Health Care Fraud:
How Far Does the False Claims Act Reach?
Shelley R. Slade, Esq.
The term "health care fraud" is often mentioned in the same breath as the 1986 Federal False Claims Act. Press reports cite the Act as the remedy employed by the government to attack billing for ghost patients, upcoding, unbundling, and billing for inadequate or unnecessary care. Since 1988, nearly $2 billion has been recovered recovered from health-care providers and others who have cheated government health programs. In the war on health care fraud, law-enforcement agencies consider the Act to be their most powerful civil weapon.
The government's war on health-care fraud officially began in 1993 when the Attorney General announced that pursuing it would be a top priority for the Department of Justice. Through increasingly aggressive use of this law, the government has obtained huge settlements and paid sizable "bounties" to private individuals who have brought fraud to the attention of the government.
The government has used the False Claims Act to investigate a wide range of health care providers, from managed care organizations, clinical laboratories, pharmaceutical companies, and chains of hospitals and nursing homes, to physician practices, home health agencies and durable medical equipment suppliers. The government has also pursued the entities that assist plans and providers with health care transactions, such as billing companies, attorneys, and Medicare carriers and fiscal intermediaries.
The first very large settlement was the $111 million False Claims Act settlement with National Health Laboratories in 1992. Other giant settlements have been reached with SmithKline Beecham Clinical Laboratories for improper "bundling" of lab services ($325 million), Blue Cross and Blue Shield of Illinois for improper processing of Medicare claims ($140 million), National Medical Care for billing for unnecessary tests ($375 million), and Beverly Enterprises, the nation's largest operator of nursing homes, for inflating the costs of treating Medicare patients ($170 million).
The government's use of the False Claims Act appears to be effective in deterring health-related frauds. Indeed, when the New York Times reported in 1999 that Medicare spending had dropped for the first time in the history of the program, the paper noted that federal efforts to "rein in fraud" have been at least partially responsible for the decline.
A major factor in the government's success has been the financial incentives for "whistleblowing" established by provisions in the False Claims Act that permit private persons to bring cases on behalf of the United States and to share in the government's recovery. When private whistleblowers bring frauds to the attention of the government, they can receive bounties in the millions of dollars. Publicity concerning these awards motivates otherwise reluctant informants to bring additional fraud to light, and increases public awareness concerning the reach of the False Claims Act. Examples of recent, sizable recoveries by whistleblowers include:
- Louis Mueller received $678,584 from a 1999 settlement with Walgreen Company, the retail pharmacy chain, after Mueller filed a False Claims Act case reporting that Walgreen billed Medicaid the full amount for prescriptions that were only partially filled.
- As part of a 1998 settlement, Francine Mettevelis and Rhea Jones received $903,899 for reporting that Charter Behavioral Health Systems - Orlando billed Medicare for medically unnecessary psychiatric care for elderly patients with severe dementia, Alzheimer's Disease and other organic brain disorders.
- The estate of Teresa Semtner received $3.2 million after Semtner brought a suit against Emergency Billing Services, disclosing the company's practice of upcoding the claims of its clients.
- George Denoncourt received approximately $4 million as part of the settlement of his allegations that the State of New York was overcharging the federal government under various Social Security Act programs, including Medicaid.
- Donald McLendon, the former Vice President of Olsten Corp., received $9.8 million as part of a 1999 settlement of his allegations that Olsten charged Medicare for unallowable, sales and marketing costs.
- As part of a $140 million civil settlement with Health Care Service Corporation, the private plaintiff was paid more than $21 million for exposing that this Medicare carrier had submitted false information to the Health Care Financing Administration, failed to process claims in accordance with HCFA's guidelines, and failed to process correspondence and reviews in a timely manner.
- In 2002, Eckerd Corporation, a national retail pharmacy chain, paid the United States $5.87 million to resolve allegations that Eckerd dispensed partial prescriptions due
to insufficient stock, but billed for the full quantities prescribed
for beneficiaries of Medicaid and other government health insurance
Summary of the Act
The False Claims Act—embodied in U.S. Code Title 31, Chapter 37, Subchapter III—prohibits the submission of "knowing" false claims to obtain federal funds. The United States may sue violators for treble damages (three times the government's loss), plus $5,000 to $10,000 per false claim. The law is not limited to claims submitted with fraudulent intent or actual knowledge of their falsity. It also applies to "ostriches with their heads in the sand" who make false claims with "deliberate ignorance" or "reckless disregard" of truth or falsity, or "gross negligence."
The Act gives the government a remedy against all of the key players in a scheme. That includes those with the requisite knowledge who submit false claims; "cause" such claims to be submitted; make or use false statements to get false claims paid; or "cause" false statements to be made or used. The Act broadly defines "claim" to reflect Congress's desire to attack all types of fraud against the federal Treasury. This enables the Act to reach so-called "downstream providers" and subcontractors who receive federal funds through third parties, such as government contractors and HMO's.
