U.S. false claims law (in depth)

From Academic Kids

The following is an in-depth review of false claims law in the United States; an introductory article is also available.

The United States General Accounting Office (GAO) estimates that medical fraud and abuse approaches 10% of all health care expenditures or $100 billion dollars. To reduce this figure, the Justice Department and private litigators have used the False Claims Act (FCA) as the fraud fighting weapon of choice. Private litigators are given standing to file civil suit on the Federal government's behalf by the FCA's qui tam, or whistleblower provisions. Qui tam is short for qui tam pro domino rege quam pro se ipso in hac parte sequitur or "he who brings the action for the king as well as for himself [sic]."

These provisions gained renewed public attention following the False Claims Act Amendments Act of 1986. The 1986 Amendments made it easier for qui tam relators to file claims and increased the rewards for doing so. Initially, the FCA was used to fight defense contractor fraud, but it was soon applied to other areas of government spending, including Medicare and Medicaid.

The qui tam provisions' growing application to medical fraud reflects their effectiveness. In 1988, medical fraud recoveries, using the qui tam provisions, amounted to a mere one percent of the total qui tam recoveries, with the majority defense-related. By 1993, that total had grown to 46 percent and has remained over one third of total qui tam recoveries ever since.

The following summarizes the qui tam lawsuit from plaintiff and defendant perspectives. First, there is a brief review of the history and current scope of the False Claims Act. Second, the elements of a qui tam action are examined. Third, some strategies for those institutions and individuals who are actual or potential defendants in a qui tam action are suggested. In conclusion, there is an exploration of the reaction of the health care industry to this powerful law and possible future developments.

Contents

Qui tam's origins

In the United States, laws dating back to 1790 authorized private citizens to sue on behalf of the Federal Government. However, the FCA statute being used today passed in March 1863, following Congressional reaction to fraud perpetrated by Union Army suppliers. The triggering incident occurred when a key Union position was jeopardized by the delivery of rifle and ammunition boxes containing only sawdust.

Known as the Lincoln Law, defendants shown to have defrauded the government faced penalties of double the damages suffered by the government plus a $2,000 civil penalty per false claim. The qui tam relator received half of the recovered amount.

In 1943, Congress amended the FCA following a multitude of "parasitic" lawsuits in which plaintiffs sued based on information already in the government's possession. The Congressional changes barred use of information in the public record and lowered the reward to between ten and 25 percent of any recovery. As a result, until Congress changed the law in 1986, few qui tam cases were filed.

During the 1980s defense buildup, reports of $400 hammers and $800 toilet seats led Congress to revise the statute. The 1986 FCA amendments raised the reward for qui tam plaintiffs to between 15 and 30 percent of the recovery, eased restrictions on the use of public information, and inserted provisions to allow the plaintiff to recover damages stemming from workplace retaliation. As a result, qui tam lawsuits dramatically increased.

The scope of the False Claims Act

The FCA is broadly applicable to almost any situation where federal dollars are involved. Given the Act's current structure it seems that categories of qui tam cases will grow--limited only by the qui tam plaintiff's tenacity and ingenuity. This possibility is reflected in the many categories of cases resulting in qui tam recoveries including, but not limited to:

  • failures to report fraud;
  • education grants;
  • housing programs;
  • emergency relief programs;
  • fraudulent pre-selection of beneficiaries for Federal programs;
  • defense contracting;
  • agriculture support programs;
  • false certifications of compliance with environmental laws;
  • vehicle parts suppliers; and
  • Medicare/Medicaid fraud.

Subcategories of medical fraud include:

  • double billing;
  • use of untrained personnel to provide services;
  • failure to supervise unlicensed personnel;
  • distribution of unapproved devices or drugs;
  • forgery of physician's signatures;
  • creation of phony insurance companies or employee benefit plans;
  • upcoding;
  • unbundling;
  • kickbacks;
  • services provided without medical necessity;
  • fraudulent cost reports;
  • inadequate care, and;
  • use of substandard equipment.

Federal health care enforcement initiatives

On March 21, 1995, FBI Director Louis Freeh stated that organized crime has "penetrated virtually every legitimate segment of the health care industry." That is why Attorney General Janet Reno ranked health care fraud "one of the highest priorities" of the Justice Department. Congress responded to Reno and Freeh by passing the Health Insurance Portability and Accountability Act of 1996 (HIPAA or the Act), found at 1128C(a) of the Social Security Act.

The Act requires that, after restitution, compensation, and relator's awards are paid, all health care related criminal fines, forfeitures, and civil and administrative penalties and judgements be placed in the Federal Hospital Insurance Trust Fund. The Secretary of Health and Human Services (HHS) and the Attorney General can then appropriate money from the fund to combat fraud. In 1997, the program's first year, the Attorney General appropriated $104 million from this fund. Separately, the FBI received $47 million. Consequently, all 94 U.S. Attorney's offices have coordinated criminal and civil enforcement teams and the FBI has 370 agents dedicated to health care fraud. The False Claims Act is the statute of choice for the U.S. Attorney's engaged in this effort. In particular, qui tam cases represent about one third of total recoveries.

