Supreme Court Approves Implied False Certification Theory but Imposes “Demanding” Materiality Limitation

In a decision that will impact every provider who supplies goods and services to the federal government, the Supreme Court today approved the implied false certification theory as a basis for liability under the False Claims Act (FCA). Specifically, in Universal Health Services v. Escobar, the Court ruled that the FCA is violated whenever a provider submits a claim for payment to the government yet misrepresents its compliance with material statutory, regulatory or contractual requirements—whether expressly or through omission. However, the Court emphasized that the misrepresentation must be “material” to the government’s payment decision in order to be actionable under the FCA. While it borrowed from a variety of sources, the Court was clear that “under any understanding of the concept, materiality looks to the effect on the likely or actual behavior” of the party receiving services.

The Court made clear that the materiality standard is a “demanding” one that prevents the government from imposing liability for all noncompliance; and the Court emphasized that the FCA is not “an all purpose antifraud statute” or a means for punishing “garden-variety breaches of contract and regulatory violations.” For a misrepresentation to be material, it must have “a natural tendency to influence, or be capable of influencing” the government’s payment decision. A plaintiff cannot prove materiality merely by showing that the government “would have the option to decline to pay if it knew of the defendant’s noncompliance.” Additionally, if the government chooses to “pay 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.”

While the Court acknowledged that expressly designating a provision as a condition of payment is relevant to determining whether the provider “knowingly” submitted a false or fraudulent claim, the inquiry is not dispositive. For example, even if the government “failed to specify that guns it orders must actually shoot,” a provider of firearms could nonetheless face liability under the FCA if either (1) it has actual knowledge that the government “routinely rescinds contracts if the guns do not shoot” or (2) a “reasonable person would realize the imperative of a functioning firearm.” Similarly, the Court reasoned that simply labeling a regulatory requirement as a condition of payment does not necessarily give rise to FCA liability if violated, stating “[w]hat matters is not the label the Government attached to a requirement, but whether the defendant knowingly violated a requirement that the defendant knows is material to the Government’s payment decision.”

The Court’s analysis rejected UHS’s narrow interpretation (FCA liability attaches only if the regulation is expressly identified as a condition of payment) as well as the expansive view of the government and First Circuit (any violation is material if the defendant knows the government would be entitled to withhold payment). As the lower courts begin to apply the implied certification theory set forth in Escobar, it will be interesting to see the practical impact of the Court’s “demanding” materiality standard.

House Approves Site-Neutral Payment Relief for Some Hospitals but Bill Faces Uncertain Future in Senate

On June 7, the House passed H.R. 5273, the Helping Hospitals Improve Patient Care Act of 2016 which, in part, modifies the Medicare payment rules for certain hospital outpatient departments (HOPDs) which were adopted as part of the “site-neutral” payment provisions under Section 603 of the Bipartisan Budget Act of 2015 (Pub. L. No 114017). As we discussed in November, Section 603 will effectively reduce compensation for certain off-campus HOPDs beginning January 2017 by eliminating eligibility for compensation under Medicare’s Hospital Outpatient Prospective Payment System (HOPPS). As originally drafted, Section 603 provided a “grandfathering” exception for off-campus HOPDs that were already billing under the HOPPS as of November 2, 2015, retaining HOPPS eligibility for these HOPDs. However, Section 603 contained no exception for HOPDs that were under development as of that date, upsetting the financial projections of several hospitals.

H.R. 5273 would effectively extend the grandfathering exception to facilities under development as of November 2, 2015, allowing them to receive HOPPS reimbursement after January 1, 2017 so long as certain requirements are met. The bill also provides a broad exception for off-campus HOPDs operated by cancer hospitals. The costs associated with extending grandfathered status to certain HOPDs will be offset by other cuts in Medicare reimbursements.

Though the bill has passed the House, its future in the Senate is uncertain. Possible amendments to the bill and the limited time available to review and vote upon it may stand as barriers to passage.

The HOPD reimbursement changes implemented under Section 603 are critically important to a number of hospital systems, and we will continue to monitor and report on this legislation as it proceeds.

BREAKING: Deal Reached on New EU Medical Device and IVD Regulations

On May 25, 2016, the European Union (“EU”) Council and Parliament politically agreed on the provisions that will go into the final version of the long-awaited EU medical device and in vitro diagnostic (“IVD”) regulations.  The agreement seeks to fill the regulatory gaps uncovered as technology evolved faster than the current regulatory regime, which had not been updated since 2007.

