By John R. Phillips and Mary Louise Cohen, Phillips & Cohen LLP

In many hospitals and other institutions there is a tendency to think that nothing needs to be done when billing mistakes are made in the institution’s favor. But that decision is a risky one these days if it involves Medicare or any other federal health insurance funds.

Failing to report Medicare billing errors to the federal government can get healthcare providers – and their employees – in trouble in two ways: They could be prosecuted for criminal violations, which could result in prison time as well as fines, and they could be sued for treble damages by whistleblowers and the government.

Criminal liability under the “duty to disclose” provision
Just recently the government has begun to use a little-known provision of the Social Security Act to discourage healthcare fraud. The “duty to disclose” provision of the 1977 amendments to the law [42 USC sec. 1320-7b(a)3] makes concealing from the government or failing to report Medicare overpayments a felony.

Under the “duty to disclose” provision, healthcare providers and others who conceal or fail to disclose that they have received larger payments than they are entitled to are guilty of a felony and could be imprisoned for up to five years and fined up to $25,000. Their employees, including auditors, who conceal these overpayments may be guilty of a misdemeanor and subject to fines.

In negotiations with healthcare providers to settle False Claims cases during the past year, government attorneys have been threatening to prosecute the providers for violating this law. But there have been no reported prosecutions yet.

One area in which this statute might be particularly important to healthcare providers is cost reporting. For example, hospitals might inaccurately estimate the proportion of their indirect administrative and general costs attributable to outpatient care rather than inpatient care. Intermediaries may not catch mistakes like that for a couple of years, if they ever do, since final settlements or audits usually don’t occur until two years after the cost reports are submitted. By then, the incorrect claims are likely to have been repeated in later cost reports because hospitals generally use cost reports from previous years to figure succeeding cost reports. In these cases, it’s the hospital’s responsibility to report errors in other cost reports.

Blowing the whistle on Medicare fraud
Healthcare providers that submit fraudulent claims to the government also run the risk of someone blowing the whistle on the practice. That person could be a doctor, a clerk, a patient or even a competitor. The whistleblower simply needs to know about specific acts of fraud to file a lawsuit seeking damages on behalf of the government.

The False Claims Act allows private citizens as well as the government to sue individuals, companies or institutions that are defrauding the government and recover three times the government’s losses plus $5,000 to $10,000 for each false claim. Fraudulent practices by a provider often will involve thousands, and sometimes millions, of individual patient claims, which makes the amount of civil penalties in healthcare fraud cases almost always staggering.

The government has used the threat of penalties under the False Claims Act to persuade healthcare providers to reimburse the government for fraudulent claims and pay smaller penalties. The Department of Health and Human Services (HHS) has established several False Claims initiatives, including the “Physicians at Teaching Hospitals” (PATH) project and the “DRG (Diagnostic Related Group) Window” project. The PATH project involves billing Medicare for treatment by faculty physicians that was actually done by residents and interns. Under the “DRG Window” project, HHS is looking at violations of its “72-hour rule,” where Medicare was billed separately for outpatient treatment of patients later admitted.

An increasing number of whistleblowers also are filing lawsuits against healthcare providers. To encourage people to report fraud, the law stipulates that whistleblowers will receive 15 percent to 25 percent of whatever money the government recovers as a result of their lawsuits if the government joins the case and up to 30 percent if it doesn’t. The False Claims Act also provides job protection for whistleblowers.

Insiders are the best source of information
Whistleblowers may file lawsuits even if they participated in the fraud. Congress figured insiders would be the best source of information about fraud, and employees are usually forced to participate in fraudulent schemes to keep their jobs. However, judges may reduce the whistleblowers’ rewards if they find that they planned or initiated the fraud.

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 while the government investigates to decide whether it wants to join the lawsuit, which is usually a year or longer.