The effort has produced dramatic results. In 1997, prosecutors filed 282 criminal indictments and "opened" 4,010 civil matters, a 61 percent increase over 1996. They won $1.2 billion and collected $1.087 billion in judgments, settlements, and administrative fines. Furthermore, over 2,700 individuals and entities were excluded from federal health care programs.

However, the qui tam provisions' greatest impact is in their deterrent effect. Professor William Stringer estimated that the deterrence value of qui tam lawsuits saved the Federal Government between $35.6 billion to $71.3 billion from 1986-1996. Over the next ten years, Professor Stringer projects that the FCA's qui tam provisions will save $105.1 billion to $210.1 billion.

Initiating a civil action

The Attorney General initiates most civil actions for false claims. When private individuals file an action under the FCA it is brought in the government's name. The claim is filed in camera and under seal in the U.S. District Court with jurisdiction over the claim. Copies of the complaint and a written disclosure of all material evidence and information should be served on the local U.S. Attorney and in Washington, D.C. with the U.S. Attorney General.

Government intervention

The government has chosen to intervene in 22 percent of the cases it has reviewed. The Government has 60 days from the time the sealed complaint is filed to decide whether or not to intervene. However, the Government may obtain an extension for "good cause shown." In almost all cases the government will ask for an additional 60 days to investigate the complaint. In that 120 day period, Justice Department, FBI, Office of Inspector General (OIG), and HHS resources may be employed to interview the relator and her counsel, review the relator's complaint and supporting documents, wiretap, inspect the medical provider's documents at their place of business, and review the medical provider's filings with Medicare and Medicaid. If the case is strong and the potential recovery is high enough, the government will probably intervene.

Government intervention is generally good for the relator. The prospective defendant is apt to be intimidated by the government's massive effort. However, when the Government intervenes, the relator, though still a party to the action, loses control of the proceedings and the relator's reward is limited to between 15 and 25 percent of the government's total recovery plus reasonable attorney's fees and expenses. One Assistant United States Attorney made clear the effect of government intervention when he stated "if we intervene, [the relator and her counsel] will not be active participants. When we take the case over, we do take it over." This leaves the government free to negotiate with the defendant as long as the resulting settlement is "fair, adequate, and reasonable."

Even when the government initially declines to intervene, it retains intervention rights throughout the subsequent proceedings. Furthermore, when a relator settles a case 31 U.S.C. 3730(b)(1) provides that "the action may be dismissed only if the court and the Attorney General give written consent to the dismissal and their reasons for consenting." Despite this wording, some courts have held that if the government declines to intervene, either while the case is under seal or during the course of the action, then it loses standing to object to voluntary dismissal of the action or to object to the settlement terms between the defendant and the relator. Finally, when the government declines to intervene the relator's share of the award increases to between 25 and 30 percent of the recovery plus reasonable attorney's fees and expenses.

Jurisdiction and venue

A qui tam action may be brought in any judicial district in which the defendant(s) can be found, resides, transacts business, or in which the false claim occurred. Under 3732(a), the Federal Courts may also have jurisdiction over state whistleblower claims if they arose from the same transaction or occurrence that triggered the Federal qui tam action. This is important in states such as Ohio, Florida, and California that have their own whistleblower statutes.

Statute of limitations

The statute of limitations is defined under 3731(b). A claim must be brought within six years from the date on which the violations of 3729 were committed or three years after the date when facts material to the right of action are known or reasonably should have been known by the United States official charged with the responsibility to act in the circumstances, but not more than ten years after the date of the violation, whichever occurs last. A relator is not required to file suit as soon as he or she uncovers the false claims. However, the reward may be reduced by the Court if the relator unreasonably delays bringing the action.

Standing

Under 31 U.S.C. 3730(a), the U.S. Attorney General is empowered to institute a civil action against persons that submit claims in violation of 31 U.S.C. 3729. Section 3730(b) contains the qui tam provision which provides for "a person" to bring a civil action on the government's behalf for violations of 3729.

To have standing under Article III of the Constitution the relator must show actual or threatened injury. In several cases, defendants have unsuccessfully attempted to challenge the relator's standing. United States ex rel. Truong v. Northrop Corporation was the clearest opinion rejecting such challenges. In that case, the court found that the relator's standing stemmed from the injury to the Federal Government in whose name the suit was brought. The relator's standing is not an issue when the U.S. government intervenes or when the relator has suffered actual damages due to actions taken by his or her employer.

