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On June 1, the Supreme Court resolved a long-standing circuit split over how to judge scienter under the False Claims Act’s “knowingly” element. 2
Writing for a unanimous Court in United States ex rel. Schutte v. SuperValu Inc., Justice Thomas held that “[t]he FCA’s scienter element refers to [a defendant’s] knowledge and subjective beliefs—not to what an objectively reasonable person may have known or believed.”
SuperValu has already begun to reshape the FCA landscape for the Medicare Advantage sector, which absorbs a staggering $450 billion in annual government payments. Cigna Corp., for example, recently made headlines by settling a trio of FCA claims related to its Medicare Advantage plans for $172 million. As discussed below, the settlement marks a significant turning point in the government’s enforcement efforts against Medicare advantage insurers and providers.
The whistleblowers in SuperValu had accused two retail pharmacies—SuperValu and Safeway—of “knowingly” reporting to Medicare and Medicaid the full retail price of prescription drugs as their “usual and customary” price, despite providing significant discounts to other payors.
The FCA defines “knowingly” to mean acting (1) with actual knowledge of the information; (2) deliberate ignorance of the truth or falsity of the information; or (3) in reckless disregard of the truth or falsity of the information. 3 The FCA does not require proof of specific intent to defraud.
Although evidence showed that SuperValu and Safeway had interpreted “usual and customary” to mean discounted prices, the retailers argued that it was “objectively reasonable” to read “usual and customary” to mean full retail prices. The district court agreed and dismissed the FCA suits, holding that the retailers had not acted “knowingly.”
The Seventh Circuit affirmed dismissal, finding that the retailers had made “objectively reasonable” interpretations of ambiguous law. In other words, because the claims were objectively reasonable, the retailers’ own subjective beliefs about what constituted “usual and customary” were irrelevant to scienter.
Vacating the Seventh Circuit decisions, Justice Thomas held that the FCA’s scienter standard “tracks traditional common-law fraud,” which depends on the defendant’s knowledge and subjective beliefs. The “focus” is not “on post hoc interpretations that might have rendered their claims accurate” but “is instead on what the defendant knew when presenting the claim,” he clarified.
Justice Thomas concluded that scienter could be established by showing that the retailers: “(1) actually knew that their reported prices were not their ‘usual and customary’ prices when they reported those prices, (2) were aware of a substantial risk that their higher, retail prices were not their ‘usual and customary’ prices and intentionally avoided learning whether their reports were accurate, or (3) were aware of such a substantial and unjustifiable risk but submitted the claims anyway.”
Sure enough, the Department of Justice and relators have cited SuperValu as lowering the scienter bar in other FCA matters.
In United States, ex rel. Cutler v. Cigna Corp., an intervened case against Medicare Advantage insurer Cigna Corp., DOJ attorneys told the Middle District of Tennessee that SuperValu precluded “one of Cigna’s principal arguments in its motion to dismiss.” 4
Hoping to turn the tables, Cigna countered that “the Supreme Court’s opinion only highlights the fatal flaws” in the government’s scienter theory. “Because the Government failed to plead facts SuperValu holds are essential— namely, facts showing that Cigna either actually knew or ‘conscious[ly]’ disregarded a ‘substantial and unjustifiable risk’ that its claims were false.” 5
The FCA suit, in which the federal government intervened in October 2022, accused Cigna of falsely certifying the accuracy of diagnosis data stemming from the insurer’s “360 Program,” in which contracted nurses performed at home patient exams. False diagnoses caused Cigna to receive “tens of millions of dollars in risk adjustment payments” from the Centers for Medicare & Medicaid Services, DOJ alleged.
The case reflects increased enforcement against plans and providers that manipulate Medicare Advantage’s so-called “risk adjustment” system. 6 Under this system, CMS pays Medicare Advantage plans a pre-determined monthly amount for each enrollee, no matter the enrollee’s actual healthcare costs. CMS then adjusts these capitated payments based on each enrollee’s risk score.
To calculate risk scores, CMS requires Medicare Advantage insurers to submit diagnosis codes that they collect from provider claims. Insurers that submit a diagnosis codes reflecting chronic medical conditions will generally receive increased capitated payments from CMS, intended to cover the increased cost of treating such conditions.
Because diagnosis data bear directly on payment, CMS requires Medicare Advantage insurers like Cigna to certify the validity of their diagnosis data. In fact, the chief executive officer, chief financial officer, or another authorized individual “must request payment . . . on a document that certifies (based on best knowledge, information, and belief) the accuracy, completeness, and truthfulness of relevant data that CMS requests.” 7 CMS also requires that each diagnosis code be supported by a properly documented medical record in compliance with ICD Guidelines. 8
In moving to dismiss the government’s complaint-in-intervention, Cigna argued that it had an “objectively reasonable,” even if incorrect, basis for coding the invalid diagnoses due to alleged ambiguities in the relevant ICD Guidelines. 8 According to the DOJ’s June Notice of Supplemental Authority, SuperValu precluded this argument. DOJ also argued that the ICD Guidelines were unambiguous.
Cigna responded that the government’s complaint-in-intervention had “failed to plead facts SuperValu holds are essential— namely, facts showing that Cigna either actually knew or ‘conscious[ly]’ disregarded a ‘substantial and unjustifiable risk’ that its claims were false.”
