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Regulating health care costs through fraud enforcement.

IGNORING Dr. Johnson's admonition that "round numbers are always false," Beltway lore has it that some $275 million each day, or $100 billion a year, are lost to health care fraud and abuse.(1) Congress and successive administrations have reacted by embarking on a jihad against allegedly unscrupulous providers.

The Department of Justice Criminal Division has set up health care fraud task forces in a dozen or more cities, while approximately 450 full-time equivalent positions at the Federal Bureau of Investigation and the Health and Human Services Office of Inspector General (HHS-OIG) have been dedicated to investigating health care fraud. Increasingly, however, the private bounty hunter or qui tam relator has been the individual responsible for some of the most notable prosecutions and recoveries in health care fraud enforcement.

Since 1980, a system of enforcement and adjudication--modeled on the federal government's efforts to eradicate defense procurement fraud--has evolved, and it typically brings the accused corporate or institutional provider to its kness without the formality of a trial. A criminal indictment for a Medicare or Medicaid related offense generally touches off a three-pronged attack against the provider: (1) a criminal proceeding to determine guilt or innocence, (2) a government civil or administrative action to recover multiple damages and civil penalties and (3) an administrative proceeding to exclude or debar the provider from participation in the Medicare and Medicaid programs.

The trump card in this arsenal of weapons is the government's ability to suspend and withhold the provider's payments under Medicare on indictment or other reliable evidence of fraud or willful misrepresentation(2) and to exclude on conviction. A corporate or institutional provider looking down the barrel of an imminent indictment must assume that its payments under Medicare and Medicaid will be "temporarily" suspended without a hearing pending the outcome of the criminal and civil fraud proceedings.(3)

Faced with the loss of revenues from Medicare, a guilty plea to a criminal offense often becomes part of a global settlement of all of the provider's criminal, civil and administrative liability. Once an indictment or the filing of a civil fraud complaint is inevitable, the institutional provider's guilt or innocence may become less relevant, and its objective may shift to negotiating a resolution of its civil and administrative liability, which will permit its continued existence.

In recent years, the government has taken some impressive corporate scalps. In June 1994, NME Psychiatric Hospitals Inc., a subsidiary of National Medical Enterprises, then one of the nation's largest psychiatric hospital chains, pleaded guilty to conspiring to defraud the United States and to six counts of paying kickbacks to physicians and others for referrals. It agreed to pay a total of $362.7 million to resolve its federal criminal, civil and administrative liability, and to settle claims by 28 states.(4) In December 1992, National Health Laboratories Inc., one of the country's largest medical laboratory chains, pleaded guilty to two counts of submitting false claims to the government and agreed to pay $111.4 million in a similar settlement.(5)

This article reviews some of the principal criminal, civil and administrative weapons the federal government uses to combat health care fraud, certain recent enforcement efforts, and the increasing interaction between private qui tam or whistleblower actions and federal health care fraud enforcement efforts.


A. Submission of False Statements or Claims to Medicare or Medicaid

A provider seeking reimbursement from Medicare or Medicaid typically submits the following information: the patient's name, the date of service, a description of the service provided, the procedure code for the service, the charge, the provider's name and identifying number, and a certification (express or implied) that the service was medically necessary. Any one or more of the above elements can be--and probably has been--the basis for criminal false statements or false claims prosecution.

Most criminal prosecutions are for services not provided as claimed, including:

* claims for services that are not medically necessary;

* claims for services that may be medically necessary but are not covered by Medicare, for example, experimental procedures;

* "upcoding," which is using a code for a higher level of reimbursement than the code for the services actually provided;

* "unbundling," which is billing for one global procedure as a number of smaller ones to obtain a higher total level of reimbursement; and

* inflating cost reports filed with Medicare or Medicaid.

The leading criminal False Claims Act prosecution for submitting medically unnecessary claims is United States v. National Health Laboratories Inc. As part of a global settlement of all of its criminal, civil and administrative liability, NHL paid a $1 million criminal fine after pleading guilty to two counts of causing the submission of false claims to the Civilian Health and Medical Program for the Uniformed Services (CHAMPUS) for certain medically unnecessary tests. NHL's president, Robert Draper, also pleaded guilty and was sentenced to three months in prison, along with a $500,000 fine.

The Medicare statute provides that "no payment may be made under Part A or Part B for any expenses incurred for items or services ... which ... are not reasonable and necessary for the diagnosis or treatment of illness or injury or to improve the functioning of a malformed body member."(6) In addition, claim form HCFA-1500 of the Health Care Financing Administration requires a certification that "the services shown on this form were medically necessary for the health of the patient."

In the National Health Laboratories case, the government's theory was that NHL duped its physician customers into making an incorrect determination of medical necessity--that is, ordering a bundle of three lab tests, when, in truth and fact, only one such test was medically necessary.

Beginning in 1987, NHL added a high density lipoprotein cholesterol (HDL) test to its sequential multi-analysis computer (SMAC) test, a series of 19 or more blood tests widely used by physicians for diagnostic and monitoring purposes. Ideally, no claim for any test should be submitted to Medicare without a determination by a physician that the test is medically necessary for the patient's treatment. Medical technology, however, may make this principle difficult to apply. For the SMAC test to be reimbursable, only a few of the 19 or more tests need be medically necessary, because all such tests are performed on the same machine and the marginal cost of performing the additional tests is very low.

In a marketing campaign aimed at its physician customers, NHL implied that a technological breakthrough permitted it to make the HDL part of the blood test package at little or no additional cost. In truth and fact, the HDL test was run on different equipment, and NHL billed Medicare and CHAMPUS separately for the two tests, nearly doubling the amount of its take from approximately $18 to approximately $34 for each patient. Two years later, NHL added serum ferritin, a test for iron storage, to its basic SMAC test package at an additional cost to Medicare of approximately $18.