The law permits the United States to sue on its own behalf. It also authorizes private persons, referred to as "qui tam plaintiffs" or "relators"—or, colloquially as "whistleblowers"—to sue on the government's behalf as well as their own. Private complaints must be filed in federal district court "under seal" (off the public record) and be accompanied by a statement, filed with the Department of Justice, disclosing all of the material evidence the plaintiff possesses. The government has at least sixty days to investigate and decide whether to take over the case. The government may—and usually does—obtain extensions to continue its investigation, often for 18 months or more.
If the government takes over the case, the qui tam plaintiff continues to be a party. If the government collects funds from the party sued, the plaintiff may recover up to 25% of the amount. If the government does not take over the case, the plaintiff may proceed and be awarded up to 30% of the government's recovery. In successful cases, the court determines the reward based on factors that include:
- the whistleblower's contribution to the success of the case
- whether the whistleblower "planned and initiated" the violation of the False Claims Act
- whether the complaint was "based on" a prior public disclosure of the allegations, and whether the qui tam plaintiff was an original source of the allegations.
If there is a recovery in the case, qui tam plaintiffs are also entitled to recover reasonable and necessary expenses and reasonable attorneys' fees and costs from the defendant. Most qui tam attorneys represent plaintiffs on a contingency basis, meaning that the lawyers will be paid only if the client receives money from the government's recovery, or from the defendant.
How the Act Can Be Used
Congress intended that the False Claims Act be used to address knowing, false claims against Medicare and Medicaid. When Congress amended the Act in 1986, the Senate Judiciary Committee explained that the law "is intended to reach all fraudulent attempts to cause the Government to pay out sums of money or to deliver property or services . . . A false claim for reimbursement under the Medicare, Medicaid or similar program is actionable under the act." [S. Rep. No. 99-345 at 9. See also Peterson v. Weinberger, 508 F.2d 45, 51 (5th Cir.), cert. denied, 423 U.S. 830 (1975)] As a result, the Act is being used to address fraud on Medicare, Medicaid, and many other federal health insurance programs, such as the Federal Employees Health Benefits Program, the TRICARE Program of the Department of Defense, the health programs of the Department of Veterans Affairs, and the workers' compensation programs of the Department of Labor. The Act can also be used to remedy schemes involving false claims related to research grants from the National Institutes of Health and other federally funded entities.
Moreover, the Act can be used to redress situations beyond those in which a health-care provider simply charges more than is permissible or bills for something not delivered. The Act extends to claims by or on behalf of those who are ineligible to participate in government programs, claims under contracts obtained through deceptive or other unlawful means, and claims for health care provided in violation of law or contract terms. In amending the False Claims Act in 1986, Congress indicated that:
- A false claim may take many forms, the most common being a claim . . . provided in violation of contract terms, specification, statute or regulation.
- A claim can be false even though the services are provided as claimed if, for example, the claimant is ineligible to participate in the program.
- Each and every claim submitted under a contract, loan guarantee, or other agreement which was originally obtained by means of false statements or other corrupt or fraudulent conduct, or in violation of any statute or applicable regulation, constitutes a false claim.
- All claims submitted under a contract obtained through collusive bidding are false and actionable under the act. [S. Rep. 99-345 at 9]
Equally important, the complexity or ambiguity of Medicare rules—by themselves—generally will not provide a defense against liability. As stated in the Act's legislative history, "Those doing business with the Government have an obligation to make a limited inquiry to ensure the claims they submit are accurate." And, as similarly explained by the Supreme Court in Heckler v. Community Health Services [467 U.S. 51, 63 (1984)], a participant in the Medicare program has "a duty to familiarize itself with the legal requirements for cost reimbursement." In the Medicare context, false claims combined with a failure to read the rules, or to make sufficient inquiry into the meaning of complicated or unclear rules, may suffice to establish a violation.
Nor will a provider generally be able to escape liability by pointing to erroneous advice from a fiscal intermediary or carrier that conflicts with Medicare's written rules and policies. The Supreme Court has ruled that the Health Care Financing Administration has given fiscal intermediaries and carriers neither actual nor apparent authority to interpret Medicare rules or to develop policy. [Id. at 65, n. 21] Accordingly, the Supreme Court has rejected a defense to administrative liability raised by a provider who relied on erroneous oral advice provided by a fiscal intermediary:
As a recipient of public funds well acquainted with the role of a fiscal intermediary, respondent knew Travelers only acted as a conduit; it could not resolve policy questions. The relevant statute, regulations, and Reimbursement Manual, with which respondent should have been and was acquainted, made that perfectly clear. [Id. at 64-65]
In short, the fact that a government contractor in effect "opens the door to the vault" ordinarily will not be construed as a license to steal from the federal Treasury in violation of written rules and instructions.
On the other hand, reasonably relied-upon but erroneous advice provided by authoritative program agency employees (e.g., Health Care Financing Administration personnel) may be relevant to a health care provider's "knowledge" of the falsity of its claims, as well as to "causation" of damages.