The regulations will strengthen the rules for placing medical devices on the market, as well as tighten market surveillance and vigilance.  The regulations seem to take the step of establishing requirements for high-risk device expert reviews, and the regulations set forth specific duties for all economic operators, including manufacturers and distributors.

Following the regulations’ entry into force, or official publication, the medical device regulations will have a three-year grace period (five years for IVDs) before they are fully applicable and enforced.  There will be interim enforcement periods for some requirements.  Medical device and IVD manufacturers should carefully read the final regulations when they are published to adequately build a plan to comply with the new regulations.

The EU Council’s Permanent Representative Committee will be invited to endorse the agreement mid-June 2016, after which the EU Parliament’s Committee on Environment, Public Health, and Food Safety (“ENVI”) will also be invited to endorse the agreement.  After the texts are fully revised and in their final form, the texts will be formally adopted by the EU Council and Parliament.

AHA Renews Objections to OIG Hospital Compliance Reviews

In a move that could affect all hospitals reimbursed by Medicare, the American Hospital Association (AHA) this week renewed strenuous objections to various aspects of ongoing hospital compliance reviews conducted by the Department of Health and Human Services (HHS) Office of Inspector General (OIG).

AHA’s most recent correspondence references the “numerous legal defects” it had previously identified in OIG’s hospital audits. These defects include claims that OIG audits (1) waste HHS resources and are unduly burdensome to hospitals, (2) use extrapolation in a manner that compounds OIG’s erroneous interpretations of Medicare rules and policies and (3) allow Medicare Administrative Contractors to collect overpayments in violation of the Medicare statute and agency rules. This blog post focuses on the AHA’s extrapolation-related objections, which form the bulk of its previous and recent correspondence concerning OIG hospital compliance reviews.

After the OIG Office of Audit Services determines that a submitted claim or claims were improperly high, it extrapolates the difference over all similarly situated claims to calculate the total amount overpaid by the government. According to the OIG, extrapolation allows it to police hospital overpayments without reviewing each claim, which it feels is both “economical and in the best interest of the provider and the Government.”

The AHA, however, is less enthusiastic about OIG’s usage of extrapolation and raises several objections. First, AHA argues that by refusing to pay for inpatient claims that were not supported with a “valid order signed by a physician,” OIG is improperly applying a post-October 2013 policy to pre-October 2013 claims. Second, AHA opines that OIG is attempting to recoup old overpayments despite its failure to overcome the no-fault presumption that attaches to claims paid under Part A more than 3 years ago. Third, the AHA takes issue with OIG’s attempt to recoup overpayments for inpatient admissions not “reasonable and necessary” (as required by the Social Security Act), arguing that hospitals are entitled to appellate review before overpayments are recouped on this basis. Finally, AHA disagrees with OIG’s failure to account for the Part B payments hospitals should have received even if they improperly received payment under Part A, arguing that these Part B payments should be offset when the Part A overpayments are recouped.

While OIG has responded to several concerns regarding extrapolation, AHA’s May 23rd letter makes clear that the matter is far from resolved, as the group indicates it remains “very troubled” by the practice. In fact, the AHA has asked to be present at a meeting between the OIG and Mount Sinai Hospital to discuss the audit process.   Hospitals facing OIG scrutiny should ensure that any recoupment efforts are conducted in a legally sound manner, since extrapolation can cost hospitals hundreds of thousands of dollars in improper recoupments.

Hospitals and CMS To Update Court About Two-Midnight Rule Challenge After Final Inpatient Rule Is Published in August

This is an update on the hospital lawsuit challenging CMS’s fiscal year 2014 “Two-Midnight” rule and the agency’s corresponding 0.2% reduction to inpatient prospective payment rates, in Shands Jacksonville Medical Center v. Burwell. As previously reported, the court ruled that CMS had violated mandatory notice and comment requirements regarding key information the agency had used to rationalize its 0.2% payment reduction. The court ordered CMS to disclose the missing information to the public and to reopen the issue for further comment, following which the court would evaluate if CMS’s actions were lawful. After publishing the missing information and receiving many comments, in April 2016, CMS proposed both to eliminate the 0.2% payment reduction and to make up for the reductions in fiscal years 2014-2016 with a one-time 0.6% increase to hospital inpatient rates in 2017.

