Answering The Call

Attacking Healthcare Fraud with the False Claims Act

Niall P. McCarthy and Justin T. Berger

As the debate over healthcare reform rages on across the country, one fact is undeniable: fraud in the healthcare industry is rampant, and must be curtailed. As President Obama has emphasized this fact in virtually all of his recent speeches. Plaintiffs’ attorneys are in a great position to answer President Obama’s call, with the help of a law created by another historic president, Abraham Lincoln.

The Federal False Claims Act, sometimes referred to as “Lincoln’s Law,” was passed in response to the massive amounts of fraud being perpetrated by government contractors during the Civil War. Today, the False Claims Act remains a powerful weapon against fraud on the government of all types, including fraud in government-funded healthcare.

This article provides a brief overview of the False Claims Act, recent amendments to it, and the ways in which it is being used to address fraud in the healthcare industry.

The False Claims Act

The federal False Claims Act (“FCA”), 31 U.S.C. §§ 3729 et seq., allows a “private person” to bring a civil action to recover damages to the Government fisc resulting from false or fraudulent claims. Under the federal FCA, such an individual is referred to as the “relator.” If the relator succeeds in recovering damages on behalf of the Government, the relator is entitled to a reward for his or her efforts, equal to 15 to 30% of the total amount recovered by the Government, plus attorneys’ fees and costs. § 3730(d).

This creative mechanism for protecting the Government from fraud also involves some unique procedural twists. For example, a relator’s FCA complaint is always filed with the Court under seal, and is not initially served on the defendants. The complaint must, however, be immediately served on the Attorney General, along with a “written disclosure of substantially all material evidence and information” the relator possesses in support of his or her claims, usually referred to as the “relator’s statement.” § 3730(b)(2).

The Government then has an initial 60-day period to review the relator’s complaint and statement, and determine whether it wants to intervene in the action. Id. This investigatory period is usually extended for several months, if not years. The complaint remains under seal during this period, and is not served on the defendants.

If the Government elects to intervene in the action, it assumes primary responsibility for prosecuting the action. The relator, however, maintains “the right to continue as a party to the action,” § 3730(c), and often works closely with the Government to prosecute the case. The resources of relator’s counsel, and the expertise of the relator, can be critical to the success of the case.

If the case is not sufficiently strong, or if the Government simply does not have the resources to dedicate to the case, the Government can decide not to intervene in the case. If the Government does not intervene, the relator is free to prosecute the case on his or her own. If the Government does not intervene, the relator is entitled to a greater share of any proceeds — 25-30% versus 15-25% — than if the Government does intervene. § 3730(d).

Naturally, a relator cannot simply bring an FCA action based purely on information gleaned from media reports, government investigations, or other public disclosures. The “public disclosure bar” of the FCA strips the courts of jurisdiction over such cases. § 3730(e).

The Government can also initiate an FCA action without a relator. In recent years, however, this has been rare; approximately 70% of the Government’s recovery under the FCA has stemmed from cases brought by relators.

Approximately half of the states, including California, have their own false claims act statutes, most of which are largely modeled after the federal FCA. California’s statute is found at Government Code § 12650 et seq., and closely resembles the federal FCA.

Recent Amendments to the FCA

On May 20, 2009, President Obama signed into law several important, relator-friendly amendments to the False Claims Act, as part of the Fraud Enforcement and Recovery Act of 2009 (“FERA”), S. 386 (introduced by Senators Leahy and Grassley).

The amendments affect both the substantive and procedural provisions of the FCA, as follows:

Loosening or Elimination of the Intent Requirement: Last year, in Allison Engine Co. v. United States ex rel. Sanders, 128 S.Ct. 2123 (2008), the Supreme Court unanimously ruled that under two of the most-commonly utilized provisions of the FCA (the former §§ 3729(a)(2) & (3)), the plaintiff had to establish that the defendant intended its false statement or record to result in a payment by the government. The amendments effectively overturned Allison Engine’s intent requirement.

