In June, the United States Supreme Court evaluated the False Claims Act’s (FCA) scienter element to determine whether the existence of an objectively reasonable interpretation that a claim was not false could be presented as a valid defense to the FCA, even where the defendant subjectively knew that a claim was false. The two essential elements of an FCA violation are: (1) the falsity of the claim; and (2) the defendant’s knowledge of the claim’s falsity (i.e., the FCA’s “scienter” element). A unanimous Court in United States ex rel. Shutte v. Supervalu Inc., held the FCA’s scienter element refers to a defendant’s subjective knowledge and belief, and is not based upon whether an objectively reasonable person may have known or believed the claim was false.
In Shutte, two pharmacies were accused of defrauding Medicare and Medicaid. Both federal programs offer prescription coverage to beneficiaries, and both typically impose caps on reimbursement based upon a pharmacy’s “usual and customary” price (“U&C Price”). The U&C Price is expected to be calculated to include discounts offered by the pharmacy. However, the pharmacies submitted U&C Pricing that did not include various pharmacy discount programs that were routinely offered, and thus the pharmacies were reimbursed based upon a higher U&C Price than was accurate.
Prior to review by the Supreme Court, the Seventh Circuit held that the pharmacies could not have knowingly submitted false claims if their actions were consistent with an objectively reasonable interpretation of the phrase “usual and customary.” The Seventh Circuit also held that the pharmacies’ subjective beliefs were irrelevant to scienter even where: (1) the pharmacies were previously informed by Pharmacy Benefit Managers (“PBMs”) and state Medicaid agencies that the discounted prices were to be included when calculating the U&C Price; and (2) pharmacy executives were aware of, and engaged in email communications discussing, their “stealthy approach” to avoid including the discounted prescription drug prices in the U&C Price billed to Medicare and Medicaid.
In reversing the Seventh Circuit, the Supreme Court held that it did not matter whether an objectively reasonable interpretation of U&C Price would point to the Pharmacy’s higher, non-discounted prices. For scienter—or the “knowingly” component of the FCA— to be established, the Court held that it is enough that the pharmacies believed that their claims were not accurate in light of the excluded discounted prices. Thus, the relevant analysis is what the defendant’s belief was, not whether an unrelated third-party could believe differently. In Shutte, the pharmacies are alleged to have understood the intended definition of U&C and intentionally acted to exclude discounts from their reported U&C calculation. Accordingly, their submission of claims based upon an inflated U&C Price resulted in a reimbursement request at a higher rate pursuant to a false claim.
Key Takeaways:
Shutte poses significant implications for pharmacies, physician practices, and other stakeholders in the health care industry. In light of the holding, even if a reasonable person could believe otherwise, if a defendant has a subjective belief that their activities are permissible, there may be a defense to the FCA’s scienter or knowledge requirement. Moreover, where a defendant has obtained a written opinion from legal counsel discussing how and why a model is permissible, this may aid in the party’s defense that the knowledge requirement was not met due to their subjective belief that their claim submission was appropriate.
In particular, models that have become more prevalent but include ambiguities could benefit from a legal opinion to reinforce the parties’ subjective understanding regarding the arrangement’s permissibility. For example, the VBE exception to Stark only applies to compensation arrangements, not investment interests. However, “titular ownership,” or ownership in title only, is not considered “ownership” under Stark; it is considered a compensation arrangement. A titular ownership or investment interest is one that excludes the ability or right to receive the financial benefits of ownership or investment, including, but not limited to, the distribution of profits, dividends, proceeds of sale, or similar returns on investment. There is limited guidance as to what will constitute a titular ownership interest. Given the ambiguity, a legal opinion from qualified healthcare counsel finding that there is a reasonable basis to believe titular ownership exists may provide a defense against FCA claims predicated on a Stark violation alleging that the party was ineligible for the VBE exception due to an ownership interest.
How Frier Levitt Can Help
Frier Levitt’s experienced attorneys counsel stakeholders, including physician practices and pharmacies as to the regulatory impacts of different complex healthcare arrangements. To protect against potential FCA allegations predicated on the subjective knowledge of the stakeholder, Frier Levitt can review a stakeholder’s model for compliance and, where warranted, provide a regulatory opinion letter to support that stakeholder’s subjective belief that the arrangement is permissible.