Cigna also highlighted that the relators in SuperValu pointed to “notices” that “the pharmacies received that ’usual and customary’ refers to discounted prices and company executives’ internal emails ‘rais[ing] concerns’ about the need to conceal discounts from regulators.”
“[T]he Government nowhere alleges that Cigna ‘received notice’ of the interpretations the Government advances or that Cigna was aware of an unjustifiably high risk that its conduct was unlawful,” the insurer concluded.
The district court never resolved Cigna’s motion to dismiss. Rather, Cigna opted to pay $172 million to settle three sets of claims.
Cigna paid $37 million to resolve the Cutler lawsuit in the Middle District of Tennessee. From that, Robert Cutler received a relator’s award of around $8.1 million.
Two sets of claims—which together settled for $136 million—stemmed from a homegrown investigation by the United States Attorney’s Office for the Eastern District of Pennsylvania.
Cigna paid $116 million to settle claims related to its “Chart Review” program, under which Cigna retained “retained professional healthcare coders to conduct retrospective reviews of those charts to identify all risk-adjusting medical conditions that the charts supported.” Cigna allegedly used these diagnosis codes, some of which were unsubstantiated, to obtain additional payments from CMS.
Cigna paid $19.5 million to settle claims that it “knowingly submitted and/or failed to delete inaccurate and untruthful diagnosis codes for morbid obesity . . . to increase the payments it received from CMS for numerous beneficiaries enrolled in its MA plans.” Although “individuals with a BMI below 35 cannot properly be diagnosed as morbidly obese,” Cigna allegedly submitted morbid obesity codes even when the “the highest reported BMI was less than 35 for the beneficiary[.]”
Cigna also agreed to a five-year corporate integrity agreement with the Office of Inspector General of the U.S. Department of Health and Human Services.
Cigna did not admit liability. But the insurer’s decision to pay $172 million and to enter a corporate integrity agreement suggests that Cigna read SuperValu like most of the FCA bar: as lowering the threshold for scienter.
Even under its strained reading of SuperValu, Cigna’s path was undeniably steep. Indeed, there is little to dispute that a morbid obesity code is knowingly false when the beneficiary’s highest BMI was less than 35. And three separate OIG audits have found that Cigna’s diagnosis codes “did not comply with Federal requirements,” undermining the insurer’s “notice” argument in Cutler. 9
The bottom line is that SuperValu is likely to supercharge the government’s enforcement efforts against Medicare Advantage insurers and providers.
“Over half of our nation’s Medicare beneficiaries are now enrolled in Medicare Advantage plans, and the government pays private insurers over $450 billion each year to provide for their care,” said Deputy Assistant Attorney General Michael D. Granston of the Justice Department’s Civil Division. 10 “We will hold accountable those insurers who knowingly seek inflated Medicare payments by manipulating beneficiary diagnoses or any other applicable requirements.”
A Jeremy E. Abay is a partner at Pietragallo Gordon Alfano Bosick & Raspanti, LLP in Philadelphia, Pennsylvania. He represents relators, providers, and corporations in False Claims Act litigation around the country. He is also an adjunct professor at Rutgers Law School, where he teaches whistleblower advocacy and depositions.
2 598 U.S. 739, 749 (2023).
3 31 U.S.C. § 3729(b)(1).
4 Notice of Supplemental Authority, ECF No. 242, United States, ex rel. Cutler v. Cigna Corp., No. 3:21-cv-00478 (M.D. Tenn. June 5, 2023).
5 Defendants’ Response to the Government’s Notice Regarding Supervalu, ECF No. 253-1, Cutler, supra.
6 See Press Release Number: 22-83, U.S. Dep’t of Just., Justice Department’s False Claims Act Settlements and Judgments Exceed $5.6 Billion in Fiscal Year 2021 (Feb. 1, 2022).
7 42 C.F.R. § 422.504(l).
8 See 45 C.F.R. §§ 162.1002(a)(1), (b)(1), (c)(2), (c)(3); 42 C.F.R. § 422.310(d)(1). 9 Defendants’ Motion to Dismiss, ECF No. 195-197, 224, Cutler, supra.
10 See U.S. Dep’t of Health Hum. Servs. Off. of Inspector Gen., Medicare Advantage Compliance Audit of Diagnosis Codes That Cigna HealthSpring of Florida, Inc. (Contract H5410) Submitted to CMS, Report No. A-03-18-00002 (Aug. 19, 2022); U.S. Dep’t of Health Hum. Servs. Off. of Inspector Gen., Medicare Advantage Compliance Audit of Specific Diagnosis Codes That Cigna-HealthSpring of Tennessee, Inc. (Contract H4454) Submitted to CMS, Report No. A-07-19-1193 (Dec. 22, 2022); U.S. Dep’t of Health Hum. Servs. Off. of Inspector Gen., Medicare Advantage Compliance Audit of Specific Diagnosis Codes That Cigna-HealthSpring Life & Health Insurance Company, Inc. (Contract H4513) Submitted to CMS, Report No. A-07-19-01192 (March 28, 2023).
11 See Press Release Number: 23-1082, U.S. Dep’t of Just., Cigna Group to Pay $172 Million to Resolve False Claims Act Allegations, (Oct. 5, 2023).
Turning Square Corners, Federal Bar Association Qui Tam Section Newsletter (Winter 2024)