The manner in which NHL manipulated the billing form distributed to its physicians figured prominently in the government's case. In 1987, when NHL informed its clients that it would perform an HDL test "automatically" with each SMAC test at a nominal additional charge of $1.20, it changed its preprinted test order form by eliminating any order for the SMAC test alone and replacing it with a "Health Survey Profile" consisting of both SMAC and HDL. Physicians who objected to the mandatory coupling of the SMAC and HDL tests were told they would not be charged extra for the HDL.

Two years later, the Health Survey Profile was expanded to include a ferritin test "automatically" at an allegedly nominal charge of an additional 65 cents. Thus, when physicians asked to be billed by NHL directly for their patients' SMAC tests and they in turn billed their patients, they received HDL and ferritin test results at little or no extra charge. In those instances in which NHL billed Medicare, CHAMPUS and other third-party payers, the HDL and ferritin tests were billed at an additional $16 and $18, respectively.

From a revenue standpoint, the results of bundling the SMAC, HDL and ferritin tests were dramatic. Prior to adding ferritin to the Health Survey Profile, for example, NHL received approximately $500,000 from Medicare for ferritin tests performed during 1988. In 1990, the year after ferritin was added to the package, NHL's revenues from Medicare for this test alone increased to approximately $31 million.

Moreover, according to the government, physicians who ordered NHL's Health Survey Profile did not know that adding the HDL and ferritin tests tripled the cost of the SMAC test to Medicare and would not have ordered such tests if they had known.(7) In its defense but to no avail, NHL produced a 1987 letter notifying its 30,000 physician customers that the HDL test was being added to the package and that doctors could order a customized form if they didn't want the enhanced package.

It is unclear which of the following factors or combination thereof prompted the government to pursue this case criminally: that the HDL and ferritin tests are performed on different machines from the SMAC test; that NHL's preprinted form no longer gave physicians the choice of easily ordering the three tests separately; or that NHL failed to disclose that its charges to Medicare and Medicaid were different and higher than those to its physicians.

In two subsequent and seemingly similar cases involving the bunding of unnecessary lab tests, United States ex rel. Dowden v. MetPath and MetWest,(8) the government elected to forgo criminal prosecution and to pursue the companies civilly under the Civil False Claims Act (CFCA).

B. Medicare and Medicaid Anti-Kickback Act

1. Recent Enforcement Efforts

a. United States v. National Psychiatric Hospitals Inc. (NME-PHI)

In August 1993, approximately 600 FBI and HHS-OIG agents executed search warrants and served subpoenas at approximately 20 offices and facilities of National Medical Enterprises (NME), a large chain operator of acute care, psychiatric, substance abuse and physical rehabilitative hospitals. For a number of years prior to the search, NME's business practices were the subject of widespread rumors. Several ex-NME employees had alleged, for example, that kickbacks of up to $2,000 per patient were paid to corporate employee assistance officials, probation officers and even clergymen for referrals of patients to NME facilities, including patients covered by medicare and Medicaid.(9)

First enacted in 1972 to provide for a misdemeanor, the Medicare and Medicaid Anti-Kickback Act (MMAKA) prohibits anyone from providing or offering to provide any remuneration in cash or in kind, directly or indirectly, in return for a patient referral whose treatment--that is, item or service--is paid for in whole or in part by Medicare or Medicaid.(10) The statute also prohibits the solicitation or receipt of such remuneration and arranging or recommending a referral for remuneration. Violations of the MMAKA were broadened and upgraded from misdemeanors to felonies in 1977. On conviction, a violator now may be imprisoned for up to five years or fined up to $25,000, or both.

In June 1994, NME-PHI pleaded guilty to six counts of paying kickbacks at six different hospitals across the United States to induce physicians and other professionals to refer patients to its facilities, and it agreed to pay a criminal fine of $33 million, the largest ever in a health care fraud case.(11) Even so, the criminal fine was a relatively small part of NME-PHI's $379 million global settlement.

To resolve the investigation, NME-PHI also pleaded guilty to one count of conspiring to defraud the United States and to solicit unlawful referrals.

The NME investigation resulted in several additional cases being filed:

* Northshore Hospital Management Corp., another NME subsidiary, pleaded guilty to one count of fraud and was fined $1 million for making payments to a doctor to send patients to NME's Northshore Hospital, an acute care hospital in New Orleans.

* Peter Alexis, a former regional vice president of Psychiatric Institute of America (PIA), an NME division, pleaded guilty to Anti-Kickback and False Statements Acts violations.

* In November 1993, PIA of San Antonio Inc., an NME psychiatric hospital doing business as Colonial Hills Hospital, pleaded guilty to False Claims and False Statements Acts violations and was fined $2 million. The Colonial Hills medical director subsequently pleaded guilty to making false claims and theft of public money and forgery, and he was sentenced to five months imprisonment and three years supervised release.

* In January 1994, two employees of Parkview Hospital, an NME psychiatric hospital in Topeka, Kansas, were indicted for paying kickbacks to a United States Postal Service employee assistance counselor for referrals of postal service employees to the hospital.

* In May 1994, a doctor was indicted for soliciting kickbacks in exchange for referring patients to an NME hospital in Kansas City and for False Claims Act violations.

According to the government, NME-PHI not only paid physicians and other professionals for referrals but also extended patients' lengths of stay unnecessarily to milk their insurance companies.(12) NME-PHI reportedly used a weekly "insurance remaining report" to determine when the patient should be released.

Thus, although United States v. NME-PHI is thought of primarily as a kickback case, the scope of the alleged fraudulent scheme included a number of other violations, including the submission of false claims and cost reports for services that were not provided or not provided as claimed.

NME-PHI allegedly used a number of devices to promote the systematic overutilization of its facilities. The company entered into sham consulting contracts with physicians to perform certain duties for a minimum number of hours, when, in truth and fact, the physicians failed to perform those duties or received compensation far in excess of their fair market value. The compensation paid to "consultants" often bore a direct relationship to their projected referral volume. One such contract, for example, required the "consultant" to use his best efforts to meet the hospital's census objectives and work with the medical director and administrator to assure maximum bed utilization. The contract's compensation formula included a schedule of bonuses based on an escalating percentage of the hospital's pre-tax profits.

