FEATURED ARTICLES

Over Twenty States Sue to Block CMS Rule Barring Medicaid Funding for Gender-Affirming Care for Minors

On September 2, 2026, a coalition of twenty-two States and the District of Columbia filed suit challenging a CMS rule, slated to go into effect October 13, 2026, that prohibits federal Medicaid and CHIP funding for gender-affirming healthcare services furnished to minors. The plaintiff States allege that the rule exceeds CMS’s statutory authority, conflicts with multiple statutory directives, is arbitrary and capricious, and is unconstitutional. The complaint was filed in the United States District Court for the District of Massachusetts.

Published August 13, 2026, CMS’s rule bars Federal Financial Participation (FFP) for “sex-rejecting procedures” for children under age 18 in Medicaid and under age 19 in CHIP. States are required to amend their State Plans to reflect the prohibition.

The rule defines “sex-rejecting procedure” as “any pharmaceutical or surgical intervention that attempts to align an individual’s physical appearance or body with an asserted identity that differs from the individual’s sex”—either by intentionally disrupting or suppressing normal biological development (including primary or secondary sex-based traits), or “by intentionally altering an individual’s physical appearance or body, including amputating, minimizing, or destroying” sexual and reproductive organs.

In support of its asserted authority to adopt the rule, CMS leans on a provision of the Medicaid statute that requires State Plans to ensure that “care and services will be provided, in a manner consistent with” both “the best interests of the recipients” and “quality of care.” CMS also points to a provision of the CHIP statute that requires CHIP funds to be used in an “effective and efficient” manner. According to CMS, these provisions authorize the agency to withhold FFP for categories of services that it determines are not consistent with the “best interests” of the recipients, “quality of care” or are not “effective and efficient.” Finally, CMS invokes its general authority to adopt rules “as may be necessary for the efficient administration” of the Medicaid program.

In their complaint, the plaintiff States argue that the “best interests,” “quality of care” and “effective and efficient” provisions vest authority in the states “to enact safeguards in their Medicaid programs to guarantee high-quality care,” and do not bestow CMS with authority to “limit the kind of ‘medical assistance’ that is federally reimbursable.” The States also argue that these provisions are overly vague, and Congress could not have intended them to authorize CMS to “strip federal reimbursement from any treatment . . . that any agency disfavors.”

The States also argue that CMS’s rule directly conflicts with several provisions of the Medicaid and CHIP statutes.

• The Medicaid statute’s comparability requirement, which prohibits denying service to one category of patients while covering it for another based on medical diagnosis;
• The Medicaid statute’s Early and Periodic Screening, Diagnostic and Treatment requirements, which mandate coverage of medically necessary services for adolescents that are covered for adults;
• TheMedicaid Drug Rebate Program, which requires coverage of medications for indications listed in pharmaceutical compendia;
• The CHIP statute’s provisionauthorizingstates to include in their CHIP programs any service recognized by state law; and
• The Non-Interference Mandate in the ACA, which prohibits CMS from creating “unreasonable barriers” to medical care.

The States also contend that the rule is arbitrary and capricious because the agency allegedly failed to provide a reasoned justification for the rule and the report upon which the agency relied was, according to the States, “scientifically discredited,” and “methodologically flawed.” The States also argue that the committee that prepared the report was not established in compliance with the Federal Advisory Committee Act.

Finally, the plaintiff States contend that the rule violates the Spending Clause of the Constitution because it imposes new, unanticipated conditions on existing Medicaid and CHIP funding that states could not have foreseen when theyentered intotheir State Plans. The complaint points to Supreme Court precedent holding that conditions on federal spending must be imposed “unambiguously” by Congress and cannot “surprise” participating states with “post-acceptance conditions”.

A copy of the complaint is available here. A copy of the CMS rule is available here.

Reporters,Ahsin Azim,Washington, D.C.+ 1202626 5516,Alek Pivec, Washington, D.C., +1 202 626 2914, [email protected]

Second Circuit Adopts Representative Sample Standard for Direct FCA Claims, Allows Reverse FCA Claim to Proceed

InUnited States ex rel. Gallian v.AmeriSourceBergenCorp, decided on August 28, 2026, the Second Circuit addressed the level of particularity required to plead direct claims under the False Claims Act. The court affirmed the Eastern District of New York’s ruling that the relator failed to satisfy Rule 9(b) with respect to her direct FCA claims but successfully stated a “reverse” FCA claim.