The hospital plaintiffs and CMS were to have filed a status report with the court, by May 23, 2016, addressing the parties’ positions as to the impact of CMS’s proposal. Instead, however, the court has allowed the parties to delay filing their status report until two-weeks after the agency publishes its final rule governing hospital inpatient payments for fiscal year 2017. The parties explained that CMS’s final rule “could affect the nature of, or need for, any further proceedings . . . .” The final rule will be published in early August.

We will continue to monitor and to provide updates with any breaking developments in the Shands Jacksonville case. As it currently stands, the agency’s action in fiscal year 2014 (carried forward to fiscal years 2015 and 2016 ) is in serious jeopardy. Thus, as we have previously mentioned, hospitals should continue to take actions to preserve their appeal rights as to underpayments caused by the Two-Midnight rule and the 0.2% payment reduction.

Deadlines Near for MSSP Application Cycle for Program Year 2017

As we near the end of May, critical deadlines for participation in the Medicare Shared Savings Program (“MSSP”) for program year 2017 are approaching.  Under the MSSP ACO Final Rule, CMS finalized new regulations that established a process for and the timing of initial applications for participation in the MSSP and renewals of existing participation agreements.  CMS made clear that an application or renewal may be denied if the applicant fails to submit information by the required deadlines.  Health care providers and suppliers interested in participating in, as well as participants from program year 2014 seeking to apply to renew their agreements for, the MSSP for program year 2017 should take note of the upcoming deadlines for the 2017 Application Cycle.

New ACOs applying to the MSSP must submit a Notice of Intent to Apply (NOIA) to CMS on or before Tuesday May 31, 2016 at 5 p.m. (EST).  Likewise, current ACOs with a 2014 start date interested in renewing their agreements with CMS for the next three-year agreement period must also submit a NOIA to CMS on or before the same deadline.  Lastly, Track 3 ACOs that are currently participating or applying to participate in the MSSP must submit their SNF 3-Day Waiver NOIA on or before the same deadline.  If you would like additional information about or assistance with the MSSP application process, please contact the Squire Patton Boggs’ Healthcare team.

House Prevails in Challenge to Administration’s Funding of ACA Cost-Sharing Provision

Yesterday, in a blow to the Obama Administration, the United States District Court for the District of Columbia struck down a key ACA provision designed to reduce insurance costs. Specifically, Section 1402 of the ACA requires insurers participating in the Exchanges to reduce deductibles, coinsurance, copayments, and other means of cost-sharing on qualified health plans. Rather than stick insurers with the bill, the ACA provides that the federal government will subsidize these costs (estimated at nearly $175 billion over 10 years).

Judge Rosemary M. Collyer’s opinion concluded that unlike other ACA efforts to decrease the costs of care paid by insureds, Section 1402 does not permanently appropriate funds to offset the costs associated with its cost-sharing reductions. Instead, it relies on a “current appropriation” funding structure, meaning that Congress must annually appropriate funds to cover the costs associated with the cost-sharing reductions. Since Congress has not provided current appropriations for the cost-sharing reductions, Judge Collyer concluded that the Obama Administration exceeded its constitutional authority by spending funds without proper Congressional appropriation. Accordingly, Judge Collyer enjoined the Obama Administration from spending unappropriated monies to fund reimbursements due to insurers under Section 1402.

The ultimate impact of the Court’s opinion in House of Representatives v. Burwell will not be known for some time, since Judge Collyer stayed her ruling pending a (widely anticipated) appeal to the more Administration-friendly DC Circuit. Unlike the broad-based, policy-focused objections at issue in NFIB v. Sebelius (individual mandate) and Burwell v. Hobby Lobby (contraceptive coverage mandate), this case concerns a major source of funding for the ACA’s consumer cost-saving measures. Accordingly, although its full impact is not yet certain, the case’s financial implications mean that stakeholders should closely monitor developments as the case works its way up on appeal.

CMS Issues Proposed Rule on MACRA Physician Payment Systems

The Centers for Medicare and Medicaid Services (CMS) recently released a proposed rule (the “Proposed Rule”) establishing two physician payment systems introduced by the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA).  These two systems, the Merit-based Incentive Payment System (MIPS) and the Alternative Payment Models (APM), change the way Medicare incorporates quality metrics into physician payments.  Additionally, the Proposed Rule will help Medicare develop new policies to address and incentivize physician participation in alternative payment methods.