Certain contractual arrangements also included free or discounted office space, income guarantees, car and office expense allowances, including allowances for purchases of Computers and mobile phone systems and allowances for support system personnel. In some instances, NME-PHI facilities made payments to physicians in the form of loans, which it would later discharge based on the physicians' referral volume.

NME-PHI monitored the level of referrals by source, to reward high-volume sources and to punish low or decreasing volume sources. Computerized tracking systems were used to maintain information on patient admissions, lengths of stay and income generated by source. High-volume sources were rewarded by reciprocal referrals from NME-PHI for outpatient consultation.

According to the government, NME-PHI encouraged overutilization by establishing marketing, admissions and budget goals for each facility, and by paying its employees and "consultants" bonuses for meeting those goals--hardly abnormal business behavior in sectors of the economy where there is no MMAKA. What is permissible elsewhere, however, may well be a crime in the health care industry. Soft drink bottlers, for example, are free to engage in all kinds of commercial behavior aimed at encouraging the "over-utilization" or consumption of their product. This is verboten in health care.

In maximizing its profits through conduct that included blatant overutilization, NME seemed oblivious to the fact that it was operating in a highly regulated sector of the economy and that a violation of these regulatory strictures constituted fraud.

As part of its global settlement agreement and in addition to its $362.7 million in payments, NME-PHI and NME agreed to divest themselves of all psychiatric and substance abuse facilities, except for four facilities, by November 1995. Indeed, the company was forced to sell a number of these facilities to raise the necessary cash to pay its $362.7 million in criminal fines, damages and civil penalties to the federal government and certain states. Upon divestiture, neither NME-PHI nor NME may own or operate a psychiatric hospital or residential treatment or substance abuse center for five years.

b. Caremark International Indictment

For approximately three years, the FBI and HHS-OIG have been investigating Caremark International Inc. a leading U.S. provider of intravenous medicine and nutrition in the home (known as "home infusion") for possible MMAKA violations. In August 1994, a federal grand jury indicted Caremark, three Caremark employees, a Genetech Inc. vice president for sales and marketing, and David R. Brown Jr., a Minneapolis physician, for conspiring to defraud the government and violating the MMAKA.(13)

Genetech manufactures and sells Protropin, a synthetic growth hormone for children who are not growing properly because of a pituitary gland deficiency, and pursuant to an agreement with Genetech, Caremark is the exclusive distributor of this product.

The government alleges that in 1986 and 1987, Caremark and the Genetech vice president agreed to pay Brown 5 percent of the annual gross revenues from the sale of Protropin generated by Brown's prescriptions, and that this agreement and payments made pursuant thereto violated the act. After paying Brown $138,000 pursuant to this arrangement, the defendants allegedly made payments of approximately $509,000 to him during 1988-93 for referrals under the guise of research grants. According to the government, Brown did not do the research work specified in the grants and, in truth and fact, the payments were kickbacks for prescribing Protropin.

Caremark and the other defendants have denied that their conduct is illegal and have vowed to defend.

The FBI and HHS-OIG are continuing to investigate Caremark payments to physicians in other cities.

2. Medicare and Medicaid Anti-Kickback Safe Harbors

The language of the MMAKA is so broad that it encompasses a host of innocuous transactions. As a result, Congress exempted certain business practices from its applications and directed the HHS-OIG to issue safe harbor regulations (SHRs) for additional practices that would not be subject to criminal prosecution or provide a basis for exclusion.

a. Statutory Safe Harbors

By statute, the MMAKA does not apply to

* Discounts or reductions in price--that is, volume discounts--if properly disclosed and appropriately reflected in claims or charges;

* Payments made to employees under a bona fide employment relationship for the provision of items or services covered by Medicare or Medicaid; or

* Group purchasing vendor agreements when there is a written contract specifying the amount to be paid by the vendor to the purchasing agent and, in the case of groups of providers, disclosure is made of the amount of compensation received from the vendor with respect to purchases made on the group's behalf. This exception applies, for example, where several hospitals use a single purchasing agent to negotiate discounts from vendors, a practice that often results in lower prices than the hospitals could obtain individually.(14)

b. HHS-OIG Safe Harbor Regulations

Recognizing that the act's breadth might encompass additional legitimate transactions, Congress directed the HHS-OIG in 1987 to promulgate SHRs specifying practices that will not be subject to criminal prosecution under the MMAKA and will not provide a basis for exclusion from participation in Medicare and Medicaid.(15) To date, the HHS-OIG has issued SHRs establishing 10 categories of business practices that will not be subject to criminal prosecution or program exclusion even if otherwise violative of the statute. The health care provider must structure the transaction so that it strictly complies with each requirement of the particular SHR under which protection is sought. All other business practices and transactions continue to bear the risks that existed prior to the issuance of the SHRs.

c. Advisory Opinions/Fraud Alerts

Almost from MMAKA's inception, providers have clamored for the creation of an advisory opinion procedure within HHS-OIG to furnish guidance on the legality of proposed agreements under the act. There is precedent for enforcement authorities to provide that guidance, particularly where a statute has broad application and may encompass legitimate transactions. The Department of Justice provides advisory opinions, for example, under both the antitrust laws and the Foreign Corrupt Practices Act, subject to certain limitations and conditions.

To date, the HHS-OIG has resisted all efforts to institute an advisory opinion process, principally on the ground that providing opinions would be an overwhelming task requiring an enormous increase in agency resources. HHS-OIG objects also on the ground that putative defendants would rely on opinions requested by others to negate an inference that they intended to violate the MMAKA.

In March 1994 in the last Congress, Rep. Peter Hoagland introduced the Advisory Opinions Act, which would authorize HHS to issue advisory opinions in certain circumstances, not only on what constitutes prohibited conduct under the MMAKA, but also whether a proposed arrangement would violate any other provision of the Social Security Act.(16) Each advisory opinion would be binding on HHS and on the requesters, and a failure to seek an opinion could not be construed as evidence of an intent to violate the law. HHS would be authorized to charge requesters a reasonable fee for the issuance of an advisory opinion to defray the costs of the process. It remains to be seen whether support is sufficiently widespread to overcome HHS's opposition to this legislation.

