Civil and Criminal Enforcement Actions Under the False Claims Act:

Must the Government Prove Materiality At Trial

By: Mark D. Seltzer and Kathleen B. Hogan

Despite Supreme Court case law in the banking context which removed materiality as an essential element of a false statement charge under section 1014 of the federal criminal code, the defense of civil False Claims Act suits against health care providers for Medicare and Medicaid overbilling should still include challenges to the materiality of the alleged false claims. Defense counsel should take advantage of the recognition by some circuits that materiality remains a threshold requirement to any government action under the civil False Claims Act. Indeed, even if the government can prove a civil False Claims Act cause of action, the government must then carry an additional burden of demonstrating materialty as to the causation of damages. Supreme Court case law does suggest, however, that defense counsel may be unsuccessful in seeking to dismiss criminal False Claims Act and other criminal false statement charges on materiality grounds where materiality is not an express element of those statutory violations.

Recent legislative efforts led by the American Hospital Association to reform the civil False Claims Act to establish quantifiable standards of materiality of damages should further encourage defense counsel to defend Medicare and Medicaid overpayment cases by highlighting to the government the lack of material damages caused by alleged misbillings. The proposed False Claims Act reform initiative also may be an indicator to defense counsel that potential jurors will be receptive to arguments of government overreaching in its penalizing of innocent misbilling claims.

Materiality and the Wells Case: The Supreme Court Removes Materiality from Section 1014 Prosecutions

In United States v. Wells, 117 S.Ct. 921 (1997), the Supreme Court addressed the issue of whether the materiality of the falsehood is an element of the crime of knowingly making a false statement to a federally insured bank. The government charged defendants Jerry Wells and Kenneth Steele with violating, in part, 18 U.S.C. § 1014 (“section 1014”) by providing to a bank a forged personal guarantee as security for bank financing. The purported guarantee would have enabled the bank to pursue the assets of the defendants’ wives in the event that the defendants had defaulted on their loan. After being instructed by the trial judge that the materiality of the alleged false statement was not a jury question, the jury convicted the two defendants of violating section 1014 as well as a related conspiracy charge.

The defendants argued that, in light of the Supreme Court’s holding in United States v. Gaudin, 515 U.S. 506 (1995) (finding materiality is a necessary element of 18 U.S.C. § 1001 and that the issue of materiality should be submitted to the jury), the materiality of the false statement should have been decided by the jury. In response, the government contended that materiality was not an element of a section 1014 prosecution.

Contrary to the holdings of the vast majority of circuits, the Supreme Court held that materiality was not an element of a section 1014 violation. In so ruling, the Supreme Court found the plain language of the statute and its legislative history to be controlling. The language of section 1014 nowhere requires that a material fact must be the subject of the false statement. In fact, the statute never even mentions materiality.

Materiality and the Criminal False Claims Act: The Impact of Wells

Like section 1014, the criminal False Claims Act, 18 U.S.C. § 287, contains no explicit requirement that the government must prove materiality beyond a reasonable doubt. Section 287 provides in pertinent part that:

Whoever makes or presents to any person or officer in the civil, military, or naval service of the United States, or to any department or agency thereof, any claim upon or against the United States, or any department or agency thereof, knowing such claim to be false, fictitious, or fraudulent, shall be imprisoned . . . .

Nevertheless, the circuits are split as to whether section 287 includes a materiality requirement. Relying on the shared legislative purpose of sections 287 and 1001, a number of circuits have found that the government must prove materiality beyond a reasonable doubt at trial to convict a defendant under section 287. See United States v. Snider, 502 F. 2d 645, 652 n.12 (4th Cir. 1974) (finding that although the False Claims Act makes no reference to a material fact, “materiality has been required as an element of the offense in the same manner as under section 1001.”); United States v. Haynie, 568 F.2d 1091, 1092 (5th Cir. 1978) (assuming without deciding that materiality is an element of a section 287 charge); United States v. Adler, 623 F.2d 1287, 1291 (8th Cir. 1980) (treating materiality as an essential element of both section 287 and section 1001 offenses); United States v. White, 27 F.3d 1531, 1535 (11th Cir. 1994) (assuming without deciding that materiality is an element of a section 287 offense); United States v. Durenberger, 48 F.3d 1239, 1243 (D.C. Cir. 1995) (assuming without deciding that materiality is an element of a section 287 offense); but see United States v. Elkin, 731 F.2d 1005, 1009 (2nd Cir. 1984) (holding that “the language of section 287 in no way suggests that materiality is an element of the offense”); United States v. Parsons, 967 F.2d 452, 456 (10th Cir 1992) (“materiality is not an element required by 18 U.S.C. § 287”); United States v. Taylor, 66 F.3d 254, 254 (9th Cir. 1995) (“this court has never held that materiality is an implicit element of 18 U.S.C. § 287”).

The holding in Wells indicates, however, that if the Supreme Court is faced with the question of whether section 287 requires the government to prove materiality, the Court would likely find that it does not. First, section 287 contains no express materiality requirement. Second, the legislative history surrounding the enactment of section 287 likewise indicates that Congress did not intend to include a materiality requirement. Prior to 1940, the criminal False Claims Act was part of 18 U.S.C. § 80 which criminalized both the making of false statements and false claims to federal officials. In 1940, section 80 was divided into two parts: the portion criminalizing the making of false claims was codified at section 287, while the portion criminalizing the making of false statements was codified at section 1001.

