How to avoid liability under the False Claims Act

By John R. Phillips and Mary Louise Cohen, Phillips & Cohen LLP
(Reprinted from American Medical News, Feb. 10, 1997, with permission)A Civil War-era law is shaking up the health-care industry.

The False Claims Act allows the government as well as private citizens to sue individuals or companies that are defrauding the government and recover three times the damages plus additional penalties.

Any physician, hospital or other health-care provider that participates in Medicare, Medicaid, CHAMPUS or any other federally funded health-care program is liable under the law. With the law's 10-year statute of limitations, doctors can be liable for claims made as long ago as 1987.

It has become a popular enforcement tool because prosecutors only have to prove that improper claims were submitted "with reckless disregard of the truth" to the government. Whether the fraud was intentional is irrelevant, unlike in criminal cases where that must be proved.

You can be held responsible
And those who can be held responsible for the fraud include not only the individuals or companies that committed the act but also those who actually receive the government funds even if they were unaware of the specific false claims made on their behalf. The law holds them accountable because they failed to properly supervise those who submitted claims on their behalf.

As a result of lawsuits filed under the False Claims Act:

• Eleven hospitals and their consultants in Pennsylvania have been charged with upcoding, unbundling and rebundling Medicare claims to increase their reimbursements.
• Teaching hospitals across the country are under scrutiny by the Dept. of Health and Human Services for their Medicare claims. The University of Pennsylvania paid $30 million in December 1995 and Thomas Jefferson University paid $12 million in August to settle charges that included faculty physicians billing the government and patients for treatment done by residents.
• Independent laboratories have paid more than $300 million to settle charges that they billed Medicare and other federally funded insurance programs for unnecessary blood tests.

Kickbacks also at issue
Individual physicians also have been hit hard by False Claims Act lawsuits. Charges have included upcoding, routinely billing for unnecessary services, substandard services, false diagnoses to justify claims and kickbacks for referrals.

Whether a violation of the federal anti-kickback law constitutes a False Claims Act violation is currently one of the most hotly disputed issues in fraud litigation. If it does, then the physician found liable is subject to treble damages and penalties as high as $10,000 per patient billed.

Although the federal courts are split on this issue, doctors should be wary of accepting any benefit (research grant, free rent, free products, etc.) from hospitals, labs or other providers of medical services.

Congress passed the original False Claims Act in 1863 to prosecute manufacturers that sold the Union army defective supplies. But when Congress amended the statute in 1986, it hoped that the law would be used to uncover fraud in all areas where the government provides funding, either directly or indirectly. The revised law stipulated harsher penalties for wrongdoers and greater rewards for whistleblowers.

The number of False Claims Act lawsuits then jumped from 33 in fiscal 1987 to more than 300 in fiscal 1996.

In the early years of the amended law, most cases involved defense contractors. But in the past year, only one-fourth have been related to the defense industry. About 40 percent of the lawsuits were against health-care providers.

Part of the reason for the False Claims Act's growing success is the reward provision. Whistleblowers get 15 percent to 25 percent of the total amount the government recovers if the government intervenes in the case and up to 30 percent if the government declines to intervene.

These rewards are meant to encourage whistleblowers to take the personal and professional risks that exposing wrongdoing usually entails. Anyone with knowledge of an individual or organization submitting false claims to the government can file a lawsuit. This could be an employee or even a competitor.

Lawsuits initiated by whistleblowers are called qui tam cases. (Qui tam is short for a longer Latin phrase meaning "he who brings the action for the King as well as for himself") The lawsuits are filed under seal and are not available to the public for 60 days or longer while the government investigates to decide whether it wants to join the lawsuit.

Whistleblowers may file lawsuits even if they participated in the fraud. However, if the courts find that the whistleblowers planned or initiated the fraud, then judges may reduce their rewards. And if the whistleblowers are convicted of criminal actions in connection with the fraud, then they will not be awarded any money.

Protect yourself
To avoid or minimize liability under the False Claims Act, physicians should:

• Carefully choose contractors to perform functions such as billing, for you will be held liable for any scam contractors run when they submit claims on your behalf. Be skeptical of anyone that offers to maximize recoveries far beyond the norm.
• Aggressively supervise contractors and employees to ensure they are aware of and are following all government regulations regarding filing claims.
• Create an environment that rewards whistleblowers for reporting wrongdoing in-house. Many, if not most, whistleblowers who have filed lawsuits have done so only after being harassed, ostracized or punished when they reported the problem to their managers.
• Respond rapidly and appropriately once an offense is detected and act to prevent further wrongdoing.
• Reject any freebies or other offers of benefits that could be characterized as incentives or rewards for patient referrals.

If you find that you have received payments for charges that should not have been submitted, you may be criminally liable - as well as liable for monetary damages - if you don't report the error. This little-known provision allowing criminal prosecution is laid out in 42 USC sec. 1320-7b(a)3. Consult an attorney immediately.

Although a voluntary disclosure will not release you from returning any wrongful payments, prosecutors are more likely to agree to settle for penalties less than the triple damages that the government is entitled to.