Texas Supreme Court Imposes Materiality Requirement on Texas Healthcare Fraud Omissions Claims
In a significant decision for healthcare providers, the Texas Supreme Court reversed a court of appeals decision that had revived claims against a laboratory testing company and reinstated summary judgment for the defendant. The Court held that the Texas Health Care Program Fraud Prevention Act’s (the “Act”) omissions provision requires proof of materiality, even though the provision does not expressly use the word “material.”
The case arose from allegations that the defendant violated Texas Medicaid billing regulations by failing to offer Texas Medicaid the same pricing and discounts allegedly offered to other payors. The State alleged that the defendant’s reimbursement claims and provider agreements contained false statements or misrepresentations, and that the defendant concealed or failed to disclose information about its alleged noncompliance in violation of Section 36.002(2) of the Act.
The State argued that materiality is not required under Section 36.002(2), noting that other nearby provisions expressly require materiality while that provision does not. The Court rejected that argument. Reading the Act against common-law fraud principles, the Court held that omissions claims, like affirmative misrepresentation claims, require proof that the omitted information mattered to the government’s payment decision. The Court also reasoned that the statutory word “permits” suggests that the omission must bear on whether payment was made.
The Court then considered whether the defendant had negated materiality at summary judgment. It held that a defendant may satisfy its initial burden by presenting competent evidence of undisputed facts that, viewed as a whole, are incompatible with materiality. The burden then shifts to the State or relator to present competent evidence creating a genuine issue. Argument alone is insufficient, and evidence of a regulatory violation does not necessarily establish materiality.
Relying on common-law fraud principles and federal False Claims Act precedent, including Universal Health Services, Inc. v. United States ex rel. Escobar, the Court explained that the government’s continued payment of claims despite actual or imputed knowledge of the alleged violation is “very strong evidence” of immateriality and may sometimes be conclusive. Relevant evidence may include what the government knew, how it acted after learning the facts, who received the information, how similar violations were treated, whether the requirement was a formal condition of payment, and the magnitude of the alleged violation.
On the record before it, the Court concluded that the defendant had met its burden. During the State’s investigation, the defendant disclosed the relevant conduct, explained its legal position, provided access to billing data and other materials, and continued to receive payment without objection. The State did not explain why it continued paying the defendant if the alleged violations were material. Nor was it enough to show that compliance with the regulations was a condition of payment or that the defendant may have violated them.
The Court emphasized that the State need not immediately stop paying claims whenever it learns of a potential regulatory violation. It may continue paying while preserving its enforcement position through tools such as prepayment review, post-payment review, additional documentation requirements, or prior authorization. But the State must act with diligence; after a reasonable time to investigate, prolonged inaction may support a conclusion that the alleged misconduct was not material.
Chief Justice Blacklock, joined by Justice Busby, dissented. The dissent argued that the omissions provision requires causation, not materiality, and that the Court had added a requirement the Legislature omitted from the statutory text.
The decision is a major development for defendants facing Texas healthcare fraud claims. It confirms that materiality is an element of omissions claims under the Act and gives defendants a threshold defense where the alleged omission did not matter to the State’s payment decision, even if the State alleges a regulatory violation.
The majority opinion can be access here. The dissenting opinions can be accessed here and here.
This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.
