Court Concludes Government Agencies Cannot Categorize Regulatory Violations as Material as a Matter of Law

On January 7, 2022, a district court in the Western District of Kentucky dismissed DOJ’s implied false certification theory relating to allegedly medically unnecessary genetic tests, holding that the prosecutors failed to adequately plead materiality.  In so holding, the court set forth a novel test for materiality that forecloses the government’s ability to argue that certain regulations are per se material based on the government’s characterization of them as conditions of payment.  Instead, plaintiffs must still plead “specific facts regarding the effect of a violation of that regulation” to survive dismissal.

Federal prosecutors alleged that the defendant violated the FCA by submitting claims for genetic tests while not in compliance with three particular regulations.  The first required that physicians “use the results [of a test] in the management of the beneficiary’s specific medical problem.”  The second imposed special requirements for the ordering of warfarin-responsiveness tests.  And the third stated that “[t]ests not ordered by the physician who is treating the beneficiary are not reasonable and necessary,” and thus are ineligible for reimbursement because they fail to satisfy Medicare’s statutory criteria for reimbursement.  The prosecutors asserted that these regulations—in particular the last, compliance with which they claimed is self-designated as necessary for payment—were material to the government’s decision to pay.

However, the court found these allegations conclusory and unsupported by any facts addressing whether the regulations were truly material.  The court first considered whether, “[b]y purporting to incorporate the statutory standard into regulatory language, may an agency circumvent the factual materiality analysis described in Escobar by choosing to categorize certain regulatory violations as ‘material’ as a matter of law?”  The court answered this in the negative, explaining that materiality is necessarily a mixed question of law and fact, because, were it otherwise, “every violation could be treated as material by the executive’s regulatory say-so: the simple expedient of deeming any (and perhaps all) regulatory violations to render a service ‘not reasonable and necessary’ under the healthcare laws.”  Thus, the court set forth a three-part test for materiality: “materiality turns on what the government previously did (a factual question), whether payment is conditioned on that requirement’s satisfaction (a legal question), and the significance of the requirement to the bargain (a mixed question).”

The court found the government’s factual allegations utterly wanting.  The closest the prosecutors came to bringing forth the necessary factual support was their allegation that the government had engaged in a retrospective review of claims submitted by the defendant’s lab and concluded that “similarly deficiently claims were medically unnecessary.”   But the court dismissed the significance of that allegation for two reasons.  First, the government did not specify whether the claims were deficient due to violations of the same regulations at issue in the case, or merely “similar” but different regulatory requirements.  Second, the court appeared concerned that the government may have denied the claims as medically unnecessary “in anticipation of litigation,” and explained “the government points to no authority for the proposition that it may rely on only an after-the-fact rejection of the same claim it seeks to  litigate.”  In other words, the government’s factual evidence of materiality must, according to the court, arise prior to the government’s litigation over the question of materiality.

A copy of the court’s decision can be found here.

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