Since 1988, the HHS-OIG has issued five fraud alerts, which describe practices or arrangements that may be problematic under the MMAKA. The HHS-OIG fraud alerts are bulletins that in general set forth specific examples of activities that are or may be suspect.

C. Federal Criminal Mail and Wire Fraud Statutes

In the health care area, the mail and wire fraud statutes(17) are the weapons federal prosecutors typically use to attack frauds perpetrated on private, commercial health insurers, as opposed to Medicare or Medicaid.

These statutes prohibit use of the mails or interstate wire communication in furtherance of a scheme to defraud or to obtain money or property through false or fraudulent pretenses or representations. Each mailing or wire communication in furtherance of the scheme constitutes a separate offense. Moreover, the mailing or wire communication need not contain a misrepresentation, but need only be "in furtherance" of the fraudulent scheme to be a violation.

Nearly every form of health care fraud--providing or receiving kickbacks, billing for services not provided, for services not provided as claimed, or for unnecessary services--can be attacked under these statutes, if the mails or interstate wire communications are used.


A. Federal Civil False Claims Act

In addition to criminal prosecution, the federal government may also sue providers and their employees for money damages and civil penalties for "knowingly" submitting or conspiring to submit false claims or claims based on fraudulent conduct to Medicare, Medicaid or some other federal program. Under the federal Civil False Claims Act (CFCA), providers are liable for three times the amount of damages sustained by the government as the result of a false claim and for a civil penalty of between $5,000 and $10,000 for each false claim submitted.(18)

A health care provider's monetary exposure under the CFCA is often horrendous because of the volume of small claims submitted. If a provider is found to have engaged in a fraudulent practice, the chances are it has done so repeatedly and so has submitted a great many false claims. Even at the $5,000 minimum, the civil penalty liability for 100 false claims, for example, is $500,000, before any calculation of treble damages. Given these consequences, few defendants have the stomach to take these cases to trial.

In United States v. Krizek,(19) for example, the government filed a civil action against George E. Krizek, a psychiatrist, and his wife, who was responsible for his billing operation, for submitting and conspiring to submit 8,000 false claims to Medicare and Medicaid during the CFCA's six-year statutory period, common law fraud, payment by mistake, and unjust enrichment. The government's false claims theory was two-fold: that Krizek up-coded by billing for 45-50 minute psychotherapy sessions under the American Medical Association's Current Procedural Terminology (CPT) Code 90844, when he should have billed for a 20-30 minute session under CPT Code 90843, and that he provided medically unnecessary services.

Because of the volume of claims involved, Krizek's civil penalty exposure alone was more than $80 million dollars--a fact which clearly troubled the court:

Dr. Krizek is not public enemy number one. He is at worst, a psychiatrist with a small practice who keeps poor records. For the government to sue for more than eighty million dollars in damages against an elderly doctor and his wife is unseemly and not justified. During this period, a psychiatrist in most instances would be reimbursed between $48 and $60 for a 45-50 minute session and $40 or less for a 20-30 minute session. This is hardly enough for any professional to get rich.(20)

At the three-week bench trial, the government's medical necessity case fizzled. Its theory was that some of Krizek's hospitalized patients should have been discharged earlier, that some patients suffered from conditions that could not be effectively treated through psychotherapy, and that sessions with certain patients should have been shorter. Given the difficulty of determining medical necessity for 8,000 claims, the case was tried based on a sample of seven patients and 200 claims that were allegedly representative of Krizek's coding and treatment practices.

To support its case, the government presented testimony from experts who opined about a lack of medical necessity based on a cold review of Krizek's notes from his patient files. In response, Krizek testified about his reasons for treating each of the patients, with supporting testimony from other professionals involved in their care. Since the court found the government failed to meet its burden, it can be inferred from Krizek that something more than a cold review--such as interviewing the patients or others involved in their care--is required if the government is to prevail over credible testimony from the practitioner.

On the upcoding or billing side, Krizek won one battle, but he lost the war. According to the government, CPT Code 90844 is appropriate only where the psychiatrist has 45-50 minutes of face-to-face contact with the patient. The Krizeks admitted they interpreted the 45-50 minutes category to mean the total amount of time spent on the patient's case, including face-to-face contact, reviewing the patient's chart and discussing the patient's progress and treatment with the medical staff. The court rejected the idea that Krizek's 90844 claims were knowingly false under the CFCA because they bundled additional treatment together with a face-to-face session, stating:

The court will not impose False Claims Act liability based on such a strained interpretation of the CPT codes. The government's theory of liability is plainly unfair and unjustified. Medical doctors should be appropriately reimbursed for services.... The system cannot be so arbitrary, so perverse, as to subject a doctor whose annual income during the relevant period averaged between $100,000 and $120,000 to potential liability in excess of 80 million dollars because telephone calls were made in one room rather than another.(21)

The court faulted the Krizeks, however, for their "non-system" in submitting claims. Essentially, Mrs. Krizek and other billing personnel assumed that each patient had a 50-minute psychotherapy session, unless Krizek told them otherwise. Mrs. Krizek testified she felt this was a fair approximation of the time spent on the patient's case because sometimes an examination would last up to two hours, while she would submit a claim for only a 50-minute session. The result of this non-system was that on certain days Krizek submitted more than 20 claims--enough claims to consume or exceed a 24-hour day. While crediting him as a "tireless" worker, the court found he could not have worked more than 12 such sessions or nine hours in any one day.

Admitting error and negligence, the Krizeks offered to make restitution for any overcharge to the government in excess of a nine-hour day. The government contended, however, that the Krizeks acted "knowingly" in submitting any such claims and were liable under the CFCA for treble damages and civil penalties.