Coming in at over 900 pages, the Proposed Rule is complex and stakeholders should take the time to unpack all the provisions.  CMS proposes rolling out the two physician payment systems in early 2017 so stakeholders do not have a lot of lead time in preparing their own systems, especially since the final rules will not be released until later this year.

Merit-Based Incentive Payment System (MIPS)

The purpose of MIPS is to streamline payments while maintaining a focus on quality and reducing redundancies.  MIPS consolidates three programs: the Physician Quality Reporting System, the Physician Value-Based Payment Modifier, and the Medicare Electronic Health Record (EHR) Incentive Program into one program and winds down payment adjustments under the previous programs.  MIPS would apply to eligible clinicians, including physicians, physician assistants, nurse practitioners, clinical nurse specialists, certified registered nurse anesthetists, and groups that include these practitioners.

To determine the incentive payments clinicians receive, MIPS would use four performance categories: quality, resource use, clinical practice improvement activities, and meaningful use of certified EHR technology.  Within each category, CMS proposes up to six standards to determine how the clinician performed under each category, aggregating the scores to create a MIPS composite performance score.  This score would then be used to determine if the clinician receives an upward or downward payment adjustment, or no payment adjustment.

Alternative Payment Models (APMs)

CMS also proposes to move more fee-for-service payments into APMs in order to focus on better care and smarter spending for healthier beneficiaries.  The Proposed Rule suggests two types of APMs: Advanced APMs and Other Payer APMs.  An Other Payer APM is an arrangement in which eligible clinicians pay participate through other payers.  An Advanced APM provides a path through which eligible clinicians can become a Qualifying APM Professional and earn incentive payments for participating in the APM.  Both types of APMs require use of certified EHR technology and be either a Medical Home Model (or a comparable Medicaid Medical Home Model for Other Payer APMs) or bear more than a nominal amount of risk for monetary losses.  Additionally, both types of APMs would use quality measures comparable to those used by the MIPS program.


Comments on CMS’ proposed rule are accepted until June 27, 2016.  Interested parties can comment electronically on, or send their written comments to Centers for Medicare and Medicaid Services, Department of Health and Human Services, Attention: CMS-5517-P, P.O. Box 8013, Baltimore, MD 21244-8013.  When commenting, make sure to reference CMS-5517-P when sending written comments.

Billions at Stake for Providers in Argument Before US Supreme Court

This week, the United States Supreme Court heard oral arguments in Universal Health Services v. United States ex rel. Escobar, a case destined to influence the scope of False Claims Act (FCA) liability for anyone who receives payments from Medicare, Medicaid or any other federal government-funded health care program. As Justice Breyer acknowledged during oral argument, “billions of dollars” are “at issue.”

During oral argument, the Justices seemed likely to accept the implied certification theory of liability under the FCA, at least in some form. The decision is likely by the end of June. Watch this space for details and analysis of its precise contours. Below are more details about the case.

Escobar concerns “implied certification” liability — a theory that requires a provider to comply with underlying statutory, regulatory or contractual obligations associated with a service even though those obligations are not specified when the service is provided. If the provider fails to comply with those obligations but submits a claim for payment, it has breached the implicit promise, thus potentially giving rise to liability under the FCA.

Universal Health and others want the theory abolished, while relator Escobar wants it upheld.  The Justices appeared to ponder—in the words of counsel for Universal Health Services—the “jot” from the “tittle” on how to distinguish underlying obligations that are sufficiently important to implicate the FCA from those that are not. Although both sides and the United States Solicitor General’s office (participating as an amicus in support of Escobar) posited several principles upon which to resolve the case, none seemed to elicit a consensus among the Court’s eight members.

The FCA is a Civil War-era law designed to protect government coffers by prohibiting individuals from “knowingly” submitting (or causing the submission of) a “false or fraudulent claim” for payment. In order to further protect the government’s coffers, the FCA authorizes private plaintiffs (known as “relators”) to bring suit on the government’s behalf and share in its recovery.

