Yesterday, the Supreme Court decided a False Claims Act suit that has enormous implications for Medicare and Medicaid fraud.

The allegations in Universal Health Services v. United States ex rel. Escobar are startling. Yarushka Rivera, a young Medicaid beneficiary, died of an adverse reaction to medication that she’d received to treat her bipolar disorder. After her death, her parents discovered that Arbour Counseling Services, where she’d received treatment, was really dodgy.

[F]ew Arbour employees were actually licensed to provide mental health counseling and that supervision of them was minimal. [O]f the five professionals who had treated Yarushka, only one was properly licensed. The practitioner who diagnosed Yarushka as bipolar identified herself as a psychologist with a Ph.D., but failed to mention that her degree came from an unaccredited Internet college and that Massachusetts had rejected her application to be licensed as a psychologist. Likewise, the practitioner who prescribed medicine to Yarushka, and who was held out as a psychiatrist, was in fact a nurse who lacked authority to prescribe medications absent supervision. Rather than ensuring supervision of unlicensed staff, the clinic’s director helped to misrepresent the staff’s qualifications. And the problem went beyond those who treated Yarushka. Some 23 Arbour employees lacked licenses to provide mental health services, yet—despite regulatory requirements to the contrary—they counseled patients and prescribed drugs without supervision.

Notwithstanding all this, Arbour submitted lots of claims for payment to Medicaid in connection with Yarushka’s treatment—and Medicaid promptly paid those claims. Believing that Arbour’s submission of claims violated the False Claims Act, Yarushka’s parents brought suit.

That teed up the question in the case: what does it mean for a claim to be “false or fraudulent” within the meaning of the False Claims Act? After all, Arbour actually provided Yarushka with the services that it claimed to provide. None of its claims contained an outright lie. It’s just that Arbour’s employees weren’t qualified to provide those services. Is a sin of omission like that actionable?

In a unanimous decision that has the important virtue of common sense, the Supreme Court said yes. Eligibility to receive government money turns on compliance with certain programmatic rules. If an entity submitting a claim is in flagrant violation of those rules, the claim is false in the sense that it omits critical information about the claimant’s eligibility for payment. The claims implicitly certify compliance with eligibility rules, even if they don’t do so explicitly.

That’s an enormous victory for the Justice Department, which has at times faced headwinds from lower court judges who were uncomfortable with the “implied certification theory.” The judges’ discomfort was understandable. Government programs are so complex—the rules for Medicare and Medicaid are especially daunting—that almost any claimant will violate some technical rule or another. Does every request for payment that the claimant submits amount to a False Claims Act violation?

Of course not, said the Court. The FCA also requires the false statement to be material to the government’s decision to pay. And the Court emphasized that the materiality inquiry is “rigorous” and “demanding”—it’s not about minor or insubstantial violations. In language that is sure to be cited endlessly, the Court wrote:

[W]hen evaluating materiality under the False Claims Act, the Government’s decision to expressly identify a provision as a condition of payment is relevant, but not automatically dispositive. Likewise, proof of materiality can include, but is not necessarily limited to, evidence that the defendant knows that the Government consistently refuses to pay claims in the mine run of cases based on noncompliance with the particular statutory, regulatory, or contractual requirement. Conversely, if the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material. Or, if the Government regularly pays a particular type of claim in full despite actual knowledge that certain requirements were violated, and has signaled no change in position, that is strong evidence that the requirements are not material.

Whether this materiality standard is stiff enough to discourage opportunistic plaintiffs from making ticky-tack arguments about programmatic compliance remains to be seen. Given how fact-sensitive the inquiry is, I bet we’re going to see endless (and endlessly dull) discovery disputes about the scope of the federal government’s obligation to disclosure data about how it treats analogous claims. At a minimum, a flexible standard like this will tempt plaintiffs’ lawyers to see how far they can push the envelope.

That ought to worry health-care providers. The Court’s decision puts them on notice that failure to adhere to Medicare and Medicaid rules can—sometimes, at least—amount to a False Claims Act violation. Providers that were hoping that the Supreme Court would reduce their exposure to crippling penalties are sure to be disappointed.

At the same time, the case is a big win for those who see the False Claims Act as an essential tool for combating health-care fraud. It’s a stark, modern-day reminder to providers everywhere of Justice Holmes’s famous dictum that “[m]en must turn square corners when they deal with the Government.”

@nicholas_bagley