Addressing an issue of first impression, the First Circuit has clarified the burden to satisfy the knowledge element required in False Claims Act (FCA) cases in the context of laboratory testing and Medicare fraud. The Medicare Act permits reimbursement of diagnostic laboratory tests only if they are “reasonable and necessary” for diagnosis or treatment of illness or injury (see 42 U.S.C. § 1395y(a)(1)(A)).
In United States ex rel. Omni Healthcare Inc. v. MD Spine Sols. LLC, Omni Healthcare, Inc., a medical group, brought a qui tam action against a laboratory, MD Spine Solutions, LLC, on behalf of the government, alleging that MD Spine violated the FCA by billing for medically “unnecessary” tests when cheaper tests were available, despite the tests at issue being ordered by treating Omni-Relator physicians (160 F.4th 248 (1st Cir. 2025)).
The dispute centered on the knowledge element of the FCA. To establish liability, Omni had to show that MD Spine knowingly submitted a false claim to the government. “Knowingly” is broadly defined under the FCA and includes actual knowledge, deliberate ignorance or willful blindness, and reckless disregard. MD Spine argued that Omni failed to make that showing because the tests at issue were specifically ordered by Omni physicians and MD Spine was entitled to defer to the recommendations of treating physicians in concluding that the tests were “reasonable and necessary.” The district court granted summary judgment in favor of MD Spine, finding no persuasive evidence that MD Labs acted with requisite FCA scienter — actual knowledge, deliberate ignorance, or reckless disregard — when it submitted claims to Medicare. The First Circuit affirmed and held that while labs have a legal duty to ensure that they are not submitting false or incorrect claims to the government, they can generally rely on a doctor’s order for proof of medical necessity. To support its holding, the First Circuit relied on SCOTUS’ recent opinion in United States ex rel. Schutte v. SuperValu Inc., where the Court held that knowledge is subjective, focusing on a specific defendant’s mental state at the time he presents the allegedly false claim, not on what an objectively reasonable person may have known or believed, or what the defendant may have learned after he submitted the claim (598 U.S. 739 (2023)).
Thus, Omni would have needed to show that MD Labs, at the time it submitted these claims to Medicare, had knowledge under the FCA or believed or suspected that the claims were actually false or that there was a high and unjustifiable risk of falsity but submitted them anyway. Significantly, the First Circuit provided guidance on when such a standard might be met, such as where a lab has specific reason to doubt the doctor’s recommendation; where a lab’s own conduct makes services unnecessary; where the lab explicitly ignores regulatory warnings limiting coverage of certain tests; or if a lab manipulates orders, drives unnecessary testing through misleading marketing, undermines the clinical basis for a test, or ignores regulatory or contractor warnings regarding coverage limitations. The last factor was important in this case as there was no OIG Guidance, Local Coverage Determinations (LCDs) or National Coverage Determinations (NCDs) prohibiting the conduct at issue.
The First Circuit’s opinion allows labs to generally rely on a doctor’s order for medical testing as evidence that the test was medically necessary and reasonable to satisfy the Medicare Act. Under this framework, the burden then shifts to the government or relator to rebut this showing. The Court emphasized, however, that laboratories still have a legal duty to ensure that they do not submit claims for medically unnecessary tests, and they can still be liable under the FCA.
Although the First Circuit’s holding generally limits FCA exposure for defendants, the protection is not absolute where the government can point to specific “red flags” that could have provided a laboratory with knowledge that a test was not necessary as discussed earlier. Moreover, laboratories should implement clear compliance standards and documentation protocols for internal questions about tests ordered, so that the government cannot later point to internal flags about medical necessity as evidencing knowledge that the tests were, in fact, not necessary. Laboratories should also be mindful of financial relationships with referring physicians that could incentivize overutilization or raise questions under the Anti-Kickback Statute (AKS). Further, the decision increases the need for thorough documentation of medical necessity by physicians and places the physician’s order squarely in the middle of necessary evidence. This potentially exposes physicians to greater scrutiny in FCA cases for their ordering patterns.
While this opinion is limited to the First Circuit for now, this holding has potentially broader, and generally positive, implications for laboratories that find themselves subject to FCA enforcement — namely, the import of SCOTUS’ holding in SuperValu and the need for subjective evidence to prove knowledge elements. Enforcement theories that rely on objective standards or regulatory ambiguity — without proof of what a specific defendant believed at the time of the action — will likely become increasingly difficult to sell.