The language of section 1001 contains an explicit requirement that the government demonstrate that the alleged false statement was material. The inclusion of the materiality requirement in section 1001 strongly implies that Congress’s exclusion of a similar materiality requirement from its companion statute, section 287, may have been intentional.

Materiality and False Statement Violations Specific to the Health Care Industry

The federal criminal false statement offenses which are unique to the health care industry are ripe for defense attacks on the materiality of false claim charges. Within the Social Security Act itself, Congress created 42 U.S.C. § 1320a-7b(a)(1) (“section 1320a-7b(a)(1)”) which criminalizes the making of a false statement in a claim or application for payment of benefits by a federal health care program. Unlike the criminal False Claims Act, however, section 1320a-7b(a)(1) explicitly requires that the government demonstrate that the alleged false statement was material. Courts have construed materiality in this context to include any statement “necessary to put the claimant in a position to receive government benefits . . ..” United States v. Brown, 763 F.2d 984, 993(8th Cir. 1985) (interpreting 42 U.S.C. § 1396h(a)(1) which, in 1987, was redesignated 42 U.S.C. § 1320a-7b(a)(1)). The government is not required to demonstrate that it relied on the false statement in making the decision to pay the claim. It must simply demonstrate beyond a reasonable doubt that the statement placed the claimant in a position to receive government benefits which the claimant had no rightful claim to receive.

The Health Insurance Portability and Accountability Act also criminalizes the making of materially false statements in connection with the delivery of or payment for benefits, items, or services in connection with a health care benefit program. See 18 U.S.C. §1035 (“section 1035”). As with section 1320a-7b(a)(1), the language of section 1035 expressly requires that the government prove materiality beyond a reasonable doubt. As of the date of publication of this article, there were no reported cases that interpret section 1035. However, given the similar language in and purpose of the two statutes, courts are likely to construe the materiality requirement included in section 1035 consistent with the materiality requirement in section 1320a-7b(a)(1).

While Supreme Court case law may imperil the success of defense challenges to the validity of certain criminal false claims act charges on materiality grounds where materiality is not an express element of the applicable statutory violations, the case law under the civil False Claims Act may be more receptive to defense attacks on government showings of materiality. For that reason, defense counsel may wish to raise defenses to materiality under the civil False Claims Act both during the course of settlement discussions with the government and at any trial.

The Civil False Claims Act and Materiality

The civil provisions of the False Claims Act, 31 U.S.C. §§ 3729-33 (the “FCA”), have been utilized as the federal government’s primary civil weapon against health care fraud. The FCA imposes civil liability for, among other acts, knowingly presenting a false claim for payment to a federally-funded health care-related entity. The statute does not require that the government demonstrate that the person or entity that submitted the claim intended to defraud the government. Rather, the government must prove, by a preponderance of the evidence, that the person or entity submitting the claim actually knew that the information contained in the claim was false or that the person or entity recklessly disregarded or deliberately ignored the truth or falsity of the information. The statute provides that the government may collect up to three times the amount of damages sustained by the government plus a mandatory per-claim civil penalty of $5,000 to $10,000.

As with the criminal False Claims Act provisions codified at 18 U.S.C. § 287, the plain language of the FCA does not require that the government demonstrate that the alleged false statements were material. A few of the circuits have, nonetheless, imposed a materiality requirement in FCA actions. See United States ex rel. Berge v. The Board of Trustees of the University of Alabama, 104 F.3d 1453, 1459 (4th Cir. 1997) (stating “we now make explicit that the current civil False Claims Act imposes a materiality requirement”); United States v. Data Translation, Inc., 984 F.2d 1256, 1267 (1st Cir. 1992) (finding that the False Claims Act requires that the false statement made to the government be material). In the civil context, as in the criminal context, a material statement is one that has a natural tendency to influence or is capable of influencing agency action. Berge, 104 F.3d at 1460. In contrast to the Supreme Court’s holding in Gaudin as to section 1001 criminal prosecutions, materiality under the civil False Claims Act is considered a mixed issue of law and fact, but it is an issue for the court to decide and not a jury.

The favorable case law under the civil False Claims Act provides defense counsel with a window to assert a two-pronged attack against the materiality of an overpayment claim. It is an attack that should be pressed during settlement discussions with the government and, if those discussions are unfavorable to the position of the provider client, at any trial. First, defense counsel should challenge the materiality of the purported false claim for payment as to the reimbursement decisions of the federally-funded entity. Second, defense counsel should challenge the materiality of the causal link between the purported false claim and any government showing of damages.

Although at first blush it may appear that where a false claim for reimbursement under Medicare, for instance, was actually paid the government has automatically established the materiality of the causal link between the false claim and damages -- that is, but for the claim, the HCFA contractor never would have paid and, therefore, the claim caused damages equal to the amount paid -- that is not necessarily the case. There are several examples: (i) a physician bills one procedure code when he should have used another procedure code and reimbursement for the two codes is identical; (ii) a hospital provides incorrect information on a Medicare billing form with no reimbursement impact; (iii) a physician bills the correct code but provides other information in the claim form relating to medical history, and demographic and diagnostic data, which is incorrect but would not have an immediate impact upon the payment of the specific reimbursement claim (although the incorrect information may ultimately be significant to the payor’s later reevaluation of the appropriateness of the medical services provided); and (iv) a physician provides services that the physician believes in good faith is indicated but the Medicare contractor subsequently determines was not medically necessary, and the contractor recoups the reimbursement from the physician.

Finally, defense counsel also may draw guidance from the legislative challenge to the False Claims Act as a barometer of potential jury reaction to claims of government overreaching.

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Last Updated: 9/29/98