The Supreme Court’s Decision in Universal Health Services v. U.S. ex rel. Escobar: Professor David Freeman Engstrom Answers Critical Legal Questions

The Empiricists 1
David Freeman Engstom ’02

Yesterday the Supreme Court decided the most important case yet regarding the reach of the False Claims Act (FCA), a little-known but increasingly controversial statute first enacted during the Civil War but substantially amended in 1986 that incentivizes private individuals, acting as “relators,” to ferret out fraud on the federal government.   In this Q&A, Professor David Freeman Engstrom discusses the legal questions raised in the case and also his motivation to get involved as an amicus.

A recent editorial called Escobar the “most important case under the radar” and the “strongest candidate for sleeper status” this term.  Why should we care?

Two reasons.  First, fraud on Uncle Sam is a big problem.  Some estimate fraud within Medicare and Medicaid alone costs the federal fisc upwards of $100 billion per year.  That’s a huge drain—and a huge burden on the taxpayers who are ultimately left holding the bag.  Second, the FCA has quickly become the federal government’s most important anti-fraud tool.  The regime has grown steadily since the late 1980s and is currently humming along at roughly 600 lawsuits and more than $3 billion in recoveries per year.  To put this in perspective, the FCA’s litigation output is now roughly as large as antitrust or securities law.

But the FCA is also controversial because of its novel structure:  The FCA grants what amounts to a private right of action to you or me to serve as “relators” and bring lawsuits on behalf of the United States alleging fraud in connection with government programs.  If we prove that a hospital or a military contractor defrauded the government, we earn a cut of the money returned to the federal treasury.  We get to be, in the lingo, “private attorneys general” for the United States.

What was the Escobar case about?

The facts are tragic.  A teenager named Yarushka Rivera sought treatment for bipolar disorder at a mental health facility in Massachusetts, with the tab for her treatment picked up by Medicaid.  After five years of treatment, she had a bad reaction to a medication she was prescribed, suffered seizures, and died.  She was 17.  Her mother and stepfather soon learned that only one of the five professionals who treated Yarushka was licensed—a glaring violation of state Medicaid regulations.  They brought suit under the False Claims Act, which imposes liability on “any person who . . . knowingly presents, or causes to be presented, a false or fraudulent claim for payment” to the government.  Their basic argument was that the facility’s claim for Medicaid reimbursement was false because it failed to mention that the services provided to Yarushka had been provided in a way that flouted the licensing regulations.  In legalese, Yarushka’s grieving parents claimed that the facility’s payment request was an “implied certification” that it had fully complied with those regulations.

All that seems like a no-brainer.  Why shouldn’t the False Claims Act cover such conduct?  Didn’t the government get less than it bargained for?

The case might seem like an easy one, but the question of which violations create FCA liability raises devilishly difficult line-drawing problems.  In many cases, a government contractor delivers goods or services, but in doing so violates a regulatory provision in a way that plainly rips off the government.  (Standard Civil-War-era examples include selling the Union Army sick mules.  A modern example is a recent case where a contractor provided the government with security guards who couldn’t shoot.)  But government regulations, especially in the health care context, are vast and often byzantine.  Does violation of any regulation—even a nitpicky one—bring the claim within the FCA’s ambit?  That’s hard.  Too loose of a test and we risk turning the FCA into an all-purpose enforcement statute—imposing unjustified liability on contractors and raising the price the government (and thus taxpayers!) pay for goods and services.  Too tight and we leave lots of wasteful fraud unchecked, unpoliced, and undeterred.

What did the Court decide, and who won?

Until now, the circuits were all over the map as to when relators can assert “implied certification” claims.  In its ruling below, the First Circuit said, in effect, always.  The Seventh Circuit recently said never.  Several other circuits have said sometimes.

In its decision, the Supreme Court endorsed the “sometimes” camp but then announced a new test based on a “reasonable person” standard.  Going forward, FCA liability will attach only where a “reasonable person” would agree on two points.  First, the reasonable person has to think that a contractor’s claim for payment for goods or services, when paired with silence on its legal non-compliance in providing those goods or services, amounts to an evasive “half truth.”   Second, a reasonable person has to agree that the contractual, statutory, or regulatory violation is important enough to matter.

Perhaps the one clear winner in all of this is Yarushka’s family.  Though the case will be re-litigated on remand under the Court’s new test, the opinion makes clear that the computer codes the care facility used in making its reimbursement requests, when paired with its silence as to its blatant licensing violations, amounted to “half-truths” from the perspective of a reasonable person.  The Court also strongly suggested that the licensing violations at issue are important.  The family’s path to victory thus seems clear.

The other winners and losers are harder to tally.  American taxpayers probably won, but only by handing a loss to rigid formalists.  The Court steered clear of extreme, bright-line, inflexible approaches.  But much remains to be seen.  Taxpayers will only really benefit if lower courts can consistently apply the Court’s squishy “reasonable person” standard to the myriad contexts in which a contractor seeks payment after committing a contractual, statutory, or regulatory violation.  Some commentators have already said that the Court made a muddle of the entire area.  That might be true.  It might not.  But expect lots of litigation in the meantime.

Does Escobar teach any broader lessons?

It does.  I’ve been beating the drum over the past few months that the Escobar case is a revealing chapter in the long-running litigation wars.  In recent decades, corporate America has become increasingly adept at arguing that this or that litigation regime has run amok.  And their claims have gotten traction, moving state legislatures to enact unwise and unfair “tort reforms” and fueling the shift to arbitration as a mode of dispute resolution.  It should therefore not surprise that the Escobar case drew a swarm of amicus briefs from groups like the Chamber of Commerce warning that FCA litigation in general, and these implied certification claims in particular, have “wildly expanded” and “exploded,” imposing massive and unjustified costs on American society.

Here’s why the Escobar case has been so revealing:  Because the federal government must, by statute, track all FCA lawsuits, it is the rare litigation regime where, with a little effort, we can construct high-quality data and then actually test core claims about its operation.  That’s exactly what I did between 2011 and 2013, and my findings, presented in a series of articles and then an amicus brief I filed with the Court in Escobar itself, suggest we should be very wary of claims the Chamber and its cronies make.  An “explosion” of lawsuits featuring “implied certification” claims?  My data say the opposite—and this is just one of many of their claims I’ve been able to disprove.

Of course, it’s hard to know whether or how any of this impacted the Court’s thinking in Thursday’s decision.  Justice Thomas is not the wonkiest of Justices, and it’s possible he tuned out all this chatter.  Still, for whatever reason, the Court—very wisely—resisted the temptation to credit the alarmist claims of those who advocated a tighter test and sought to choke off the FCA’s use and development.  If the Court did consider policy arguments, it seems that data, not anecdote, prevailed.

David Freeman Engstrom is a Professor of Law and the Bernard D. Bergreen Faculty Scholar at Stanford Law School.