Under the 1986 amendments to the CFCA, a person acts "knowingly" if he or she "(1) has actual knowledge of the information; (2) acts in deliberate ignorance of the truth or falsity of the information; or (3) acts in reckless disregard of the truth or falsity of the information."(22)

Finding that Mrs. Krizek made no effort to establish how much time Dr. Krizek spent with a particular patient and that he "failed utterly" in supervising his billing agents, the court concluded that the Krizeks acted in reckless disregard of the truth or falsity of the information and were liable under the CFCA. The computation of damages and civil penalties was referred to a master, and the Krizeks were enjoined from further participation in Medicare or Medicaid until such time as the court was satisfied that they could abide by the rules.

Given the court's decision in Krizek, physicians who delegate responsibility for billing to office managers without providing any checks or controls may be at risk under the reckless disregard prong of the CFCA's test for acting "knowingly."

The Krizek case demonstrates the difficulty in litigating a health care CFCA case. Despite their partial success, the Krizeks' liability to the government is sure to be far beyond their ability to pay. The case also suggests that if you litigate, the government will be almost biblical in extracting the full measure of statutory revenge. If you settle, however, it may be more realistic about the consequences of applying the $5,000 civil penalty to each and every false claim. Indeed, the government often will arbitrarily limit the number of false claims it will assert for settlement purposes when dealing with an otherwise legitimate provider.

B. Qui Tam Actions

In 1986, Congress amended the CFCA's qui tam provisions and thereby resuscitated civil actions by private citizens on behalf of the federal government for the submission of false claims.(23) Although the qui tam statute has been on the books since 1863, court decisions prior to 1986 had narrowed severely the class of individuals entitled to sue.

Under the qui tam statutory scheme, the private party, known as the "relator," files a complaint under seal on behalf of the United States government alleging a violation of the act, while furnishing the Department of Justice with a copy of the complaint and all of the evidence and information in the relator's possession. Theoretically, the DOJ then has 60 days to investigate the alleged violation and decide whether to intervene in the action. In actual practice, the DOJ often wil move for and obtain numerous extensions of the 60-day period to conduct its investigation.

If the DOJ elects to intervene and take over the action, the relator will receive between 15 and 25 percent of any recovery, together with reasonable attorney's fees, expenses and costs. If the DOJ decides not to take over the action and the relator is successful in obtaining a recovery for the government, whether by settlement or judgment, the relator receives between 25 and 30 percent of the recovery, along with reasonable attorney's fees, expenses and costs. If the alleged violation has been publicly disclosed--for example, in the media or in a congressional hearing--the relator must be an "original source," that is, one who has independent and direct knowledge of the alleged violation, in order to be able to bring the action.(24)

Since the 1986 amendments, the government has recovered approximately $800 million through qui tam actions, and relators in turn have received approximately 18 percent, or $127 million, of the recoveries. Not surprisingly, the rate of annual qui tam filings has increased seven-fold from 32 during the government's 1987 fiscal year to 220 for fiscal year 1994. Approximately 50 percent of the filings involve defense procurement fraud and approximately 22 percent health care fraud.(25)

Some of the biggest health care fraud recoveries began as qui tam actions, including the $110 million settlement in United States v. National Health Laboratories. In 1989, MetPath, the nation's second leading independent blood testing laboratory, was losing substantial physician business to NHL. In approximately early 1990, Christopher "Jack" Dowden, a MetPath vice president in San Diego, reported his suspicions to HHS-OIG that NHL was sliding extra tests into its billings.(26) After also filing a qui tam action against NHL in U.S. District Court in Los Angeles, Dowden was paid $15 million from the government's $100 million plus recovery from NHL.

Turning to his own employer's practices, Dowden filed a second qui tam action in 1991, this time against MetPath and a second company, MetWest, the nation's sixth largest independent blood testing laboratory headquartered in Tarzana, California. Like NHL, MetPath and MetWest allegedly bundled certain medically unnecessary tests--in this instance, HDL, total iron binding capacity (TIBC) and protein ground glucose (PBG)--together with their SMAC test.

MetPath and MetWest ultimately paid the government a total of $39.8 million ($35.013 million from MetPath and $4.797 million from MetWest) to resolve their CFCA liability. Dowden received 15 percent of that, or $5.97 million, as his award under the qui tam statute. Thus, for his efforts in these two qui tam actions--NHL and MetPath/MetWest--Dowden received nearly $21 million.(27)

C. Civil Monetary Penalties Law

Suits in U.S. district court under the CFCA and for fraud, payment by mistake and unjust enrichment are not the government's only civil options.

In 1981, Congress enacted the Civil Monetary Penalties Law (CMPL), which provides for the imposition of civil monetary penalties and assessments through administrative proceedings based on providers that make false or improper claims for Medicare or Medicaid payments. Any person presenting, or causing the presentation of, a claim for Medicare or Medicaid benefits for medical items or services that the provider knows or should know were false, or not provided as claimed, is subject to a civil monetary penalty of not more than $2,000 for each item or service and an assessment of not more than twice the amount claimed for each such item or service.(28)

It is tempting to dismiss the CMPL as a lesser form of governmental civil monetary recovery remedy than the CFCA--as sort of an administrative mini-CFCA statute. Regrettably, the CMPL simply has a different set of teeth, which, in certain instances, can inflict a more severe bite than the CFCA.

The congressional premise for enactment of the CMPL was that the DOJ declined prosecution in too many good Medicare and Medicaid fraud cases. The Senate report stated: "U.S. attorneys may refuse to accept Medicare and Medicaid fraud cases for any number of reasons.... Under present law, when a decision is made not to accept a case for prosecution, the only recourse for the Government is to attempt recovery of the overpayment involved."(29)

Thus, the CMPL provides an administrative alternative to criminal prosecution or a CFCA action, or both, by the DOJ. In addition to the loss of a right to a jury trial, there are several often important differences between the CMPL and the CFCA that work to the provider's detriment.

