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November 27, 2017
  United States v. Palin -- Fourth Circuit
Living in a Material World: Fourth Circuit Finds Universal Health Did Not Shift Materiality Standard Applicable to Health Care Fraud

Areas of Law: Health Law, White Collar Crime

Issue Presented: Whether the trial court applied the correct standard when determining the materiality of certain misrepresentations to the accused's health care fraud scheme.

Brief Summary: In a published opinion, the United States Court of Appeals for the Fourth Circuit affirmed the holding of the district court that found Beth Palin and Joseph Webb guilty of health care fraud and conspiracy to engage in health care fraud. Palin owned an addiction clinic and lab. Webb assisted her in operating both facilities. The two instituted a scheme to defraud health care benefit programs. Pursuant to the scheme, the lab performed expensive weekly tests on insured patients that were not medically necessary. However, the appellants were both aware that insurers prohibit providers from submitting claims for unnecessary tests.

After being found guilty, the appellants moved for a new trial, relying in part on Universal Health Services, Inc. v. United States, 136 S. Ct. 1989 (2016). The appellants contended that Universal Health changed the materiality standard applicable to health care fraud, rendering their asserted misrepresentations immaterial. The district court denied the motions.

On review, the Fourth Circuit first acknowledged the district court had not expressly ruled on materiality. But, to the extent this omission was an error, it was harmless because no rational fact finder could conclude the misrepresentations were not material. The court also found that Universal Health did not establish a new standard of materiality for healthcare fraud. Even if it had, under Universal Health's standard, the appellants' misrepresentations were material because insurers would not have paid for medically unnecessary tests. Ultimately, the Fourth Circuit affirmed the holding of the lower court.

Extended Summary: Beth Palin owned both an addiction clinic and a lab. The facilities were operated by Palin with the assistance of Joseph Webb. The lab performed two types of urine analysis tests: a basic, inexpensive "quick cup" test, and a more expensive "analyzer" test. Doctors ordering drug testing for their patients often did not specify which test they wished for the patient to receive. Knowing that insurers do not pay for medically unnecessary tests, Palin and Webb implemented a scheme to treat insured patients differently than uninsured patients. Uninsured patients received the "quick cup" test each week and paid cash. Insured patients received both the "quick cup" and the "analyzer" test. These patients paid for the "quick cup" in cash, and the lab billed insurers for the "analyzer" test.

The district court found both Palin and Webb guilty of health care fraud and conspiracy to engage in health care fraud, in violation of 18 U.S.C. §§ 1347 and 1349. The court determined that Palin and Webb created and executed a plan that was expressly prohibited by insurers - submitting claims for medically unnecessary tests. Palin and Webb moved for a new trial relying, in part, on Universal Health Services, Inc. v. United States, 136 S. Ct. 1989 (2016), a decision issued after the guilty verdict. They argued that the materiality standard applicable to health care fraud under Universal Health rendered their asserted misrepresentations immaterial. The district court denied the motion, and Palin and Webb appealed.

In affirming the lower court, the Fourth Circuit first analyzed whether the district court erred by not expressly ruling on materiality. Since harmless error review applies and because both the government and the appellants agreed that materiality constitutes an element of health care fraud, the Fourth Circuit had to conclude beyond a reasonable doubt that the appellants' guilty verdict would have been the same absent the error. Relying on United States v. Poole, 640 F.3d 114, 120 (4th Cir. 2011), the Fourth Circuit determined that the record contained no evidence to suggest that, sans the error, insurers would have knowingly paid for the medically unnecessary "analyzer" test. Accordingly, the court concluded that even if the district court's omission was error it did not justify reversal because the error was harmless.

Next, the Fourth Circuit considered whether the materiality standard expressed in Universal Health negated the materiality of the appellants' misrepresentations and thus compelled relief. In Universal Health, the Supreme Court discussed how materiality applies with regard to the specific theory of FCA liability known as "implied false certification." With regard to that form of liability, the Court wrote, "if the government pays a particular claim despite knowing certain requirements for payment were violated, 'that is very strong evidence that those requirements are not material.'" Under this standard, the appellants argued that material misrepresentation didn't exist in their own case because the insurers regularly paid the "analyzer" test claims without knowing the type of test and frequency.

The Fourth Circuit determined that the appellants misconstrued Universal Health. First, the court doubted the appellants' implication that the Supreme Court intended to broadly "overrule" materiality standards that had previously applied in the context of criminal fraud. Second, the Fourth Circuit propounded that the Court's examination of materiality for "implied false certifications" did not extend to health care fraud. Finally, the Fourth Circuit found Palin and Webb's misrepresentations to be material even under Universal Health. The court determined that if materiality "looks to the effect on the likely or actual behavior of the recipient of the alleged misrepresentation," as provided in Universal Health, then the appellants' misrepresentations were material because insurers would not have paid for the "analyzer" tests had they known that the tests were medically unnecessary. The Fourth Circuit similarly rejected appellants' other claims and affirmed.

To read the full opinion, click here.

Panel: Judges Motz, Duncan, and Wynn

Argument Date: 09/13/2017

Date of Issued Opinion: 10/30/2017

Docket Number: 16-4522

Decided: Affirmed by published opinion.

Case Alert Author: Avatara Smith-Carrington, Univ. of Maryland Carey School of Law

Counsel: Michael John Khouri, LAW OFFICES OF MICHAEL KHOURI, Laguna Hills, California; Nancy Combs Dickenson, OFFICE OF THE FEDERAL PUBLIC DEFENDER, Abingdon, Virginia, for Appellants. Janine Marie Myatt, OFFICE OF THE UNITED STATES ATTORNEY, Abingdon, Virginia, for Appellee. ON BRIEF: Larry W. Shelton, Federal Public Defender, OFFICE OF THE FEDERAL PUBLIC DEFENDER, Roanoke, Virginia, for Appellant Joseph D. Webb. Rick A. Mountcastle, Acting United States Attorney, OFFICE OF THE UNITED STATES ATTORNEY, Roanoke, Virginia, for Appellee.

Author of Opinion: Judge Motz

Case Alert Supervisor: Professor Renée Hutchins

    Posted By: Renee Hutchins @ 11/27/2017 04:04 PM     4th Circuit  

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