False Claims Act & Health Care Fraud

Shelley R. Slade


These days one often hears the term “health care fraud” mentioned in the same breath as the False Claims Act. Press reports cite the False Claims Act as the remedy employed by the government in a wide gamut of health care cases, including everything from improper kickbacks, inadequate care, and failure to test, to upcoding, unbundling, and billing for ghost patients or unnecessary care. Indeed, according to the Department of Justice, over the last 15 years, the government has used the False Claims Act to recover almost $2 billion from health care providers and others who have cheated government health programs. In the war on health care fraud, law enforcement considers the False Claims Act to be the most powerful civil weapon in the government’s arsenal.

How broad exactly is the reach of this ubiquitous law? How can it be that an Act seemingly aimed at “false claims” has been used to address kickback allegations, as in the Columbia/HCA and National Medical Care cases, and inadequate care, as in some of the nursing home cases? Where are the false claims in those cases? And, how does the scope of the statute differ from the common law remedies for civil fraud? As with common law fraud, must you have evidence of deceitfulness or fraudulent intent to use the False Claims Act against improper health claims, or is reckless conduct sufficient?

This paper examines the scope of the False Claims Act in the area of health care. It explains how the Act addresses not only express false claims, but also claims that are implicitly false because they violate the rules of a federal health care program. It discusses how the Act is aimed not only at false claims submitted with fraudulent intent, but also false claims submitted by those who turn a blind eye to the rules of the game, while continuing to reap the benefits of government health programs. Finally, it demonstrates how the Act reaches all of the key players in a false claims scheme, by broadly defining the conduct that creates liability under the Act, and clarifying that the Act reaches “downstream” grantees, providers and contractors who submit claims to third parties who are, in turn, reimbursed by the federal government.


The government’s war on health care fraud officially began in 1993 when the Attorney General announced that pursuing health care fraud would be a top priority for the Department of Justice. Through the increasingly aggressive use of this law, the government has obtained huge health care fraud settlements in recent years, and has paid sizeable “bounties” to private individuals who have brought fraud to the attention of the government.

The first health care fraud settlement of very significant size was the $111 million False Claims Act settlement with National Health Laboratories in 1992. Additional record 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 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 government’s use of the False Claims Act has been hugely successful in redressing and deterring health care fraud. 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 the federal government’s “efforts to rein in fraud” have been at least partially responsible for the decline.

A very significant 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 False Claims Act cases on behalf of the United States, and share in the government’s recovery. When private whistleblowers bring health care fraud to the attention of the government, they often 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, sizeable recoveries by whistleblowers include the following:

* 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 False Claims Act 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 under the False Claims Act 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 False Claims Act 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 False Claims Act 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 False Claims Act 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.


The False Claims Act prohibits the submission of “knowing” false claims to obtain federal funds. The United States may sue persons who violate the Act for treble damages (i.e., three times the financial loss to the government), plus $5,000 to $10,000 per false claim.

Importantly, the law covers not only those who submit false claims with fraudulent intent and actual knowledge of the falsity of their claims. It also applies to the “ostriches with their heads in the sand” who make false claims with “deliberate ignorance” or “reckless disregard” of the truth or falsity of their claims. The Act has been interpreted to apply to false claims submitted with “gross negligence.”

The False Claims Act gives the government a remedy against all of the key players in a scheme to submit false claims. It creates a civil cause of action against those who submit false claims, those who “cause” false claims to be submitted, those who knowingly make false statements to get false claims paid, those who knowingly use false statements to get false claims paid, and those who “cause” false statements to be made or used to get false claims paid.

The False Claims Act also contains a broad definition of “claim” to reflect Congress’s desire that the Act be used against all types of fraud on the federal fisc. Through this definition, the Act reaches 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 a private person, referred to as a “qui tam plaintiff,” “relator,” or, colloquially, “whistleblower”, to sue on behalf of the government, as well as on their own behalf.

When a private party brings a lawsuit under the False Claims Act, their complaint must be filed in federal district court “under seal,” or, in other words, off the public record. They must file a statement with the Department of Justice, disclosing all of the material evidence in their possession. The government is then given at least sixty days to investigate the qui tam plaintiff’s complaint while the matter is under seal, and decide whether to take over the case. The government may, and usually does obtain extensions of this initial seal period from the court to continue its investigation, often for 18 months or more.