First, the level of intent required for liability under the CMPL is less stringent than that needed for a CFCA violation. The CMPL is a pure "should have known" standard, while the CFCA, at a minimum, requires "reckless disregard" or "deliberate ignorance." In 1987, Congress changed the CMPL's statutory language from "knows or has reason to know" to "knows or should know." Its purpose was to emphasize that those who bill Medicare and Medicaid "have an affirmative duty to ensure that claims for payment which they submit, or are submitted on their behalf by billing clerks or employees, are true and accurate representations of the items or services actually provided."(30)

Second, administrative law judges may make exclusion determinations as part of the same administrative proceeding.

Third, the application of the $2,000 civil penalty per line item, plus up to twice the amount claimed "in lieu of damages sustained by the United States or a state agency," can be monetarily more severe than a recovery under the CFCA.

In Chapman v. U.S. Department of Health & Human Services(31) a nursing home submitted four cost reports to Medicaid containing 19 false line-item cost entries totalling $118,136 for items and services purportedly provided. As a result of these 19 false items, the Medicaid agency overpaid, or suffered damages in the amount of, $21,115. Nonetheless, the HHS-OIG sought and the ALJ imposed not only a $2,000 civil penalty for each of the 19 false line items, but also an additional assessment of $118,136--the amount claimed--for a total penalty and assessment of $156,136.

Since the state Medicaid agency already had recouped the $21,115 overpayment, Chapman argued that the additional assessment should be limited to an amount equal to the government's damages--$21,115--as opposed to $118,136. Although agreeing that actual damages should be considered as an aggravating or mitigating circumstance, the 10th Circuit pointed out that under the CMPL, Chapman could have received a total penalty of $274,272--the amount claimed of $118,136 x 2 = $236,272 + $38,000 in civil penalties = $274,272. Since Chapman's actual fine of $156,136 in civil penalties and assessments was only 57 percent of the maximum authorized by statute, the court concluded that the ALJ's action was justified and well within his discretion.

Chapman illustrates that the CMPL is a potent weapon for attacking Medicare and Medicaid fraud. From the provider's perspective, the only thing good about it is that there is no provision analogous to the CFCA, which authorizes qui tam actions by private parties.


A. Mandatory Exclusion

In addition to severe criminal penalties and horrendous civil liability, providers will be mandatorily excluded from participation in the Medicare and Medicaid programs for certain health care fraud violations and may be excluded for a host of others. Indeed, the health care laws and regulations relating to exclusion are far more draconian than their defense procurement fraud counterparts.

Exclusion is mandatory on conviction of a criminal offense relating to (1) the delivery of an item or service reimbursed by Medicare or Medicaid or (2) patient abuse or neglect.(32) Companies and individuals convicted of either of these types of offenses, be it a felony or misdemeanor, are mandatorily excluded from participation in Medicare or Medicaid for a minimum of five years, and exclusions for up to 15 or 26 years are not uncommon.

Under the statute, the term "convicted" is defined broadly to include judgments of conviction that are on appeal, pleas of nolo contendere, and even first-offender deferred adjudication programs. For institutional providers that depend on Medicare and Medicaid for most of their revenues, these mandatory exclusion provisions are the equivalent of a corporate death penalty.

But wait! If exclusion is mandatory, how is it that NME and NHL are still in business? Why are not all corporate health care felons mandatorily excluded for at least five years and perhaps more? Given the breadth of the statutory provisions on mandatory exclusion, negotiating a resolution that keeps the corporate provider in business exemplifies Ambrose Bierce's definition of a lawyer: "One who is skilled in the circumvention of the law." One solution is to plead guilty to a non-program related felony on the condition that HHS-OIG agree not to exclude.

NHL, for example, pleaded guilty to two counts of submitting false claims to CHAMPUS, not Medicare or Medicaid. Since the conviction was for a non-program related offense, HHS-OIG had the discretion to exclude or not exclude, as it saw fit.

The NME case called for more ingenuity in circumvention. Presumably, the government was not willing to ignore the kickback violations and take a plea to submitting a false statement or claim to CHAMPUS. If the government insists on a guilty plea to a MMAKA violation, there is no way around mandatory exclusion. Nonetheless, while HHS must exclude, it does retain the discretion to limit the exclusion to the pleading entity.

Thus, NME-PHI pleaded guilty, while its parent, NME, entered into a civil and administrative settlement agreement (the "NME C&A Agreement") resolving all of its liability in a manner that permitted NME and all of its other direct and indirect subsidiaries to continue to do business with Medicare and Medicaid. By the date of the plea agreement in United States v. NME-PHI, the defendant was reportedly an entity that owned bricks and mortar, and little else. In addition to the $324.2 million, NME paid a high price in its NME C&A Agreement to stay in Medicare and Medicaid.

B. Permissive Exclusion

There are 14 statutory grounds for which providers may be excluded from participation in Medicare or Medicaid.(33) These include conviction under federal or state law of criminal offenses relating to: (1) fraud, embezzlement, breach of fiduciary responsibility, or other financial misconduct involving a health care program financed in whole or in part by federal, state, or local government agency; (2) obstruction of, or interference with, health care fraud or patient abuse investigations; and (3) the manufacture, distribution, prescription, or dispensing of controlled substances.

Other grounds are: (4) the revocation, suspension or loss of license relating to professional competence, professional performance or financial integrity; (5) submitting claims for excessive charges, unnecessary charges, or failure to provide medically necessary services; (6) a failure to provide statutorily required information, for example, disclosure of ownership information, officers' prior convictions, etc.; (7) a failure to provide payment information; and (8) a failure, on reasonable request, to provide certain federal and state officials with immediate access to records, documents and data in certain specified inquiries, including investigations by HHS-OIG agents and state Medicaid fraud control units.

Even where there has been no criminal conviction, the submission of a false statement or false claim or the provision or receipt of kickback can serve as the basis for a permissive exclusion from participation in Medicare or Medicaid. An adverse result in a CFCA action or CMPL proceeding, or even a settlement of those proceedings, may serve as the basis of a permissive exclusion.

