02 September 2021

Split Seventh Circuit Panel Spars Over Escobar Interpretation

The United States Court of Appeals for the Seventh Circuit recently allowed a previously dismissed qui tam case to proceed against Molina Healthcare of Illinois (“Molina”). The suit, brought by a relator who founded Molina subcontractor GenMed, alleges that Molina fraudulently billed Illinois’ Medicaid program for skilled nursing facility (“SNF”) services that were not actually provided.  The district court previously dismissed the case at the pleading stage in June 2020, finding that the relator’s complaint insufficiently alleged that Molina knew its alleged false claims were material. The Seventh Circuit, in a split decision, reversed and remanded the case for further proceedings.

The relator alleged that Molina engaged GenMed to provide SNF services to Molina’s nursing facility enrollees, but that GenMed prematurely terminated the contract after Molina refused to pay it. The relator further alleged that Molina subsequently failed to deliver any SNF services for those beneficiaries either through its own personnel or a subcontractor for a period of two years. Molina also allegedly failed to inform federal authorities of the change and thus continued to receive full capitation payments for SNF services that were not provided.

The majority found that the relator sufficiently alleged that Molina knew its alleged conduct was material despite the fact that the government continued to pay Molina and renewed its contract with Molina twice even after the qui tam complaint was filed. While the majority agreed that Escobar made clear that the government’s continued payment despite actual knowledge that certain requirements were not met is “very strong” evidence that the requirements were not material, the majority found that “this argument is better saved for a later stage, once both sides have conducted discovery.” The majority reasoned that “for pleading purposes” Molina’s “barebones assertion that the government was aware of all material facts is not enough to sweep away the elaborate facts that [the relator] furnished” and that “many things” could explain the government’s continued contracting with Molina.

Escobar requires not only that the alleged regulatory noncompliance be material to the government’s payment decision, but that the defendant know that the government viewed the noncompliance as material. The majority disagreed with the district court’s conclusion that the complaint failed adequately to allege that Molina knew that the government viewed SNF services as material to its payment of capitated rates. The majority reasoned that the district court “failed to give proper weight” to the fact that Molina was a “highly sophisticated” healthcare entity that “was quite familiar with capitation rates” and that it knew that they were designed to reimburse for services that were actually rendered. The majority held that knowledge may be alleged generally, even under Rule 9(b), and thus the district court “was wrong to insist that [the relator] identify concrete evidence of actual knowledge.”

In contrast, Judge Sykes wrote a dissent sharply criticizing the majority’s approach, which she characterized as one that “moves our circuit law in a different direction” from Escobar. Judge Sykes would have affirmed dismissal of the fraudulent inducement theory because the relator could point to no specific misleading statement by a company representative; instead, the relator “simply invites us to assume that because the contract was renewed at a time when Molina was not providing SNFist services, Molina necessarily made false statements to the government.” Judge Sykes found the express factual falsity theory infirm because the relator was at base alleging a falsehood by omission, which meant that the case really raised a theory of implied false certification.

Finally, Judge Sykes pointed out that the theory of fraud, even pled as an implied false certification, failed for two reasons. First, the theory could not satisfy the first of Escobar’s two conditions, that the claim “make[] specific representations about the goods or services provided.” In nonetheless reversing the dismissal, the majority ignored Seventh Circuit precedent requiring specific representations to be made on the claim for payment, rather than just “a general request for payment coupled with some degree of contractual or regulatory noncompliance.” The theory also failed Escobar’s second condition, which Judge Sykes interpreted to be satisfied where a “defendant makes a specific statement…that inevitably leads the recipient to assume by implication a particular falsehood….” But “[w]here, as here, the defendant’s claim for payment wouldn’t necessarily lead the recipient to assume the specific falsehood alleged in the complaint, there is no half-true statement and thus no falsehood by implication.”

The opinion underscores the challenges many defendants face at the motion to dismiss stage in rebutting often thin allegations of materiality.

A copy of the Court’s opinion can be found here.

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