(916) 469-9264 info@djrhealthlaw.com

The Supreme Court recently issued its decision in United States ex rel. Schutte v. Supervalu, Inc. (“Supervalu”), reversing the Seventh Circuit’s interpretation of the False Claims Act’s (“FCA”) “knowledge” standard for false claims liability. The decision, which comes after a proposed rulemaking late last December from CMS to change the standard for identifying an overpayment under the 60-day rule to align with the FCA’s knowledge requirements, means that providers may see significant changes to FCA liability for potential overpayments, particularly in situations of regulatory ambiguity.

At issue in Supervalu was whether reports of pharmacies’ “usual and customary” (“U & C”) drug prices, which excluded price-matching discount prices, were submitted with knowledge or reckless disregard for their falsity to Medicare and Medicaid. At the time of submission, there was no clear guidance from CMS on whether U & C drug pricing included discount drug pricing. However, in the absence of such guidance, private entities like pharmacy benefits managers (“PBMs”) had given their own guidance expressly including discounts as part of U & C drug pricing.  The Seventh Circuit imposed a threshold “objectively reasonable” test as part of its evaluation of whether the defendants knew their claims were false due to CMS’ silence on the issue. The question before the Supreme Court was whether this objective threshold was part of the FCA’s knowledge standard in ambiguous situations like this, where providers know how entities like PBMs defined U & C drug pricing, but the ultimate regulator with authority on the matter, CMS, had not issued such guidance.  

Knowledge Standard under the FCA

The FCA defines “knowingly” to mean (i) actual knowledge; (ii) deliberate ignorance; or (iii) reckless disregard.  While it is clear that proof of specific intent to defraud is not required to demonstrate knowledge under these standards, federal law is otherwise silent as to what these three standards otherwise mean. 

In Supervalu, the lack of clear guidance from CMS raised a question about whether the pharmacies at issue had knowledge rising to an actionable false claim under the FCA.  The Seventh Circuit held that the pharmacies lacked knowledge under a baseline “reckless disregard” test. Under that test, a defendant cannot act with culpable knowledge under the FCA as a matter of law “if (a) it ha[d] an objectively reasonable reading of the statute or regulation and (b) there was no authoritative guidance warning against its erroneous view.” In its application of the test, the Seventh Circuit held that the defendant pharmacies did not recklessly disregard the falsity of its claims submitted during the period when no authoritative CMS guidance existed and therefore could not have violated the FCA.

The Supreme Court reversed the Seventh Circuit’s baseline “reckless disregard” test. In reversing the Seventh Circuit, the Supreme Court held that the FCA’s knowledge standard is met where defendants (1) actually knew the U & C prices include discounted prices, (2) were aware of a substantial risk that discounts should be included in U & C prices and intentionally avoided learning whether their discount-excluding U & C price reporting was inaccurate, or (3) were aware of the substantial and unjustifiable risk and submitted claims anyway. The Supreme Court rejected the Seventh Circuit’s inclusion of an objective standard in situations of ambiguous regulatory text, explaining that “ambiguity does not preclude [defendants] from having learned [the term U & C’s] correct meaning—or, at least, becoming aware of a substantial likelihood of the terms’ correct meaning.”

What Does This Mean for Providers? 

The holding in Supervalu clarifies that the defendant’s state of mind is critical for FCA liability—the defendant’s belief in the falsity, or the substantial likelihood of falsity, of a claim is key to whether a false claim exists. This extends even to situations of regulatory ambiguity, where unofficial industry consensus may suffice as evidence of meaning even where the regulating agency has failed to provide guidance. The pharmacies’ disregard of the U & C interpretations they received from PBMs was used as potential support for the idea that their interpretation may have been knowingly false.

Overall, the Supervalu holding is likely to discourage providers from straying from industry consensus in the absence of clear regulatory guidance. This is because a false claim is still possible even where a regulation’s language is ambiguous and there is debate regarding the meaning of the regulation. Under this standard for knowledge, a provider may be liable for a false claim because they chose to follow an unfavored interpretation at the time of claim submission, that may later be clarified to be incorrect, if they believed there was a substantial risk the claim was false even where the unfavored interpretation was plausible. In that instance, calculated risk-taking that acknowledges differing industry opinion becomes potential evidence of knowledge for the purposes of FCA liability after the fact. Making a wrong bet in an ambiguous situation then becomes a potential false claim.

How Does This Decision Impact CMS’ Proposed Changes to the 60-Day Rule?

The Supervalu case may also have significant implications when identifying overpayments under the 60-day overpayment reporting and return rules for Medicare and Medicaid thanks to proposed changes put forth by CMS at the end of December last year.  The proposed changes would align the standards for identifying an overpayment—the triggering event for reporting and return obligations—with the FCA’s knowledge standard.  Whereas current regulations explain that an overpayment is identified when the recipient has, or should have through reasonable diligence, determined an overpayment was received and has quantified the amount of the overpayment, the proposed regulation states that an overpayment is identified when the recipient knowingly receives or retains an overpayment. “Knowingly” is expressly tied to the term’s FCA definition.

By removing the “reasonable diligence” standard and replacing it with the FCA’s knowledge standard, the proposed rule avoids imposing FCA liability for mere negligence as opposed to deliberate fraud. So in this sense, the proposed rule is more lenient than the existing one because it requires more intention to trigger liability under the FCA.  Specifically, the proposed rule would impose FCA liability for retained overpayments where the recipient actually knew an overpayment existed, where the recipient deliberately ignored substantial risk of an overpayment, or where the recipient recklessly disregarded substantial and unjustifiable risk of an overpayment. However, the Supreme Court’s holding in Supervalu tells us that, even under the proposed, more lenient rule, one key to determining if an overpayment exists will be the recipient’s subjective belief as to whether the overpayment exists or is substantially likely to exist.   

The proposed rule also removes the quantification of the overpayment as an essential step to identifying an overpayment and triggering the reporting and return obligations. The removal of this component, when taken with the Supreme Court’s centering of subjective belief in the FCA’s knowledge standard, creates a risk for providers during potential overpayment investigations.  In this way, the new SCOTUS ruling coupled with the proposed rule makes the 60-day rule becomes more concerning for providers, because quantification would no longer be an express step in the identification of an overpayment.  In other words, providers are at increased risk of running afoul of the 60-day report and return timelines as soon as they begin to believe that there has been an overpayment or that there is a substantial likelihood of an overpayment. This risk is particularly acute in complex overpayment investigations, where quantification may take significant time and resources.   

Given that healthcare regulatory compliance is riddled with ambiguities that can result in lengthy, complex investigations, the overall impact of Supervalu with the proposed changes to the 60-day rule is problematic for providers.  We will be tracking the proposed rule change carefully.  In the meantime, we strongly encourage providers to work with legal counsel when weighing a decision that involves navigating regulatory ambiguity.