Supreme Court clarifies mental state requirement for fraudulent drug prescription charges

This month, the Supreme Court issued its decision in United States ex rel. Schutte v. SuperValu Inc., 143 S. Ct. 1391 (2023), considering the scienter standard under the False Claims Act (FCA). The Court held that the FCA’s “scienter element refers to respondents’ knowledge and subjective beliefs – not to what an objectively reasonable person may have known or believed.” Id. at 1399. The case raises important questions about how to counsel clients in situations in which payment rules are ambiguous.

The Supreme Court reviewed the Seventh Circuit’s decision that the respondents were entitled to summary judgment even if they actually thought their claims were false because there was an “objectively reasonable” interpretation of the applicable law, under which the claims would not be false. The Supreme Court presumed the following facts.

Respondents ran pharmacies that submitted claims for reimbursement to Medicare and Medicaid. Medicaid and several private Medicare plans limit the reimbursement rate to the “usual and customary” rate charged to the public. Respondents’ competitor began offering 30-day supplies of many drugs for $4, which was lower than respondents’ prices. To compete, respondents often price-matched the drugs for cash sales. Petitioners’ alleged this happened often; for 2014, 88% of one respondents’ cash sales for its top 20 generic drugs were at discounted rates. Respondents continued to report their usual and customary rates excluding the discounted sales, the result being that the federal payers paid more than what respondents charged the public. This made the claims materially false, so the case turned on scienter.

Here, petitioners alleged that respondents’ executives actually knew that this practice was improper because both received notice from a pharmacy benefit manager stating as much, and because executives at both companies raised concerns about the practice. The Seventh Circuit nonetheless held that respondents were entitled to summary judgment because their actions were consistent with an “objectively reasonable” interpretation of “usual and customary,” even if that interpretation turned out to be incorrect and the respondents actually thought the prices they submitted to the government were incorrect.

In a unanimous decision, the Supreme Court disagreed, holding that if respondents’ claims were false and they actually thought that their claims were false – because they believed that their reported prices were not actually their “usual and customary” prices – they would have “knowingly” submitted a false claim. Id. at 1399. In other words, where the respondent had an actual, subjective belief that a claim was false, it did not matter if there was a possible, objectively reasonable argument against falsity.

The Supreme Court’s decision seems narrow but has the potential to have broad impacts on regulatory practice. Justice Kagan noted in oral argument that the facts presented the “easy case” in which the respondents “thought that this interpretation was wrong … they knew it was wrong.” The “objectively reasonable” interpretation was allegedly concocted during litigation.

Importantly though, the FCA’s scienter requirement is much broader, encompassing “actual knowledge,” as well as situations in which a person “acts in deliberate ignorance” or “reckless disregard” of the truth or falsity of information. 31 U.S.C. § 3729(b)(1)(A). The Court noted that each can be satisfied subjectively:

Under the FCA, petitioners may establish scienter by showing that respondents (1) actually knew that their reported prices were not their “usual and customary” prices when they reported those prices, (2) were aware of a substantial risk that their higher, retail prices were not their “usual and customary” prices and intentionally avoided learning whether their reports were accurate, or (3) were aware of a substantial and unjustifiable risk but submitted the claims anyway.”

Id. at 1404.

It is the “recklessness” scienter requirement that has the potential to be so impactful to a regulatory practice. Recklessness is often addressed in the civil context and in the FCA context as objective. The Court noted that, in some cases, a respondent is “reckless” for “acting in the face of an unjustifiably high risk of illegality that was so obvious that it should have been known, even if it was not actually known.” Id. at 1401, n. 5. The Court did not address this, noting that it is “enough to say that the FCA’s standards can be satisfied by a defendant’s subjective awareness of … an unjustifiable risk of such falsity.” Id.

The concept of “subjective recklessness” raises interesting questions for regulatory advice on prospective compliance with ambiguous rules. This is clear in a hypothetical that Justice Kavanaugh proposed during oral arguments: What if there are three possible interpretations of a regulatory requirement, and the provider chooses the most aggressive interpretation that they still thought was reasonable, but after the fact the courts determined it was incorrect? This question is not addressed in the decision but will be repeatedly faced by practitioners.

This question becomes all the more complicated in the face of subregulatory guidance or guidance from Medicare/Medicaid contractors that take a more conservative approach. The Supreme Court has made clear that the Medicare Act precludes CMS and its contractors from adding substantive requirements using such guidance without notice and comment. Azar v. Allina Health Servs., 139 S. Ct. 1804 (2019). Nonetheless, they often do. Could improper guidance documents put a provider on notice that failing to follow the guidance’s interpretation creates an unjustifiable risk of violating the FCA? This seems like an incorrect, but possible, outcome.