Relator and subject matter jurisdiction

Unless the relator bringing the qui tam lawsuit is the "original source" of the information, the court will lack subject matter jurisdiction. To be an original source the relator must have "direct and independent knowledge of the information on which the allegations are based." Furthermore, the relator must have "voluntarily provided the information to the Government before filing the action...."

The Federal courts of appeal are divided on their interpretations of "public disclosure," and "original source." For example, the D.C. Circuit Court of Appeals held that a qui tam claim is barred only if it is based on publicly disclosed "allegations or transactions" but not if it is based on mere "information" that does not clearly expose the fraud. The First Circuit Court of Appeals has been the most liberal in its interpretation of original source. It simply held that a qui tam claim "that has not yet been the subject of a claim by the government... will be allowed to go forward." However, the Second Circuit Court of Appeals is more restrictive. It held that "public disclosure of the allegations divests district courts of jurisdiction over qui tam suits."

The Sixth Circuit seems to follow a middle course. In U.S., ex rel. Pogue v. American Healthcorp., Inc., the court held that "Congress sought to prohibit qui tam actions only when either the allegation of fraud or the critical elements of the fraudulent transactions themselves were in the public domain." In that case, the court found that business prospectuses, one annual report, and three independent newspaper reports contained "language too general to put the reader on the trail of the alleged illegal referral scheme." The court cited the D.C. Circuit Court's opinion in U.S. ex rel. Findley v. FPC-Boron Employees' Club which held that a relator's claim will not be invalidated unless the public disclosures "specifically identify the nature of the fraud."

Scienter

The scienter or knowledge requirement under the FCA is less than the elements of common law fraud. As noted above, the plaintiff must prove either 1) actual knowledge of the falsity of the information submitted to the government; 2) deliberate ignorance of the truth or falsity of the information; or 3) a reckless disregard of the truth or falsity of the information. Thus, only the defendant's negligence or innocent mistake will go unpunished.

Particularity

There are some differences among the circuit courts regarding Federal Rule of Civil Procedure 9(b)'s requirement that fraud be pleaded with particularity. Rule 9(b) requires that "in all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally." The sixth circuit has construed Rule 9(b), as requiring a plaintiff to allege, at minimum, "the time, place, and content" of the alleged misrepresentation constituting fraud. However, in the Sixth Circuit, Rule 9(b) is modified by Rule 8 which calls for simple, concise and direct allegations in pleading. For example, in Pogue the court held that, even though the plaintiff gave no specific dates nor identified any particular employees, his general reference to a time frame of 12 years and his identification of the corporation's involved met the particularity requirement. Furthermore, an Illinois District Court, in U.S. ex rel. Robinson v. Northrop Corp., held that "pleadings cannot generally be based on information and belief unless the factual information is 'peculiarly within the defendant's knowledge or control.'" Thus, there are alternative means to satisfy Rule 9(b) requirements as long as the defendant is provided with "fair notice of the claims against him." Despite these possibilities, plaintiffs should do their best to meet the time, place, and content requirements to avoid defendant motions to dismiss and to better sell their cases to the U.S. Attorneys reviewing the complaints.

Double jeopardy considerations

Under 3731(d), the civil case is stayed during the defendant's criminal trial. Once the defendant is either convicted, pleads nolo contendere, or pleads guilty, the defendant is estopped "from denying the essential elements of the offense in any action which involves the same transaction as the criminal proceeding." Thus, the civil trial is carried out only to determine damages. As can be seen in the above listing of damages and penalties, the qui tam penalties can be great.

In December 1997, the Supreme Court, in Hudson v. U.S., overturned U.S. v. Halper and held that civil penalties plus criminal fines do not violate the Constitution's double jeopardy clause. In Halper, the defendant overcharged Medicare by $9.00 on each of 65 claims he submitted--$585.00 total. He was subsequently convicted of violating 18 U.S.C. 287, the criminal false claims statute and sentenced to two years in jail and fined $5,000. The government then sued him under the FCA attempting to hold him liable for a further $130,000. In that case, the Supreme Court affirmed a federal district court decision which held that the FCA penalty violated the double jeopardy clause given Halper's criminal conviction.

In rejecting Hudson, Chief Justice William Rehnquist, writing for the majority, stated that "we believe that Halper's deviation from longstanding double jeopardy principles was ill considered." The Supreme Court held that the Fifth Amendment's double jeopardy clause "protects only against the imposition of multiple criminal punishments for the same offense ... and then only when such occurs in successive proceedings." The court stated that "the ills at which Halper was directed are addressed by other constitutional provisions. The Due Process and Equal Protection Clauses already protect individuals from sanctions which are downright irrational."

