Your belief matters: U.S. Supreme Court decision affirms subjective knowledge standard for False Claims Act determinations

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Primary care physicians and other clinicians should review their False Claims Act (FCA) compliance policies and processes in the wake of a recent U.S. Supreme Court decision which concluded that a party’s subjective belief as to whether an FCA violation occurred is an important factor for determining liability. Specifically, on June 1, 2023, the U.S. Supreme Court issued a unanimous opinion in the highest-profile FCA case decided in many years, rejecting a pair of decisions that had adopted an “objective” standard for assessing potential FCA malfeasance in the context of pharmacy drug discount programs.

While this case arose in connection with pharmacy discount programs, the relevance of this ruling is far broader – it establishes a new precedent that could affect cases involving primary care physicians, hospitals, health care systems, and any other providers that bill federal health care programs.

The decision

Conor Duffy, JD
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Seth Orkand
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In U.S. ex rel. Schutte v. Supervalu Inc., the Court held that for purposes of establishing scienter, i.e., knowledge of alleged wrongdoing, under the FCA, “it is enough if [defendants] believed that their claims were not accurate” [because] “what matters for an FCA case is whether the defendant knew the claim was false.” The Court declined to uphold a proposed objective scienter standard under the FCA, and accordingly vacated the underlying judgment of the Seventh Circuit Court of Appeals.

This decision arises from two consolidated qui tam FCA suits brought against operators of retail drug pharmacies by whistleblowers. The whistleblowers alleged that the pharmacies violated the FCA by submitting claims to federal health care programs for covered prescription drugs with reported prices that exceeded the “usual and customary” charges for the drugs to the general public. These practices were claimed to violate Medicare and Medicaid regulations that limit pharmacy reimbursement based on a formula that, in part, looks to the pharmacy’s “usual and customary charge” to the public as a cap on the amount Medicare or Medicaid may reimburse for the drug. The alleged FCA violations specifically related to discount drug programs offered by these retail pharmacies.The whistleblowers claimed that:

• The wide prevalence of the discounts on drugs meant that the discounted rate offered to customers became the respective pharmacy’s “usual and customary” rate (not the higher non-discounted rate reported by the pharmacies to Medicare and Medicaid), and
• The defendants were notified that the discounted prices were the “usual and customary” prices but submitted claims anyway and sought to shield that information from regulators.

The Seventh Circuit upheld judgments in favor of the pharmacies on the basis that they did not knowingly violate the FCA because they acted consistent with an objectively reasonable interpretation of the relevant law (the “usual and customary” requirement), even though it may not have been a correct interpretation. In other words, Seventh Circuit held that the pharmacies’ subjective beliefs did not matter because “someone else, standing in the [defendants’] shoes, may have reasonably thought that” their interpretation was accurate.

The Supreme Court rejected the Seventh Circuit’s objective standard, and instead instructed that the answer “is straightforward: The FCA’s scienter element refers to [the defendants’] knowledge and subjective beliefs – not to what an objectively reasonable person may have known or believed.” To reach this conclusion, the Court observed that the “facial ambiguity” of the phrase “usual and customary” does not by itself preclude a finding of scienter under the FCA. The Court further refused to recognize an “objective safe harbor” against FCA liability proposed by the defendants, and stated that the Court will not “look to legal interpretations that [defendants] did not believe or have reason to believe” when submitting claims to absolve those claims from FCA liability.

Establishing knowledge in an FCA Case

Physicians and other clinicians should be aware that following this decision, scienter may be established in one of three ways: (1) by showing actual knowledge of the falsity of claims; (2) by showing awareness of the substantial risk of the falsity of claims and intentional avoidance of learning whether the claims were accurate; or (3) by showing submission of claims despite an awareness of a substantial and justifiable risk that they are false.

Takeaways for providers and health care organizations

The Court’s decision underscores the importance of evidence concerning the actual knowledge and beliefs of clinicians and health care organization that bill federal health care programs and thus may be subject to FCA liability. This evidence could include, for example, notices from regulators and internal deliberations concerning often ambiguous or vague regulatory requirements. Interestingly, the decision was authored by Justice Clarence Thomas, who also authored the opinion on behalf of a unanimous Supreme Court in the last high-profile FCA case before the Court – the seminal decision in Universal Health Services v. U.S. ex rel. Escobar, 136 S. Ct. 1989 (2016) addressing the FCA’s materiality standard.

Ultimately, clinicians and health care organizations should recognize that their own knowledge and reasonable beliefs about the propriety of billing practices or particular claims may later be relied upon as evidence of knowledge and intent (scienter). Clinicians and health care organizations should be mindful of how such beliefs are expressed and retained in records, and of the need to consult with compliance counsel proactively to address concerns about claims and billing practices in advance of potential regulatory scrutiny.

Seth B. Orkand, JD, is a partner at Robinson & Cole LLP and is co-chair of the firm’s Government Enforcement and Internal Investigations team. He frequently advises medical providers in matters involving allegations of health care fraud.

Conor O. Duffy, JD, is a partner at Robinson & Cole LLP and member of the firm’s Health Care Practice Group. He regularly counsels physicians, hospitals and other health care organizations on compliance with federal fraud and abuse laws.