Broadening of “Reverse” False Claims Liability: Under the prior version of the FCA, if a defendant receives an overpayment from the government, or otherwise owes the government money, the defendant was only liable if it “makes, uses, or causes to be made or used, a false record or statement to conceal, avoid, or decrease” that obligation. The amendments greatly broadened this so-called “reverse false claims” provision, by adding a clause that creates liability even where a defendant does not make a false record or statement. In particular, the amended subsection imposes liability where the defendant “knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government.” § 3729(a)(1)(G). Though this provision will require interpretation by the courts, its plain meaning suggests that where an entity is overpaid by the government, realizes it has been overpaid, and takes no action to return that overpayment, it is liable under the amended FCA, whether it affirmatively conceals the overpayment or not.

Elimination of the Direct Presentment Requirement: Under subsection 3729(a)(1) of the prior FCA, “claims” were limited to requests or demands presented “to an officer or employee of the United States Government or a member of the Armed Forces of the United States.” Similarly, for purposes of the former subsection (a)(2), claims were limited to those “paid or approved by the Government.” Despite broader language elsewhere in the FCA, at least one circuit had interpreted these subsections strictly, as requiring direct presentment of claims to an agent of the government. See United States ex. rel. Totten v. Bombardier, 380 F.3d 488 (D.C. Cir. 2004). Thus, where a false claim was made on a contractor, a state, or some other entity through which federal funds pass, the direct presentment requirement was not met, and FCA liability did not attach. The amendments effectively overturned Totten and similar cases. Specifically, the amendments extended the definition of “claim” to include any request or demand for money or property, “whether or not the United States has title to the money or property,” that “is made to a contractor, grantee, or other recipient, if the money or property is to be spent or used on the Government’s behalf or to advance a Government program or interest, and if the United States Government” has provided, or will provide, “any portion of the money or property requested or demanded.” § 3729(b)(2)(A).

Broadening of Retaliation Provision: In the only amendment directly affecting the qui tam provisions of the FCA, Congress has broadened the anti-retaliation provision to protect “contractors” and “agents”; the prior version only covered “employees.” The amendments also eliminated the requirement that the retaliatory acts be taken by the employer. § 3730(h).

Relation Back of Claims Added by the Government: The amendments confirm that when the government intervenes, and adds claims to the relator’s complaint, those new claims relate back to the filing of the relator’s complaint. § 3731(c).

Civil Investigative Demands: Under the former FCA, only the Attorney General, him- or herself, was authorized to issue civil investigative demands (“CIDs”), which can include requests for documents, interrogatories, and depositions. In practice, especially under the Bush administration, this meant that this powerful investigative tool was almost never used. The amendments change this, allowing any “designee” of the Attorney General to issue CIDs. § 3733(a)(1). Though it is unclear how far down the chain this power will go, it is likely to reach all the way to AUSAs, or their supervisors.

Power to Share Information: The amendments explicitly allow the Department of Justice to share information obtained through its investigation with relators, and with other Federal, State, and local government agencies. § 3733(i)(2)(l). Under the former FCA, the extent of permissible sharing was unclear, and had led many government attorneys to err on the side of non-cooperation.

Combating Healthcare Fraud with the False Claims Act

The False Claims Act, and similar state statutes, have become powerful tools in the constant battle against fraud in the healthcare industry. Indeed, according to recent statistics, approximately 60% of all FCA cases involve healthcare. The reasons are fairly apparent: Healthcare in the United States is a $2.2 trillion industry. Almost half of that spending originates from the Government, most commonly in the form of Medicare or Medicaid payments to providers of healthcare products and services. Knowing that the Government lacks the ability to track this massive amount of money as it flows through the complex healthcare delivery system in the United States, unscrupulous companies see Government money as an easy source for padding their profits.