Settling a qui tam/FCA lawsuit

The settlement agreement in U.S. ex rel. Wagner v. Allied Clinical Laboratories provides an example of a fairly typical settlement agreement. In that case Allied falsely submitted claims to Medicare to induce improper payment for tests and improperly collected Medicare payments. In summary the agreement provided that:

  • Allied would repay to the United States $4,900,000 of which $833,458 was paid directly to the relators;
  • That Allied was released from any civil or administrative monetary claims under the FCA, the Program Fraud Civil Remedies Act, 31 U.S.C. 3801 et seq.; the Civil Monetary Penalties Law, 42 U.S.C. 1320a-7a; or the common law for the conduct described in the Civil Action;
  • That Allied was released from civil or administrative monetary penalties under the above categories from liability for all acts Allied voluntarily disclosed following an internal audit of all its billing practices;
  • The United States does not release Allied or any other entity or individual from any criminal liability arising from the conduct described in the Civil Action.
  • That Allied will take "all reasonable and necessary steps" not to resubmit any false claims;
  • That Allied will abide by a Corporate Integrity Agreement for five years;

In that case, the Corporate Integrity Agreement required that Allied implement a Corporate Integrity Program (CIP) covering all company directors, officers, employees, and independent contractors associated with Allied's sales, performance, or billings for lab services. In brief, this program consisted of:

  • The formation of a CIP Management Committee consisting of the regional general managers of the corporation;
  • The designation of a Corporate Compliance Officer;
  • The submission by the Committee of quarterly reports to the Board of Directors with copies sent to HHS;
  • The development of written "Standards of Conduct" to be distributed to "all persons covered by the CIP."
  • A requirement to develop an ongoing training and education program for all present and future employees to ensure future compliance with the law;
  • Removal of all employees involved in the matters described in the Civil Action.
  • A requirement to make "reasonable inquiries" to determine whether or not any present and future employees, agents, or contractors has ever been convicted of a criminal offense related to health care or is otherwise ineligible to participate in federal programs and, if so, to terminate the relationship;
  • Instituting an "annual review of its billing policies, procedures and practices" to ensure appropriate billing;
  • Taking immediate corrective action when future violations occur including restitution and reporting to HHS;
  • Annual reporting to HHS of, among other things:
    a) all actions taken to comply with the Agreement
    b) a list of all documents dealing with compliance
    c) verification of compliance training
    d) a summary of all internal investigations and,
    e) certification of compliance with the Agreement;
  • Prior notification of HHS whenever the corporation acquires or sells or changes the name of any entities; and
  • Maintenance of all records for a period of six years.

The settlement agreement also required that, upon reasonable notice, HHS have access to records and employees without a corporate representative present. Were Allied to breech the agreement it could face exclusion or suspension from federal programs.

Defendant's negotiating a settlement agreement should also be aware that government attorney's have often insisted on waiver of the attorney-client privilege and waiver of the work-product doctrine. Nevertheless, some settlements have not included such waivers. Furthermore, the government usually tries to limit releases to the behavior described in the complaint. Therefore, a defendant should attempt to negotiate a release of 1) all claims related to the subject matter, 2) a release for individuals for the same monetary damages and penalties for which the organization has already paid once, and 3) a catch-all release for claims under any statutory or regulatory provisions of the federal programs that could potentially cover the subject matter of the complaint.

Preventing FCA lawsuits

Medical providers need to be aware that "all employees, sub-contractors, agents, representatives, shareholders, vendors, competitors, clients and the like are potential relators." Furthermore, the harsh provisions of settlement agreements and other costs involved in defending an FCA lawsuit call for corporate medical providers to take preventive action simply to meet their fiduciary duty to stockholders.

To reduce their exposure to qui tam lawsuits, medical providers should develop internal mechanisms to ensure compliance with complex and constantly changing Medicare and Medicaid regulations. The benefits of an internal fraud detection program include early detection of problems, subversion of employees' ability and inclination to bring a qui tam lawsuit, and the opportunity to voluntarily disclose fraud or mistakes thereby reducing penalties to double damages and also reducing fines.

The Act's future

There is annual pressure on Congress to revise the False Claims Act. The American Hospital Association (AHA) has made weakening the False Claims Act its top priority. In particular, the AHA seeks to raise the intent level required to prove a false claim and to raise the burden of proof from a preponderance of the evidence standard to a clear and convincing standard.

Ultimately, if medical providers have their way with Congress, the power of the FCA and its qui tam provisions may be fleeting. The AMA and the AHA are jointly spending millions on Capitol Hill lobbying efforts and in court battles to diminish the FCA's power. Their efforts may stifle a dawning awareness of the FCA's utility in fraud fighting efforts in many other sectors of our society.

However, if the FCA remains in its current form, an inventive citizenry will begin to more broadly use this powerful tool to hold public officials, corporations, and individuals entrusted with the expenditure of trillions of taxpayer dollars to their word.

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