United States v. Palin, 4th Cir., filed 10/30/17: A Case Addressing Materiality in Light of United Health Services, Inc.

The Fourth Circuit rejects claim that Universal Health establishes a “new standard of materiality” but finds that even if it did, appellants here lose.


The appellants here, a married couple, Ms. Palin and Mr. Webb, were convicted after a 2-week bench trial of heath care fraud and conspiracy to engage in health care fraud, in violation of 18 USC §§1347 and 1349.  Their central claim on appeal is that the district court failed to apply the correct standard of materiality, and failed to find their misrepresentations were material.

Palin owned an addiction medicine clinic, “Mountain Empire Medical Care” (MEMC), and Bristol Laboratories (Lab), a lab that processed urine drug samples ordered by MEMC doctors and others.  Webb assisted her.  The Lab performed two different kinds of tests– a “quick-cup” test, and a more expensive and sophisticated “analyzer” test.  The government contended that uninsured patients received the quick-cup test, and insured patients received both tests.  The Lab billed insurers for the sophisticated tests.  The government argued that treatment was contingent on the insured status of the patients.

In its order finding appellants guilty, the district court found that Palin and Webb “knowingly and willfully executed a scheme to defraud health care benefit programs” by performing tests for insured patients that were not medically necessary.  Shortly after conviction, the United States Supreme Court issued its opinion in Universal Health Services, Inc. v. United States ex rel. Escobar, __U.S.__, 136 S. Ct. 1989 (2016).  Appellants then argued to the district court that Universal Health changed the materiality standard applicable to health care fraud under §1347 and that under this new standard, the misrepresentations in this case were not material.  The district court denied the motion.

In this appeal, both the government and appellants agree that materiality constitutes and element of health care fraud and conspiracy to commit health care fraud.  The Court agreed and pointed to Neder v. United States, 527 U.S. 1, 21-25 (1999), a case in which the United States Supreme Court held that mail, wire, and bank fraud statutes incorporated the common-law definition of “fraud,” which requires “a misrepresentation or concealment of material facts” illustrating that materiality is an implicit element in those statutes.

Here, even though the district court did not make a specific finding of “materiality” in its order supporting the convictions, the Court found that error to be harmless since the record conclusively establishes that insurers would not have paid for the more sophisticated tests had they known they were not medically necessary.  Nor did the Court accept the appellants’ argument that Universal Health compelled a different result.

In Universal Health, the Court considered materiality under the False Claims Act (FCA).  The Court noted that, “[u]nder any understanding of the concept, materiality ‘looks to the effect on the likely or actual behavior of the recipient of the alleged misrepresentation.'” 136 S. Ct. 2002 (bracket omitted) (quoting 26 Samuel Williston & Richard A. Lord, A Treatise on the Law of Contracts 69:12 (4th ed. 2003).  In light of this, appellants argued that because they billed insurers for the sophisticated tests, and because the insurers regularly paid those claims despite knowing the type of test and the frequency of testing, it followed that “not material misrepresentation existed.”  Appellants’ Br. 18-19.  The Court rejected this argument finding that the record abundantly showed that the insurers would not have paid for the sophisticated tests had they known those tests were not necessary. According to the Court, there was no evidence presented to suggest that medical necessity was anything less than a critical prerequisite to payment.

In addition to this claim, the Court also rejected appellant’s sufficiency of the evidence claim, and their challenge to the sufficiency of the indictment which are pretty standard.

Anyway, I highlight this case because it illustrates the expansion of Universal Health into other fraud contexts (as was completely predictable). It will be interesting to watch how other courts apply Universal Health going forward.