contractors supplied defective materials to the Union, including substandard clothing, fraudulent supplies, and old or disabled animals. (25) While the FCA proved an effective measure against fraud during the Civil War, (26) amendments to the FCA in 1943 significantly limited its utility. (27) However, Congress drastically amended the FCA in 1986 after a series of significant and highly-publicized accounts of fraud in the defense industry surfaced. (28) These amendments increased financial incentives for whistleblowers and expanded whistleblowers' role by reducing a number of barriers that had inhibited prior actions. (29) Since the passage of the 1986 amendments, the FCA has grown exponentially, (30) becoming the federal government's most effective tool in combatting fraud and abuse in government spending. (31)

      There are multiple provisions of the FCA, but the two most pertinent to this Note include: (1) the basic provision for liability, which applies when someone "knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval"; (32) and (2) the provision prohibiting false records and statements, which applies when someone "knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim." (33) Additionally, the statute provides a definition for "knowingly," specifying that the standard is not just limited to actual knowledge of fraud, but also includes deliberate ignorance and "reckless disregard of the truth." (34) The statute further acknowledges that liability does not require intent to defraud. (36) Thus, when a government contractor overcharges the government for providing goods or services, the contractor may violate the FCA; (36) similarly, if a health care provider submits a claim to Medicare for a service that was not provided, regardless of his or her intent to do so, the provider may be subject to FCA liability. (37)

      The broad scope of the FCA is largely due to its qui tam provision, which permits private citizens to bring actions on the government's behalf. (38) Through this mechanism, a wide range of individuals, rather than exclusively federal prosecutors, can file FCA suits; these individuals are known as relators or whistleblowers. (39) The government benefits from this scheme because qui tam relators can discover fraud related to government spending at a greater level than the government could on its own; (40) relators benefit by receiving a large portion of the proceeds. (41)

      The 1986 FCA amendments significantly increased the benefits for qui tam relators, which effectuated enormous growth in FCA actions and FCA liability. (42) In 1987, relators brought only 8 percent of FCA claims through qui tam suits; more recently, in 2016, qui tam plaintiffs brought 83 percent of FCA claims. (43) Whistleblowers are commonly employees or former employees of defendants who "often file qui tam lawsuits to get even for the wrongs they believe they have suffered or are experiencing at work." (44) Though opinions of whistleblowers are mixed, U.S. Senator Chuck Grassley, author of the 1986 amendments, emphasized his views on the importance of whistleblowers in identifying fraud: "No matter what we do to deter waste and fraud, whistleblowers are the key to the government finding out when that act happens." (45)

   2. The Implied False Certification Theory of Liability

      The main provision of the FCA imposes liability when an individual submits a "false or fraudulent claim for payment or approval" to the government or government...