In the event the government takes over the case, the qui tam plaintiff continues to be a party in the case, although the government takes the lead in the litigation. If the government is able to recover funds from the party sued, then the qui tam plaintiff may recover up to 25% of the government’s recovery, with the amount determined by the court, and determined by several factors, including:

* the whistleblower’s contribution to the success of the case;

* whether the whistleblower “planned and initiated” the violation of the False Claims Act; and,

* 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.

In the event the government does not take over the case, the qui tam plaintiff may go forward on his or her own and litigate the case against the defendant. In the event there is a recovery for the United States, the relator may recover up to 30% of the United States’ recovery, with the percentage again to be determined based upon an examination of the factors detailed above.

Regardless of whether the United States takes over the case, the relator is also entitled to recover their reasonable and necessary expenses, and reasonable attorneys’ fees and costs, from the defendant. Most qui tam counsel represent qui tam plaintiffs on a “contingency” basis, meaning that the lawyers will only be paid their fees if their client recovers money, whether from the government’s recovery, or from the defendant.

Use of the FCA to Address Health Care Fraud

Congress has made clear its intent that the False Claims Act be used to address knowing, false claims on Medicare and Medicaid. When Congress amended the False Claims 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).

Accordingly, the False Claims Act may be, and is 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. It also may be used to remedy schemes involving knowing false claims for grant funds from the National Institute of Health and other federally funded entities financing health care research.

Moreover, the False Claims Act may be used to redress situations beyond those in which a health care provider simply bills for something they didn’t deliver, or charges more than permitted. The Act extends to claims by 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.”

* “claims may 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.

Importantly, the complexity or ambiguity of Medicare rules – – in-and-of-themselves – – generally will not provide a defense to False Claims Act liability . As stated in the legislative history to the False Claims Act, “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 a limited inquiry into the meaning of complicated or unclear rules, consequently may suffice to establish a violation of the False Claims Act.

Nor will a provider as a general matter be able to escape False Claims Act liability by pointing to erroneous advice provided by 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 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.

While reasonably relied-upon, but erroneous advice provided by authoritative program agency employees (e.g., Health Care Financing Administration personnel) may disprove a health care provider’s “knowledge” of the falsity of its claims, as well as the false claims’ “causation” of damages, incorrect agency advice that flies in the face of the plain meaning of written program rules likely will not get a provider off the hook. If the law were otherwise, health care providers could simply “shop” for an incorrect opinion by an inexperienced federal official to justify their improper practices.

In short, the fact that the government in effect “opens the door to the vault” by issuing unclear rules, or misleading interpretations of those rules, should not be construed as a license to steal from the federal fisc in violation of published regulations and program instructions.

The foregoing principles have permitted the government to use the False Claims Act in a wide variety of situations involving knowing, false claims, including the following:

1. Claims for “medically unnecessary” health care.

2. Claims on which services are “upcoded” or on which an inappropriate Diagnosis Related Group is used.

3. Double-billing by one provider.

4. 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.

5. Billing for patients not eligible to receive a benefit such as home health or hospice.

6. 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 out sums of 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 care.

7. “Unbundling” of services required by Medicare rules to be “bundled.”

8. 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, in fact, provided.

9. Billing for ghost patients and other care not provided at all.

10. Allocating costs that should be borne by private insurers to a federal health program.

11. 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.

12. Billing for unsafe or defective products sold in violation of Food & Drug Administration rules.

13. 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.

14. 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.

15. 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 govenment payors 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

How do I Determine Whether a Health Care Company has Violated the FCA?

In analyzing whether improper health care claims give rise to liability under the False Claims Act, it is useful to break down the inquiry into the following, straightforward questions:

1. Was a claim made for federal funds, either directly or by submitting a claim to a third party reimbursed with federal funds?

2. Was the claim false? And, if so, what written rules, 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?

3. Did the claimant have “actual knowledge” of the falsity, or submit the claim with “reckless ignorance or deliberate disregard” of the falsity?

4. Was the claim paid?

5. Did the false claim “cause” a financial loss to the government?

6. To comply with the False Claims Act’s 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, the availability of corroborating documents and witness testimony will be critical. However, if the evidence is there, and the elements set forth above are satisfied, the False Claims Act will be a powerful weapon to redress almost any scheme to cheat federal government health programs.

Vogel, Slade & Goldstein, LLP 5225 Wisconsin Avenue, NW, Suite 502 Washington, DC 20015

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