Editor: Congress presently is considering several proposed amendments to the False Claims Act (FCA) that would overturn court decisions that have limited the application of the FCA and the prosecution of qui tam complaints. What is the status of some of the proposed amendments?
Eiland: On May 6, 2009, the House of Representatives passed the Fraud Enforcement and Recovery Act (FERA) of 2009 by a vote of 367 to 59. The Senate passed the bill on April 28, 2009 by a vote of 92 to 4 and will now consider the bill as amended by the House of Representatives. While even more extensive changes to the FCA are being proposed in Senate Bill 458 (The False Claims Clarification Act), which is still at the beginning stages of the legislative process, FERA contains a number of significant FCA changes.
FERA is a broad antifraud bill that will expand liability for making a false or fraudulent claim to the federal government. FERA addresses the Supreme Court ruling in Allison Engine Co. v. United States ex rel. Sanders , 128 S.Ct. 2123 (2008) in which the Supreme Court ruled that to be liable under the FCA, subcontractors of government contractors must intend to get a false claim paid and approved directly by the government. The legislation would make subcontractors liable for knowingly committing fraud even if the fraud is committed indirectly through another contractor.
Among its other measures, FERA clarifies that liability may attach whenever a person conspires to violate the FCA, and requires individuals who violate the FCA to reimburse the federal government for the costs of a civil action brought to recover penalties and damages. This latter change is important since one rationale cited by the DOJ in support of the FCA multiple damages provisions is that such provisions are intended in part to recompense the government for its cost of recovery.
Editor: It has been estimated that total recoveries under the FCA in 2008 exceeded $20 billion. How much of that represents recoveries from those in the healthcare sector?
Eiland: During 2008 and in 2009, it is likely that the percentages will be much greater than 50 percent of the total FCA recoveries because there have been some significant settlements of healthcare sector FCA cases, including those involving large pharmaceutical and medical device companies, that have exceeded $1 billion. Also, each line item of service on a Medicare bill can be alleged to constitute a false claim - as opposed to the defense industry in which even large contracts involve a single claim or a series of relatively large claims for each contract drawn. For this reason, the penalty provision of $5,500 to $11,000 per claim greatly increases potential recoveries in the healthcare industry.
Editor: Please tell us about the effect on the healthcare sector of the proposed amendment that would expressly allow government employees to profit personally by bringing qui tam actions against those they audit and regulate
Eiland: The Center for Medicare and Medicaid Services (CMS) has been rightfully concerned for many years that fraud and abuse can occur with respect to unscrupulous providers billing for services that were either not necessary or not performed, and has put together an extensive list of auditors to review how they administer and pay claims.
Under Medicare, there has been the fiscal intermediary responsible for auditing hospital cost reports and claims, and also Medicare carriers that have historically been responsible for reviewing and adjudicating physician claims and home health agencies and the like. Over the last three to four years, CMS has undertaken to consolidate those two roles into a Medicare administrative contractor, and then to assign components of the duties previously exercised by the fiscal intermediaries and carriers to other contractors. There are now a Medicare Secondary Payor Recovery Contractor, a Program Safeguard Contractor, a Zone Program Integrity Contractor, a Quality Improvement Contractor, and a Recovery Audit Contractor.
The healthcare industry exposure to qui tam litigation is greatly enhanced by this array of auditors that have contractual obligations to audit on behalf of CMS, including an obligation to bring information about false claims to the attention of CMSand their superiors. Under the proposed amendment, auditors can now file FCA cases based on the information that might come to their attention during that audit process. This gives them an incentive to file a lawsuit without sharing that information with CMSand their superiors. There have even been instances where qui tam cases have been filed by in-house legal counsel or the in-house corporate compliance officer of healthcare industry clients. Here again, CMS auditor employees will face a conflict of interest in deciding whether to bring a potential false claim to the attention of CMSand their superiors or whether to file a qui tam False Claims Act case.
Editor: What is the impact on the healthcare sector of the proposed amendment allowing any qui tam relator to use public information to bring a qui tam case?
Eiland: Currently, a qui tam action based on publicly available information cannot proceed if the relator is not an "original source" to the government. Limited thought appears to have been given to the impact of the proposed amendment on healthcare providers. Given their vulnerability to FCA actions, healthcare providers will be forced to defend numerous parasitic lawsuits.
Hospitals file Medicare cost reports and multiple Medicare claims. That information is accumulated each year in a MEDPAR data file that can be purchased. As a result of "data mining," information uncovered by potential whistleblowers from those filings has already produced significant FCA settlements.