Even the defendant is not notified of the lawsuit until after the seal is lifted. If the government decides to join the case, it may ask the court for a partial lifting of the seal after it completes its investigation to inform the defendant of the charges and negotiate a settlement. In those instances, the seal is sometimes lifted at the same time a settlement is reached.

If the government joins a case, the Justice Department has primary responsibility for its prosecution although the whistleblower retains some control. The whistleblower and the whistleblower’s attorney work with the government on its investigation, providing any documents, names of witnesses or other information that might help the case. And if the government proposes a settlement, the whistleblower has the right to object in court to it.

If the government decides not to intervene in a lawsuit, then the whistleblower has the right to continue on his or her own. But chances of success are better when the government joins because then its resources and authority are combined with the resources of the whistleblower and the whistleblower’s attorney.

Government attorneys and whistleblowers’ attorneys only have to prove that improper claims were submitted “with reckless disregard of the truth.” Whether the fraud was intentional is irrelevant, unlike in criminal cases where that must be proved.

Liability under the False Claims Act includes:

  • Presentation of a false claim for payment. Most healthcare fraud involves submission of improper claims for Medicare and Medicaid reimbursement.
  • Use of a false statement to get a claim paid, such as using a false diagnosis code.
  • Reverse false claims. For example, if a provider makes statements or claims during the course of a government audit that would reduce the amount of money the provider owes the government, then the provider would be liable for making reverse false claims.

Healthcare providers can be liable for false claims made as long ago as 1987 since the law has a 10-year statute of limitations. There have been lawsuits and investigations for practices such as:

  • Billing for services not provided.
  • Upcoding and unbundling.
  • Billing for services that aren’t medically necessary.
  • Substandard services.
  • Improper cost reporting.
  • Kickbacks and self-referrals. But the courts are split on whether a violation of the federal anti-kickback law constitutes a False Claims Act violation.

Congress passed the False Claims Act in 1863 because military suppliers were selling the Union army defective munitions. 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. As more people have learned about the rewards the law offers, the number of whistleblower lawsuits filed annually has jumped from 33 in 1987 to more than 300 in 1996. About 40 percent of the pending qui tam cases are against healthcare providers.

As a result of the False Claims Act:

  • The Clinical Practices of the University of Pennsylvania paid $30 million in December 1995 to settle its false claims exposure for billing Medicare for treatment by faculty physicians that was actually done by residents and interns.
  • Eleven hospitals and their consultants in Pennsylvania have been charged with upcoding, unbundling and rebundling Medicare claims to increase their Medicare reimbursements.
  • Independent laboratories have paid more than $800 million to settle charges that they billed Medicare and other federally funded insurance programs for unnecessary blood tests.

Voluntary disclosures
A voluntary disclosure of any fraudulent claims or overpayments will not release a provider from returning any wrongful payments. But prosecutors are more likely to agree to not press criminal charges and to settle for penalties less than the triple damages and the $5,000 to $10,000 for each fraudulent claim.

The law assesses a minimum penalty of two times the government’s losses for voluntary disclosures. However, three conditions must be met:

  1. The provider must report its errors within 30 days of discovering them.
  2. It must cooperate with the ensuing government investigation.
  3. The disclosure must be made before any criminal investigation, civil lawsuit or administration action relating to the violations has begun.

Thomas Jefferson University voluntarily audited its Medicare bills and last August paid the federal government $12 million. That was roughly double the amount of damages for improper Medicare claims from 1990 to 1994. The government said that bills had been submitted for treatment that had not been provided and faculty physicians had billed the government and patients for treatment done by residents.

Despite the inducement of reduced penalties, some providers may decide to keep quiet about any errors in Medicare payments. But given the federal government’s strengthened commitment to fighting healthcare fraud and the financial incentives under the False Claims Act for blowing the whistle on fraud, those providers are taking a huge gamble.

(Reprinted from New Perspectives, Journal of the Association of Healthcare Internal Auditors, Spring 1997, with permission)

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