If your local government receives federal funds, heads up. The Supreme Court adopted a new theory of liability under the False Claims Act in Universal Health Services v. U.S. ex. rel. Escobar.

The False Claims Act (FCA) allows third parties to sue on behalf of the United States for fraud committed against the United States. While the Supreme Court has yet to rule whether states and local governments can bring FCA claims, local governments can be sued for making false claims against the federal government.  

Per the Court’s ruling a defendant (including a local government) can be liable if it submits a claim for payment that makes specific representations about the goods or services provided, but knowingly fails to disclose the defendant’s noncompliance with a statutory, regulatory, or contractual requirement. Liability requires the misrepresentation must be material to the federal government’s decision to pay.   

Parents of Yarushka Rivera brought an FCA case against Arbour Counseling Services, owned by Universal Health Services, claiming that it submitted false Medicaid reimbursement claims in regards to their daughter’s care. Rivera died from seizures related to medication prescribed by an Arbour nurse who wasn’t supervised by a board certified psychiatrist as required by state regulation.  An investigation revealed that Arbour failed to comply with a number of staffing and supervision regulations. Rivera’s parents argued that Arbour’s Medicaid reimbursement claims for Rivera’s care were false because Arbour wasn’t complying with program requirements.  

Per the “implied false certification” theory when a defendant submits a claim for reimbursement, it impliedly certifies compliance with all conditions of payment. In a unanimous opinion written by Justice Thomas the Court adopted the “implied false certification” theory with two caveats. “[F]irst, the claim does not merely request payment, but also makes specific representations about the goods or services provided; and second, the defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths.”

The Court went on to rule that failure to disclose violations of statutory, regulatory, or contractual requirements violate the False Claims Act only if they are material to the federal government’s decision to pay. This is the case regardless of whether the requirements are expressly designated as a condition of payment or whether the federal government is entitled to refuse payment if it was aware of the violation. The Court points out, for example, that the United States expects that the guns it buys will shoot but may not make it an express condition of payment.

The Supreme Court did not decide whether Universal Health Services violated the False Claims Act in this case. It is up to the lower court to determine whether Universal Health Services “misrepresented its compliance with mental health facility requirements that are so central to the provision of mental health counseling that the Medicaid program would not have paid these claims had it known of these violations.”