A few years ago in the healthcare industry there was a pneumonia coding initiative. Medicare made different levels of payment based upon the underlying diagnosis that produced the diagnostic-related group (DRG) payment. Whistle-blowers did a statistical analysis of the MEDPAR files of hospitals nationwide to determine which most frequently used the DRG number that produced the highest payment. They then filed qui tam cases against the statistical outliers at the upper end. This type of data mining of publicly available information and filing of FCA lawsuits will likely escalate, and healthcare providers will be forced to defend numerous parasitic lawsuits.
Editor: What are the implications of eliminating the current requirement that fraud be pled with particularity?
Eiland: If the obligation for the relator to plead fraud with particularity is removed, exposure to "fishing expedition" discovery requests is greatly increased. Plaintiffs will be able to gain information concerning the hospital's claim for services over a six-to-ten-year period to search for errors or other discrepancies without prior knowledge.
Qui tam relators' legal counsel have already become more efficient in avoiding particularity. For example, relator's counsel may also file a collateral cause of action in state court, such as a defamation suit, in order to conduct discovery. A hospital can incur enormous costs just to defend the discovery stage.
Editor: I understand that the amendments also increase damages.
Eiland: Currently damages are based on the loss to the government. Under the Senate Bill 458, damages would instead be the amount of the government's claim. That is significant because hospitals, physicians and other providers are paid based upon multiple line items in a bill. Take a physician's bill - there may be line items based upon codes. Under current law, if a provider billed for a service at a level five, but it was really only a level three service based on available documentation, the damages would only be the difference between the two. Under S.458, damages would be the entire claim or the entire amount paid. This draconian approach is particularly inappropriate in the healthcare industry where inadvertent errors in line items are almost inevitable and that treble damages and $5,500 to $11,000 penalties are available for each error.
Defendants' costs are further increased because the proposed amendments provide that they must bear successful plaintiffs' litigation costs. Historically, the DOJ has argued that the FCA multiple damages provisions were not punitive since multiple damages were permitted, in part, to recompense the government for its costs of recovery. Costs of recovery would now be paid separately which may make the multiple damages provisions subject to further challenge as excessive under the U.S. Constitution.
Editor: What is the effect of the copycat legislation in the states?
Eiland: Congress acted a few years ago to encourage states to enact their own false claims acts that cover the healthcare sector. The legislation provided that a state would receive a portion of the federal share of any recovery if the state enacted an FCA that met federal standards, including a provision that a whistle-blower could continue a qui tam suit even if the state attorney general's office declined to intervene.
Editor: I gather that the proposed amendments make the FCA applicable to claims with respect to any recipient of federal funds and any contractor or subcontractor and remove the present presentment requirement.
Eiland: Yes. If someone is contracting or subcontracting to the federal government, their claims would be subject to the FCA. This change is of particular concern to the healthcare industry because, for example, NIH grants for clinical trials are a significant source of federal dollars for academic medical centers, university medical schools and their affiliated teaching hospitals. Many times the principal investigator and the recipient of an NIH grant will subcontract with physicians in the community to make sure the trial has sufficient participation by Medicare beneficiaries. All of the physicians would be vulnerable to FCA suits.
Editor: What is the significance of extending the statute of repose to ten years.
Eiland: In the healthcare industry it is a significant issue because claims are not timely finalized. Normally, Medicare cost reports and claims are subject to three- and four-year reopening periods. Extending the FCAstatute of repose from six years to ten years would place those in the healthcare sector at risk of an exponential increase in claims.
Editor: Were legislators aware of the disastrous effects of the proposed amendments on the healthcare industry?
Eiland: Congress, in the rush to penalize fraud and false claims by beneficiaries of TARP and other elements of the economic stimulus package, may have inadvertently increased greatly the defense costs of ordinary FCA suits.
Editor: Do you feel that the healthcare industry generally is aware of the impact of this legislation?
Eiland: Our firm sends its clients a weekly email newsletter updating them on the status and impact of the proposed amendments. The American Hospital Association, American Medical Association and their state and local counterparts also keep their members informed.
Editor: Gary, I want to thank you and your firm for the great service that you have provided to our readers and Internet viewers in the healthcare sector. Based on my experiences as general counsel, if I became aware that our business would be so drastically impacted by proposed legislation, I would inform our CEO immediately and, while I was still in his office, he would be on the phone to our Senator and Representative expressing his concern. The very small numbers who voted against this legislation indicates to me that they were not hearing from their local healthcare providers.
Published June 1, 2009.
