Federal courts continue to grapple with applying the “materiality” standard that is needed to cause a Stark Law violation or other underlying compliance matter to trigger False Claims Act liability. Although we have recently begun to gain a clearer view of what contractual requirements will not likely be viewed as material, at least one federal court has affirmed certain technical Stark Law violations as material.

The issue of materiality took center stage last year in Universal Health Services v. U.S. ex rel. Escobar, in which the United States Supreme Court backed the use of “implied certification” as a basis for FCA liability, that is, entities can be held liable for implicitly certifying compliance with all applicable laws, regulations and contractual requirements when submitting claims for federal reimbursement, even if an unmet requirement isn’t explicitly tied to payment. The Court further held, however, that to prove noncompliance with the FCA, any alleged misrepresentation must be “material” to the government’s decision to pay, or not pay, that claim. This clarification of the “materiality” requirement appeared to provide some relief for FCA defendants.

The decision in Escobar left open the parameters of applying the materiality standard. The Western District of Pennsylvania has addressed this issue with respect to Stark Law compliance, and recently revisited its decision: it has continued to hold that compliance with the Stark Law exception’s elements are “material” to the government’s payment decision.

  • Original Decision: In March 2017, in U.S. ex rel. Emanuele v. Medicor Associates the court issued an opinion holding that some, but not all, of the arrangements in question satisfied the recently-liberalized “written agreement” requirement of core Stark exceptions. For the arrangements failing to satisfy a Stark Law exception, the Emanuele court found “material” the Stark-Law-based FCA allegations in question under the Escobar standard, finding that whether the government consistently pays or refuses to pay claims when it has knowledge of similar violations favors a finding of materiality.
  • Potential Intervening Change in Law: In light of a Third Circuit decision, however, the defendants in Emanuele requested that the court reconsider its earlier opinion, claiming that the Third Circuit decision heightened the standard for materiality in FCA litigation. That is, in May, the Third Circuit addressed the issue of materiality in United States ex rel. Petratos v. Genentech, Inc. In that case, the manufacturer concealed data which indicated that use of a drug resulted in harsher side effects than previously reported. Because the government conceded that it would not have withheld payment of the claims under the circumstances, even with full knowledge of the alleged noncompliance, the court concluded that the misrepresentation did not meet the “high standard” of materiality set forth in Escobar to implicate an FCA violation.
  • Post Petratos Opinion: On August 25, the Chief District Judge in the Western District of Pennsylvania issued an opinion stating that the Third Circuit decision involving materiality was not an intervening change of law, and that even if taken as a clarification of law, the defendant’s reliance on that case was inapposite. The judge found Petratos readily distinguishable from Emanuele because, unlike the claims in Petratos, the government routinely refuses to pay claims that fail to comply with the Stark Law’s writing requirement.
  • Going forward, it remains to be seen exactly how high a hurdle the Escobar materiality standard will prove to be for plaintiffs in FCA litigation, but the Emanuele court’s affirmance that the standard was satisfied with respect to the particular technical Stark violations before the court underscores that the Escobar materiality standard may not always be a game-changer for healthcare providers.

Healthcare providers should still be able to rely on Emanuele, however, to provide some comfort in relying on the November 2015 Stark Law liberalizations for many common fact patterns, provided that they are able to demonstrate compliance with all elements of the relevant exception.