The above principles have permitted the government to use the False Claims Act in a wide variety of situations involving knowing, false claims, including the following:
- Claims for "medically unnecessary" health care. Medicare, like most other federal, state and private health insurance programs, covers only "medically necessary" treatment by properly licensed and credentialed providers. By definition, "quack" medicine consequently would not be covered.
- Claims on which services are "upcoded" or on which an inappropriate Diagnosis Related Group is used.
- Double-billing by one provider.
- Duplication of billing by two providers, such as a physician who bills for an analysis of X-rays when a radiologist has already performed and billed the federal program for the analysis.
- Billing for patients not eligible to receive a benefit such as home health or hospice.
- Claims for health care for patients referred in exchange for "kickbacks." Here the underlying health care transaction violates program rules, and the claims consequently may cause the government to pay money to claimants it did not intend to benefit. In addition, these claims may be accompanied by false certifications that no kickbacks were paid, and the care provided may be medically unnecessary.
- "Unbundling" of services required by Medicare rules to be "bundled."
- Improper administration of federal programs by fiscal intermediaries and carriers, including failure to process claims and correspondence in accordance with program agency guidelines. This conduct can damage the government by causing overpayments to health care providers and beneficiaries. It can also damage the government to the extent that the contractor bills for a level of service that was not actually provided.
- Billing for ghost patients and other care not provided at all.
- Allocating costs that should be borne by private insurers to a federal health program.
- Billing for unallowable costs, and other costs that the federal health program doesn't cover, such as lobbying, marketing and personal expenses. This conduct often will involve false statements concerning the true nature of the expenses.
- Billing for unsafe or defective products sold in violation of FDA rules.
- Provision of substandard care by nursing homes and other providers . This scenario may involve a false certification of compliance with rules or program instructions, such as Medicare "conditions of participation" that require a certain standard of care. The claims also may be false because the provider implicitly has represented that it has provided one service, when in fact it has provided an inferior service.
- Refusal to provide medically necessary care covered under capitated fee arrangements. In other words, in billing for a capitated fee, whether for a nursing home patient or a managed care organization patient, a provider implicitly represents that it is providing the services covered by applicable contract or regulatory provisions when, in fact, it knows that it is not. This conduct is also known as knowing "underutilization", and can involve schemes such as: denial of authorization for care; failure to authorize care in a timely fashion; causing network providers to deny care through the use of financial or other pressure; and, encouraging disenrollment prior to expensive procedures with reenrollment immediately thereafter.
- Other fraudulent schemes by managed care
organizations. The False Claims Act potentially covers a wide range of
additional schemes that could be perpetuated within the context of
managed care, including:
- misrepresentations concerning number of enrollees to fraudulently increase the number of capitated fees
- misrepresentations concerning status of enrollees to fraudulently increase the level of capitated fees
- misrepresentations by Medicare Plus Choice contractors concerning their adjusted community rate to decrease the value of, or eliminate the requirement for a supplemental benefits package
- false statements on applications to enter the program resulting in the federal government contracting with an ineligible entity
- misrepresentations concerning market and other rates that federal government payers use to compute capitated fee rates
- billing for services not rendered, double-billing, upcoding, and billing for unnecessary services by plan subcontractors and others who charge the plan on a traditional, fee-for-service basis
- embezzlement of capitated fees by the plan or its subcontractors
- kickbacks paid to secure subcontracts and referrals
- marketing fraud
Determining Whether a the FCA Has Been Violated
The following questions can help you judge whether improper health care claims give rise to liability under the False Claims Act:
- Was a claim made for federal funds, either directly or by submitting a claim to a third party reimbursed with federal funds?
- Was the claim false? If so, what written rule, contractual language, and/or statement on the claim establishes the falsity of the claim?
- Did the provider sign a certification, or conditions of participation, that support the allegation that the claim was false?
- Did the claimant have "actual knowledge" of the falsity, or submit the claim with "reckless ignorance or deliberate disregard" of the falsity?
- Was the claim paid?
- Did the false claim "cause" a financial loss to the government?
- To comply with the statute of limitations, can the lawsuit be filed within six years of the false claims, or within three years of when the government learned of the False Claims Act violation, whichever is later (but, in any event, not more than ten years after the false claims)?
As with any legal claim, corroborating documents and witness testimony will be critical. However, if the evidence is there, and the above elements are satisfied, the False Claims Act may be a powerful weapon to redress almost any scheme to cheat federal government health programs.
For Additional Information
About the Author
Ms. Slade is an attorney who specializes in qui tam and other False Claims Act matters. From 1990 through 1997, she handled False Claims Act cases in the Department of Justice, where she obtained a number of significant recoveries for the United States Government. In 1998 and 1999, she was Senior Counsel for Health Care Fraud in the department's civil division. She is now a partner in Vogel & Slade, LLP, 1225 19th St., N.W., Suite. 300, Washington, DC 20036. She can be contacted at (202) 223-4710, or firstname.lastname@example.org.
This page was posted on August 23, 2000.