The opinion offers several practical takeaways: (1) The Second Circuit adopted the stricter“representative sample”standard for determining whether allegations satisfy Rule 9(b); (2) the question of whether Rule 9(b) applies to all reverse FCA claim theories remains open; and (3) whistleblowers in the Second Circuit now have a practical alternative to survive dismissal if they can allege a scheme detailing what the defendant did with alleged overpayments it received.

Factual Background

The operative complaint alleged that Patsy Gallian worked as a Senior Reimbursement Manager at US Bio, a subsidiary of AmerisourceBergen Corporation. In this role, she managed pharmacy benefit management billing, commercial billing, collections, posting payments to patient accounts, and customer service. While serving in this role, she discovered what she characterized as US Bio’s “three-step scheme” to present false claims and conceal overpayments from various federal government health programs. First, Gallian alleged that US Bio systematically obtained overpayments by exploiting discrepancies in the billing system (for example, an error that read 30.0 days of service as 300), billing for medications for non-active or deceased patients, overcharging for specific drugs, and billing eligibility checks as live orders. Second, US Bio hid and retained the overpayments by relabeling them as “payer processing errors” to evade auditors and later transferred the funds into revenue through management-directed “pickups” when the company required cash. Third, US Bio concealed the scheme by certifying its compliance with all applicable statutes and regulations.

Gallian’s complaint alleged both the more typical “direct” FCA claims under 31 U.S.C. § 3729(a)(1)(A)-(B) and “reverse” FCA claims under 31 U.S.C. § 3729(a)(1)(G). A direct FCA claim captures the submission of false claims to government payors to obtain payment, while a reverse FCA claim covers situations in which a defendant knowingly conceals or avoids an obligation to pay or return money owed to the government.

Second Circuit Adopts Representative Sample Standard for Pleading Direct FCA Claims

In addressing the direct FCA claims, the Second Circuit adopted the “representative sample” standard for determining whether a relator’s allegations satisfy Rule 9(b)’s pleading requirements. The court aligned itself with the Fourth, Sixth, Eighth, and Eleventh Circuits by “expressly holding that for FCA claims involving fraudulent misstatements, where a relator pleads a complex and far-reaching fraudulent scheme with particularity, and provides examples of specific false claims submitted to the government pursuant to that scheme, a relator may proceed to discovery on the entire fraudulent scheme.”

The court then affirmed the district court’s dismal of Gallian’s direct FCA claims because she did not provide examples of the claims that US Bio allegedly submitted for payment. The court held that it would be an “unreasonable (and unsupported) stretch” to infer that Gallian, as the Senior Reimbursement Manager, lacked access to specific bills and invoices representative of her claims. It clarified that the standard set forth inUnited States ex rel.Chorcesv. American Medical Response, Inc., 856 F.3d 71 (2d Cir. 2017), which established how a whistleblower can plead fraud when they cannot identify specific claim forms, cannot be satisfied by allegations that a relator simply did not have the opportunity to obtain specific documents before filing suit.

Second Circuit Allows Reverse FCA Claims to Proceed

The court also clarified its precedent on reverse FCA claims. It reiterated that an affirmative misrepresentation need not to be pled if the relator can allege that the defendant knowingly concealed or knowingly and improperly avoided or decreased its obligation to repay the government.

More significantly, the opinion touched on whether Rule 9(b) applies to all reverse FCA claims, given that conduct covered under this provision may not require the defendant to engage in fraud.The court declined to resolve the issue, “assum[ing] without deciding” that Rule 9(b) applies to all reverse FCA claims. The opinion also upheld the bar on “mirrored” reverse FCA claims, explaining that relators cannot allege the same conduct in asserting both direct and reverse FCA claims. More specifically, the same facts cannot support a relator's direct and reverse FCA claims—the facts underlying each theory must be specific and distinct.

The Second Circuit held that, even assuming Rule 9(b) applies, Gallian successfully stated a reverse FCA claim by alleging the overarching scheme, identifying specific examples of overpayments that US Bio knowingly retained, identifying individuals who failed to disclose the overpayments, and providing necessary context to explain how US Bio allegedly misled the government.

