Legal alert: beware the False Claims Act.

The Civil False Claims Act, a Civil War statute designed to deter contractor fraud, is now the federal government's preferred enforcement method to recoup significant payments from health care providers for false billings submitted to the Medicare and Medicaid programs. This year, federal enforcement officials announced that long-term care operators, their suppliers, and hospice providers are among the prime targets in a nationwide effort to uncover false billing claims. As a result, providers are beginning to receive letters from the Department of Justice and other governmental officials notifying them that they are being investigated under the Civil False Claims Act, 31 U.S.C. [sections] 3729-3733 (the "Act"). As such, they may face significant penalties, including repayment of up to three times the amount overbilled and $5,000 per claim.

Spearheading the investigations are the Office of the Inspector General (OIG) of the Department of Health and Human Services, the Department of Justice (DOJ), and the state attorney generals. Medicare fiscal intermediaries are also threatening penalties even for honest billing mistakes.

What is the law in question?

The Civil False Claims Act

First signed into law by President Abraham Lincoln in 1863, the Act was amended in 1986 to expand the types of claims which could be prosecuted and to lower the level of "proof" required to recover payments. In effect, these amendments opened the door to federal enforcement in the health care industry through civil, rather than criminal, prosecution.

The Act differs from traditional enforcement practices applied to billing errors that resulted in a provider receiving overpayments. Historically, a Medicare intermediary simply requested that the provider repay any overpayments and was only permitted to "look back" four years to collect. Under the Act, however, violators may be subject to triple damages and a penalty of $5,000 per claim, depending upon how egregious the billing practices were. The statute of limitations also has been extended under the Act to a six-year look-back period. Recent settlements have resulted in providers paying at least two times the amount of the overpayment plus interest and agreeing to institute a corporate compliance program. Others have been prosecuted to the fullest extent of the Act.

Elements of a False Claim

There are three basic elements of a "false claim:" (1) the defendant must submit or cause to submit a "claim for payment" to the federal government; (2) the claim is "false or fraudulent;" and (3) the defendant "knew or should have known" of, or had a "reckless disregard" for, the truth or falsity of the information contained in the claim. In effect, it no longer matters whether a provider "intended" to submit a false claim. Even billing errors or misinterpretation of a regulation is enough to prompt an investigation under the Act. Just as important, the government does not need to prove it was damaged in order to prosecute under the Act.

Types of False Claims

In the case of long-term care providers, the types of billing practices targeted for enforcement include: claims for services not rendered or "ghost" supplies; claims for unnecessary services; billing for services not covered, such as wound care kits and certain urinary incontinence devices; and duplicate payments.

For example, early this year the Eastern Michigan Office of the DOJ announced that it had issued indictments against four medical equipment suppliers. These suppliers allegedly billed Medicare for patient care kits, such as urinary incontinence kits, that intentionally included unnecessary items.

Whistleblower Actions

The federal government also provides for financial incentives for private persons to bring false billing practices to the government's attention. These actions are referred to as Qui Tam or "Whistleblower" actions.

Under the qui tam statute, virtually any person may bring a civil action on his/her own behalf to recover penalties assessed for False Claims Act violations. The qui tam statute also protects whistleblowers from retaliation by their employers. As a result, insiders have become a major source of information, especially the provider's own employees (often disgruntled or recently discharged staff), its competitors, or suppliers.

To qualify for significant financial rewards, the qui tam plaintiff must satisfy two requirements. First, the whistleblower must be the first to file the action. The complaint is served first on the government to alert officials to the potential false billing and to reveal any evidence in the whistleblower's possession. At the same time, the complaint is filed under seal with the court.

During this period, the government reviews the evidence (including conducting additional investigations) and decides whether or not to prosecute the action. If the government does prosecute, the whistleblower may continue as a party to the action. If the government declines, then the private party may pursue the claim on his/her own.

For the whistleblower to recover under the qui tam provision, there must not have been any public disclosure about the issue before the complaint is filed, unless the whistleblower is the source of the news. This is to avoid a private person from profiting from a newspaper or similar investigation.

There are, however, significant financial incentives for a whistleblower to initiate a qui tam action. If the government decides to prosecute as the result of the qui tam claim, the whistleblower is entitled to 15 to 25% of the settlement or judgment. If the government does not proceed, a successful whistleblower may recover between 25 and 30% of the proceeds. If successful, the whistleblower is entitled to reasonable attorneys' fees and expenses, which are paid by the defendant.

In a recent qui tam settlement involving a nursing home, a discharged employee received $26,250 and the government recouped $150,000 based on false billings: U.S. ex rel. Tuohig v. ManorCare of Kansas Inc., No. 94-2023-GTV (DC Kan, 1994). The complaint alleged that ManorCare billed nursing staff and other personnel with overtime hours to the facility's distinct part Medicare unit, regardless of whether the personnel actually worked in the unit. In reaching the settlement, ManorCare agreed to conduct an internal compliance program which includes employee training. Further, federal investigators or members of the state's Medicaid Fraud Control Unit will be permitted to examine its financial records or other documents to determine whether the facility has complied with the terms of the settlement.

Voluntary Disclosure Program

In mid-1995, the federal government also initiated a Voluntary Disclosure pilot program in five states aimed at encouraging nursing homes, durable medical equipment suppliers, and hospice providers to disclose and cure false billing practices. Called "Operation Restore Trust," the two-year pilot program is available to long-term care and related providers in California, Florida, Illinois, New York, and Texas. These states account for about 40 percent of all Medicare and Medicaid beneficiaries. Plans call for Operation Restore Trust to serve as a model for a national program to encourage providers to voluntarily report false claims before the government begins an investigation. After nearly a year, however, only a few providers have taken advantage of the voluntary program, which does not protect a provider from criminal prosecution.

Recommended Actions

There are several steps a provider can take to reduce its exposure to a false claim suit. Most importantly, providers should establish an internal compliance program. A specific individual should be assigned to establish compliance policies and procedures, periodically monitor billing practices and keep informed on regulatory developments. Additionally, providers should conduct in-house training programs to keep employees informed of the facility's procedures and timely compliance issues, especially those targeted by the government and released through special "fraud alerts." Finally, employee compliance with established procedures should be monitored and enforced.

Many providers are also hiring billing consultants and medical records specialists to review their past practices and recommend ways to improve compliance. Although this is useful in correcting past errors, the facility inadvertently may discover false claims which could be subject to disclosure. To avoid compromising the facility, providers are often engaging legal counsel to oversee the investigation, hire the consultants, and advise them on necessary remedial actions, including voluntary disclosure.

Finally, a provider that receives notice that it is under investigation should carefully consider whether to settle, negotiate, or defend its actions, depending upon its confidence in its billing practices. Because of the potentially high penalties under the Act, many facilities are choosing to negotiate and settle, even though they firmly believe that there was no actual intent to defraud.

Dorothy Regas Richards, Esq., and Albert J. Lucas, Esq., are attorneys with Calfee, Halter & Griswold, a full-service law firm with offices in Cleveland (216-622-8200) and Columbus (614-621-1500), OH.