Court finds government agencies cannot categorize regulatory violations as material as a matter of law

On January 7, 2022, a district court in the Western District of Kentucky dismissed the DOJ’s implied theory of false certification of allegedly medically unnecessary genetic testing, finding that prosecutors had failed to sufficiently plead materiality. In so ruling, the court established a new materiality test that precludes the government from arguing that certain regulations are relevant per se based on the government’s characterization of them as terms of payment. Instead, plaintiffs must still plead “specific facts regarding the effect of a violation of this regulation” to survive termination.

Federal prosecutors alleged that the defendant violated the FCA by submitting requests for genetic testing without complying with three particular regulations. The first required that physicians “use the results [of a test] in the management of the beneficiary’s specific medical problem. The second imposed special requirements for ordering warfarin responsiveness tests. And the third said that “[t]es not prescribed by the physician treating the beneficiary are not reasonable and necessary,” and therefore are not eligible for reimbursement because they do not meet Medicare’s statutory criteria for reimbursement. Prosecutors claimed that those regulations — particularly the last one, compliance with which they say is self-appointed as necessary for payment — were important to the government’s decision to pay.

However, the court found these claims conclusive and unsupported by facts to determine whether the settlements were truly material. The court first considered whether,[b]y purporting to incorporate the statutory standard into regulatory language, can an agency circumvent the factual materiality analysis described in Escobar by choosing to categorize certain regulatory violations as “material” in law? The court answered in the negative, explaining that materiality is necessarily a question of mixed law and fact because, if it were otherwise, “any breach could be considered material by the regulatory saying of the executive.” : the simple expedient of considering any (and possibly all) regulatory violations to render a service “unreasonable and necessary” under health laws. Thus, the court established a three-part materiality test: “materiality depends on what the government has done before (a factual question), whether payment is conditional on meeting that requirement (a legal question ) and the importance of the market requirement (a mixed question).

The court concluded that the government’s factual allegations were totally flawed. The closest prosecutors came to providing the necessary factual support was their allegation that the government engaged in a retrospective review of claims submitted by the defendant’s lab and concluded that “equally deficient claims were medically unnecessary.” “. But the court dismissed the significance of this allegation for two reasons. First, the government has not clarified whether the claims are insufficient due to breaches of the same regulations at issue in the case, or simply “similar” but different regulatory requirements. Second, the court seemed concerned that the government might have dismissed the claims as medically unnecessary “in anticipation of litigation”, and explained that “the government does not refer to any authority for the proposition that it can only rely on an after-the-fact dismissal of the very claim it seeks to litigate. In other words, the government’s factual evidence regarding materiality must, according to the court, arise before the government’s litigation on the question of significance.

A copy of the court decision is available here.

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