Takeaways

AmeriSourceadopts the representative sample standard in the Second Circuit and signals that relators who lack claim-specific information may still survive dismissal by pursuing well-pled reverse FCA theories. For healthcare companies, the decision is a reminder that retaining or concealing overpayments carries its own distinct litigation risk, independent of any false billing allegations.

The full opinion can be found here.

Reporter,Morgan Cronin, Atlanta, + 1 404-572-2795, [email protected]

California Legislature Passes Bill Regulating Therapists’ Use of AI

On August 31, 2026, the California Legislature passed a bill, SB 903, that regulates how mental health therapists may use artificial intelligence (AI), barring AI chatbots from posing as therapists and requiring that licensed professionals remain in control of all clinical decisions. The purpose of the bill is “to protect consumers from unlicensed or unqualified providers, including unregulated artificial intelligence systems.”

SB 903 limits psychotherapists’ use of AI to administrative or supplementary support. Before using AI to transcribe or record a session or triage or screen patients, therapists must obtain informed, affirmative consent from the patient. The consent must tell the patient that AI will be used and “[t]he specific purpose of the artificial intelligence tool or system that will be used.” If a patient does not consent to the use of AI, the patient cannot be denied care as a result. The new bill prohibits the AI system from: (1) making therapy decisions, (2) communicating psychotherapeutically with patients (unless it is approved by the FDA and complies with HIPAA), (3) diagnosing, recommending or treating a patient, (4) detecting “emotions or mental states,” or (5) screening or triaging a patientunlessreviewed and approved by a licensed professional.

The bill also explicitly prohibits a corporation or individual from advertising or claiming to offer psychotherapythrough the use of“companion chatbots” – a direct response to the growing number of AI-powered mental health apps that have entered the market in recent years. Any entity that markets a chatbot as a therapist or claims it provides therapy would be in violation of the proposed law.

The bill permits the use of AI to: (1) recommend that an individual seeks psychotherapy services in response to an individual’s expression ofa mentalhealth concern, (2) administer standardized tests and reporting results to therapists, and (3) assist with scheduling.

If the bill is enacted, each professional licensing board will be tasked with enforcing the bill and each board will have the authority to seek injunctions and pursue other legal remedies. The bill was spearheaded by Senator Steve Padilla (D-San Diego) who has focused on regulating AI chatbots. Having passed the Senate (unanimously) and the Assembly (vote of 71-4), the bill will now go to Governor Newsom for signature.

The full text of SB 903 is available here.

Reporter,Taylor Whitten, Sacramento, +1 916 321 4815, [email protected]

CLIENT ALERT

Eleventh Circuit Holds FCA Qui Tam Provisions Do Not Violate the Appointments Clause

On September 1, 2026, the U.S. Court of Appeals for the Eleventh Circuit held inUnited States ex rel. Zafirov v. Florida Medical Associates, LLCthat the False Claims Act’s (“FCA”) qui tam provisions do not violate the Appointments Clause of Article II of the Constitution. The court reasoned that FCA relators are not “officers of the United States,” and therefore do not have to be appointed by the President, because they do not occupy a “continuing position established by law.” Importantly, the Eleventh Circuit’s decision was limited to the qui tam provisions’ constitutionality under the Appointments Clause. The defendants’ other constitutional challenges—under the Take Care Clause and Vesting Clause—remain live on remand.King & Spalding’s Client Alert on this topic is available here.

UPCOMING EVENTS

King & Spalding Health Law & Policy Forum West

Wednesday, October 14, 8:30 A.M. – 6:15 P.M. PT

Join our distinguished faculty and industry leaders for the annual Health Law & Policy Forum West on Wednesday, October 14th in Marina del Rey. As the healthcare industry continues to evolve in response to economic pressures, patient needs and accelerating technological advances, this full-day program will cover the trending topics that lawyers, executives, managers and investors need to know as they adapt to changes associated with the new administration and more.

A keynote session will feature the Honorable Alex M. Azar II, the 24th U.S. secretary of health and human services (HHS) and a recognized leader in healthcare innovation. During his tenure, he led transformative efforts to modernize the U.S. healthcare system, expanding telehealth,advancing interoperability of health records, increasing healthcare transparency and accelerating the shift to value-based care.

Attendees will also enjoy multiple networking opportunities, including a reception following the sessions.

The registration fee for the full program is $95.

For questions or to request an invitation, contact the K&S Events Team.