The ways in which the Government is defrauded in the healthcare industry are virtually endless. There are, however, some common themes that have given rise to very successful FCA cases in recent years. The following are some examples:

  • Billing for services not performed: Perhaps the most straightforward, yet surprisingly common manner in which the Government is defrauded is by being billed for services or products that were never provided to patients. A related method of fraud, and a basis for FCA cases, is “upcoding” – billing the Government for a more complex and expensive procedure than that which was actually performed.
  • Medically unnecessary services: Another common basis for FCA cases is knowingly charging Medicare and Medicaid for medical procedures and services that simply are not medically necessary.
  • Providing inadequate services or products: Billing Medicare or Medicaid for inferior or inadequate services or products can also give rise to an FCA case.
  • Kickbacks: The use of kickbacks to secure lucrative Government-funded healthcare business was recently described by a Department of Justice attorney as “a growth industry.” Both direct and indirect kickback arrangements are illegal under state and federal law, and can give rise to FCA violations.
  • Discriminatory billing: Another common basis for FCA claims is discriminatory billing; i.e., billing Medicare and Medicaid far more for services and products than is billed to other customers.

Recent Developments in Healthcare Fraud FCA Litigation
The following cases, settlements and decisions exemplify some of the issues highlighted above:

AWP Litigation, MDL No. 1456 (D. Mass.): In the massive Average Wholesale Price (“AWP”) Litigation, a relator, representing by plaintiffs’ firms including Cotchett, Pitre & McCarthy, has brought claims against major pharmaceutical companies for inflating pricing information for certain drugs, which caused the Medicaid program to make substantial overpayments. The case covers tens of millions of Medicaid transactions, and almost 1400 drugs.

In one of the most recent and important decisions in the case, Judge Patti B. Saris, of the District of Massachusetts, confirmed that even under the pre-amendment FCA, the Government’s complaint-in-intervention relates back to the filing of the Relator’s complaint. See United States v. Actavis Mid Atlantic LLC, MDL No. 1456, Civil Action No. 08-CV-10852-PBS, 2009 U.S. Dist. LEXIS 92945, at *24-*31 (Oct. 2, 2009 D. Mass).

The decision also rejected the defendants’ attempt to invoke the public disclosure bar based on government reports that disclosed some of the background information involved in the case. The court held that because the reports did not target the specific defendants and the specific drugs at issue in the case, they did not trigger the public disclosure bar. See id. at *7-*15. 

State of California v. Quest Diagnostics, et al. (Sac. Sup. Ct. Case No. CIV 34-2009-00048046): Cotchett, Pitre & McCarthy represents whistleblowers Chris Riedel and Hunter Laboratories in a lawsuit brought on behalf of the State of California, seeking the return of hundreds of millions of dollars in taxpayer money illegally charged to California's Medi-Cal system by clinical medical laboratories. The defendants include the two largest medical labs in the State - Quest Diagnostics, Inc. and Laboratory Corporation of America - as well as smaller labs. The defendants are required by California law to bill Medi-Cal the lowest prices they charge to any other purchaser under comparable circumstances. Instead, the lawsuit alleges that since at least 1995, defendants have systematically billed Medi-Cal the highest prices possible, resulting in overpayments totaling in the hundreds of millions of dollars.

The lawsuit alleges that the defendants’ overbilling of Medi-Cal is part of a broader scheme, by which they offer deeply discounted prices to doctors, hospitals, and other healthcare providers, in exchange for those providers' referral of Medi-Cal patients to the labs. The defendants then bill Medi-Cal rates grossly exceeding the discounted rates they charge others. By doing so, the defendants increase their client base, and their profits, at the expense of taxpayers.

The California Attorney General’s office has intervened in the lawsuit, and is working with Cotchett, Pitre & McCarthy to recover the overcharges to the State. 

Quest Diagnostics Faulty Test Kit Settlement - $302 million: In April of this year, Quest Diagnostics agreed to a $302 million settlement of an FCA action alleging that the company knowingly manufactured and sold faulty blood test kits, many of which were paid for with Government funds. The case originated from a qui tam lawsuit filed by a California businessman and biochemist. The qui tam lawsuit was kept under seal until the settlement was approved by a federal judge. The qui tam plaintiff will receive 18 percent of the $253-million qui tam settlement.

Conclusion

Sadly, providing healthcare has become nothing more than a profit-making enterprise for many corporations in this country. The Government, pumping a trillion dollars into the system every year, has become an easy target for those corporations. With the help of “Lincoln’s Law,” and well-informed Plaintiffs’ attorneys, ordinary citizens can start to fight back.