With New Primary Care Compensation Model, CMS Continues Efforts to Promote Value-Based Payments

Beginning in January 2017, primary care physicians and their practices (PCPs)  will be able to participate in a multi-payer payment reform and care delivery transformation aimed at strengthening primary care. Dubbed the Comprehensive Primary Care Plus (CPC+) initiative, the recently unveiled primary care medical home model is CMS’s latest effort to encourage value-based payment methodology, with an aim towards promoting health and reducing overall health care costs.

In an effort to encourage PCP participation in the voluntary initiative, the two-track CPC+ model revises existing Medicare payment structures and introduces the concept of a Medicare Care Management Fee (MCMF). In track one, PCPs will receive traditional Medicare fee-for-service payments for services rendered, as well as an MCMF of $15 per Medicare beneficiary per month. Additionally, track one participants will be eligible for a performance-based incentive payment of up to $2.50 per beneficiary per month, which is tied to clinical quality/patient experience and utilization measures that drive total cost of care.

In track two, PCPs will be reimbursed under a hybrid model that combines the traditional Medicare fee-for-service with a percentage of the PCP’s expected evaluation and management reimbursements, which will be paid upfront in the form of a Comprehensive Primary Care Payment (CPCP). In addition to payment under this hybrid model, track two PCPs will receive an MCMF of $28 per Medicare beneficiary per month, including an additional $100 for each beneficiary with certain “complex needs.” Like track one participants, track two participants are eligible for a performance-based incentive payment, but at the slightly higher rate of $4.00 per beneficiary per month.  More details on the two tracks can be located here.

CMS believes that the new model makes a “persuasive business case[] for practices to participate in the CPC+ model and choose the track that best meets their needs.” To support this contention, CMS calculates the average payments that a PCP participating in CPC+ can expect to receive (assuming a practice beneficiary pool of 700 people, which CMS explains was the average size of participating practices in a previous version of the CPC model).

With respect to track one, CMS’s calculations reveal that a participating PCP will receive $10,500 monthly ($126,000 annually) in MCMF fees. CMS predicts that PCPs will be “guided by the care delivery expectations to invest these funds into practice transformation” efforts. These practice transformation efforts will “support the sort of care and management that will increase [the] likelihood of practice eligibility for incentives that could reach $21,000 annually.”

With respect to track two, again assuming a practice size of 700 beneficiaries, CMS’s calculations reveal that a participating PCP will receive $19,600 monthly ($235,200 annually) in MCMF fees and performance-based incentives that could reach $33,600 annually. Also, because of the partially capitated, partially fee-for-service nature of the track two model, CMS anticipates that PCPs will be more willing to furnish services “in a way that best meets the needs of the patient, whether that be by email, phone, patient portal, etc.,” since the cost of such services is essentially built into the capitated quarterly payment. CMS indicates that it will test several different percentage breakdowns in order to determine the best mix of capitated and fee-for-service payments.

Whether the CPC+ initiative will draw widespread interest from PCPs remains to be seen. In a statement on its website, the American Academy of Family Physicians (AAFP) sounded at least open to considering the initiative, referencing CMS’s claim that the new model was “designed to provide physicians the freedom to care for their patients in a way they think will deliver the best outcomes and to pay them for achieving results and improving care.” Nonetheless, the AAFP stopped short of endorsing the measure, writing that it is “working now to understand this new CPC+ model and will share more information soon.” In any event, CMS’s business case for the CPC+ initiative is likely to draw interest from at least some PCPs, particularly those with sophisticated telemedicine and electronic health record (EHR) platforms.

While CMS’s development of the CPC+ initiative would be noteworthy on its own, the participation of private payors should draw the attention of providers interested in maximizing reimbursement for services rendered to patients. On April 15, 2016 CMS began accepting applications for private payors to join the CPC+ initiative, and the geographic mix of chosen private payors will help inform the 20 regions ultimately selected to participate in the CPC+ model. Applications for interested PCPs will be accepted beginning July 15, 2016, with CMS encouraging PCPs that are further along in the delivery of value-based care to apply for participation under track two.

The CPC+ initiative is simply the latest example of the federal government’s efforts to drive quality, cost-effective health care by utilizing value-based payment methodologies. As with all reimbursement models, physicians should assess whether their practice organizations are in a position to avail themselves of the benefits of—and navigate the challenges associated with—the CPC+ reimbursement model for PCPs.