A health care provider who is the subject of a proposed permissive exclusion is entitled to reasonable notice of such action, an opportunity for a hearing before an HHS administrative law judge and judicial review of an adverse finding.(34)

The NME C&A Agreement (some 40 pages long, with attachments), particularly the Corporate Integrity Agreement (CIA), will likely serve as a model for future negotiated settlement agreements. In many ways, it resembles, at least in part, administrative agreements negotiated between Department of Defense and large defense contractors resolving suspension or debarment liability.

Paragraph 4 of the agreement describes essentially three classes of alleged unlawful conduct--billing fraud, making improper payments to induce referrals, and improper waiver of Medicare co-payments and deductibles--in some detail. These are known as the "released acts." Paragraph 9(a) releases NME, but not its current and former directors and employees, from any monetary liability for the released acts, and Paragraph 9(b) releases NME from any proposed program exclusion. The release does not cover civil Internal Revenue Service claims, state claims or claims resulting from a breach of the agreement itself.

NME agreed to cooperate fully in the government's investigation of its current and former directors and employees, and that certain costs and payments incurred in connection with the investigation, including legal fees, were unallowable for government contract accounting and federal health programs reimbursement purposes.

As part of the settlement, NME also agreed to establish and maintain a corporate integrity program (CIP) to demonstrate that, as the CIP put it, "NME can be trusted to deal fairly and honestly with the government and that excluding not necessary to protect federally funded health care programs and their beneficiaries."

NME agreed that on divestiture of all but four of its psychiatric and substance abuse centers, it would no longer employ the majority of its headquarters and regional executives and that it would not employ, or contract with, these individuals for five years.

As part of the CIP, NME also agreed to:

* contract with an accounting or law firm to review annually NME's billing policies, procedures and practices, remedy any deficiencies therein within 60 days and report any material violations of any federal laws and regulations to HHS within 60 days;

* contract with an independent peer or medical review organization to review periodically (1) the admission and length of stay practices of NME's psychiatric facilities, and (2) the medical necessity and quality of services provided to federal beneficiaries at NME's acute care facilities;

* provide HHS with all documents relating to all payments to physicians, and make payments to physicians only pursuant to contracts that have been formally approved by outside counsel;

* adopt "standards of conduct" for the organization pursuant to board of directors approval, circulate the standards to each employee and obtain an acknowledgment from all employees that they had read the standards;

* institute and maintain an educational program designed to ensure that employees are aware of all applicable laws, regulations and standards of conduct they are to follow;

* file a written compliance report with HHS and CHAMPUS annually for five years setting forth NME's compliance with the CIP, as well as federal program legal requirements; and

* investigate and report to HHS within 60 days, any credible evidence of misconduct that may constitute a violation of criminal law or a material violation of civil law, rules or regulations governing federally funded health care programs.

In the event that a review or evaluation of compliance with the CIA becomes necessary, NME agreed to pay for the cost of the review up to $500,000 annually.

The CIA contains an elaborate and interesting set of provisions for alleged breaches. After being notified of an alleged breach by a "Notice to Cure," NME has 30 days to cure, to request non-binding arbitration or otherwise to satisfy the government that it is in full compliance. If NME requests arbitration, the issues will be submitted to the American Arbitration Association with the costs of the arbitration being paid by NME.

The government may not propose to exclude NME or the breaching NME facility until after the arbitration proceeding has been completed. If the government does propose to exclude NME, the company still has the right to request a hearing before an administrative law judge, and it has the right to an appellate review of the ALJ's decision before the proposed exclusion becomes effective. The one exception to staying the effective date of the exclusion is when the government determines that the health and safety of the individuals receiving services warrants the exclusion's taking effect earlier.

The insertion of a non-binding arbitration procedure into the process prior to the issuance of a proposal to exclude gives NME an opportunity to make its case to an independent third party and additional time to remedy any alleged failure to comply with the CIA.

C. Voluntary Disclosure Program

The Department of Justice and HHS-OIG reportedly are discussing the possibility of promulgating a voluntary disclosure program (VDP), presumably similar to that which has been in effect for defense contractors since 1986.

The defense program is not one of amnesty or immunity, but rather a means by which defense contractors can disclose potential criminal and civil fraud matters to the Department of Defense Office of Inspector General (DOD-OIG) in hopes of avoiding criminal prosecution and suspension or debarment. The contractor has no advance assurance that such will be the result when the disclosure is made. Moreover, the disclosure must be "voluntary" in that the DOD-OIG will not accept a matter into the program if it appears that the disclosure was triggered by the contractor's recognition that the government was about to discover the underlying facts through an investigation, audit or disclosure by third parties.

Generally, the contractor makes an initial disclosure and indicates its desire to participate in the program. If accepted, the contractor conducts an internal investigation and submits a report to the DOD-OIG disclosing the full extent of any wrongdoing, along with an offer of restitution and a description of the measures taken to ensure against a recurrence of any such conduct. The government then conducts its own investigation to verify the accuracy of the contractor's disclosures.

Since 1986, there have been more than 300 disclosures under the DOD-VDP with only a handful of corporations and approximately 60 individuals subsequently prosecuted criminally.

While the HHS-OIG has no formal VDP, OIG representatives have indicated for some time that providers making such disclosures will be accorded more lenient treatment for purposes of both criminal prosecution and exclusion.


In the health care context, the "fraud" label covers a broad spectrum of conduct ranging from a failure to comply with complex regulatory requirements--so-called "regulatory crime"--to blatantly criminal conduct. If encouraging over-all compliance is the goal of health care fraud enforcement, applying sanctions equally to both kinds of conduct, particularly mandatory exclusion, seems unwise. Given the breadth of the fraud label, the system should have sufficient flexibility to permit a basically legitimate provider that runs afoul of the law to clean up its act and survive.

Moreover, it may be difficult for a voluntary disclosure program to work effectively in the health care area as long as there is a mandatory five-year exclusion for program-related crimes. A provider that desires to make a voluntary disclosure of MMAKA violations, for example, must trust the government not to proceed criminally or be prepared to risk going out of business. This requires a leap of faith on the provider's part that does not exist in the defense voluntary disclosure program. Although defense procurement fraud can involve conduct which is more reprehensible--for instance, defective parts that pose a life-threatening safety risk--no offense gives rise to a corporate mandatory debarment.(35)

Elimination of the mandatory five-year minimum would allow HHS-OIG exclusion proceedings--like their DOD counterpart--to be more remedial in nature. Under the Federal Acquisition Regulation (FAR), the focus of a DOD debarment proceeding is supposed to be on the contractor's present responsibility and not on its past misdeeds: "The serious nature of debarment and suspension requires that these sanctions be imposed only for the government's protection and not for purposes of punishment."(36) The FAR also provides: "The existence of a cause for debarment, however, does not necessarily require that the contractor be debarred; the seriousness of the contractor's acts or omissions and any remedial measures or mitigating factors should be considered in making any debarment decision."(37)

Although the purpose of the five-year mandatory exclusion is theoretically remedial--to protect the Medicare program--its application certainly seems punitive when a physician is excluded for five years for being convicted of submitting a false claim for $62.40 to Medicare.(38)

A more flexible system--one shorn of the mandatory five-year minimum--would permit HHS-OIG to apply its exclusion authority more equitably, to require the implementation of compliance programs as a condition of continued participation, and to make the process much more remedial in nature when that is warranted by the circumstances and the public interest.

(1.)Staff of Senate Special Committee on Aging, Gaming the Health Care System, 103d Cong., 2d Sess. 9 (1994).

(2.)42 C.F.R. [sections][sections] 405.370 and 405.371(b).

(3.)Peterson v. Weinberger, 508 F.2d 45, 49-50 (5th Cir. 1975); Friedman v. Pennsylvania Blue Shield, 856 F. Supp. 263, 265 (E.D. Pa. 1993); Neurological Assoc. v. Bowen, 658 F.Supp. 468, 470-72 (S.D. Fla. 1987); Krebsbach v. Heckler, 617 F.Supp. 548, 550 (D.C. Neb. 1985).

(4.)U.S. Dep't of Justice, Press Release, Record Fine for Health Care Fraud and Kickbacks, June 29, 1994.

(5.)1993 Medicare & Medicaid Guide (CCH) [parallel] 40,975.

(6.)42 U.S.C. [sections] 1395y(a)(1).

(7.)Rhonda L. Rundle & Amy Stevens, Investigators Intensify Crackdown on Fraud in the Health Care Industry, WALL ST. J., Aug. 16, 1993, at A1 [hereinafter Crackdown].

(8.)Dep't of Justice, Press Release, Two of the Nation's Biggest Labs to Pay U.S. $39 Million to Settle Allegations that They Submitted False Medicare Claims, Sept. 13, 1993 [hereinafter Labs to Pay].

(9.)Rhonda L. Rundle, National Medical Facilities Raided by U.S. Agents, WALL ST. J., Aug. 27, 1993 at A3.

(10.)42 U.S.C. [sections] 1320a-7b(b).

(11.)Dep't of Justice, Press Release, Record Fine for Health Care Fraud Kickbacks, June 29, 1994 Plea Agreement, dated June 29, 1994, United States of America v. NME Psychiatric Hospitals, Inc., Case No. CR-94-0268, U.S. District Court for the District of Columbia.

(12.)Government's Statement of Facts in Support of Plea Agreement, June 29, 1994, United States v. NME Psychiatric Hospitals, Inc., Case No. CR-94-0268.

(13.)Thomas M. Burton, CareMark Cited in an Indictment over Payments, WALL ST. J., Aug. 5, 1994, at 1.

(14.)42 U.S.C. [sections] 1320a-7b(b)(3).

(15.)42 U.S.C. [sections] 1320a-7b(b)(3)(E).

(16.)H.R. 4028, 103d Cong., 2d Sess. (1994).

(17.)18 U.S.C. [sections][sections] 1341 and 1343.

(18.)31 U.S.C. [sections] 3729(a).

(19.)859 F.Supp. 5 (D. D.C. 1994). See also United States v. Lorenzo, 768 F.Supp. 1122, 1133 (E.D. Pa. 1991).

(20.)859 F.Supp. at 11, n.3.

(21.)Id. at 10-11.

(22.)31 U.S.C. [sections] 3729(b).

(23.)31 U.S.C. [sections] 3730.

(24.)31 U.S.C. [sections] 3730(e)(4)(B).

(25.)Data taken from 62 Fed. Con. Rep. (BNA) 515 (Nov. 14, 1994).

(26.)Crackdown, supra note 7.

(27.)Labs to Pay, supra note 8.

(28.)42 U.S.C. [sections] 1320a--7a.

(29.)S. REP. No. 139, 97th Cong., 1st Sess. 461-62 (1981), reprinted in 1981 U.S.C.C.A.N. 727-28.

(30.)H.R. REP. No. 391, 100th Cong., 1st Sess. (Part I) 534 (1987).

(31.)821 F.2d 523 (10th Cir. 1987).

(32.)42 U.S.C. [sections] 1320a-7(a).

(33.)42 U.S.C. [sections] 1320a-7(b).

(34.)42 U.S.C. [sections] 1320a-7(b)(f).

(35.)By statute, however, an individual convicted of a defense contract related felony is prohibited from serving on the board of directors of, in the management or supervisory capacity on, or as a consultant to, a defense contractor for a five-year period after the date of conviction. See 10 U.S.C. [sections] 2408(a). A defense contractor that knowingly employs such a person is subject to a possible maximum criminal fine of $500,000. See 10 U.S.C. [sections] 2408(b).

(36.)48 C.F.R. [sections] 9.402(b) (emphasis added).

(37.)48 C.F.R. [sections] 9.406-1(a).

(38.)Manocchio v. Sullivan, 768 F.Supp. 814, 815 (S.D. Fla. 1991).
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Title Annotation:Health Care and the Law
Author:O'Leary, Howard E.
Publication:Defense Counsel Journal
Date:Apr 1, 1995
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