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The government's war on health care fraud: what every physician executive needs to know.

The prevention of fraud in the health care industry is a top priority of federal, state and local law enforcement officials, legislatures and judiciaries.


With the projected increases in expenditures and the rising number of Medicare and Medicaid program participants, the United States Department of Justice (DOJ), the Office of the Inspector General of the United States Department of Health and Human Services (OIG) and state Medicaid Fraud Control Units (MFCU) continue to expend significant resources pursuing fraud and abuse.

In its 2005 Report summarizing Medicare and Medicaid Expenditures, the Centers for Medicare and Medicaid Services (CMS) projected national health expenditures to reach $3.6 trillion by 2014, an average annual growth rate of 7.1 percent. (1)

As recently as March 28, 2006, CMS alone requested an additional $5 million for fiscal year 2006, $50 million for 2007 and 2008, and $75 million for each year thereafter to support its efforts to establish a Medicaid Integrity Unit to combat health care fraud and abuse in the Medicaid program. (2)

The government addresses allegations of fraud or misconduct in the health care system in a variety of ways. They include administrative, civil and criminal remedies. The particular circumstances of the misconduct determine which of these remedies, or combinations, are utilized.

Other factors include the perceived egregiousness of the fraud or misconduct, the likelihood of a recovery or conviction, the government resources available to handle the case, and what agency or entity developed or received the information about the wrongdoing.

The agencies that investigate health care fraud and abuse include the OIG, MFCU, the Federal Bureau of Investigations (FBI), the Internal Revenue Service (IRS), the Postal Inspection Service, the Department of Defense (DOD), and State Insurance Departments (DOI).

Fraud statutes

There is a broad array of criminal statutes available to the government in health care fraud cases. They may be divided into substantive offenses and conspiracy offenses. Some of the most frequently prosecuted include false statements, false claims, mail fraud, health care fraud and the multiple inchoate offenses of conspiracy.

Just as multiple factors are considered when deciding to prosecute, so are multiple factors considered in deciding which statute to prosecute. These include familiarity and past experience with the statutes, evidentiary considerations and likelihood of success. Which statute is ultimately used will depend on the nature of the fraud and the preferences of the prosecutor handling the case.

New statutes applicable to health care fraud offenses were enacted as part of the Health Insurance Portability and Accountability Act of 1996. Several other notable additions came about as part of the Sarbanes-Oxley Act of 2002.

The False Statements Statutes prohibit the making or using of a materially false statement or document in a matter within the jurisdiction of a federal government agency. Also included are false statements or documents in connection with the delivery or payment of health care items or services.

Both sections of the statute have broad application in health care fraud, as most fraudulent schemes involve the use of false statements or documents. Virtually any materially false statement or document made or presented to the government will suffice to support a prosecution.

To establish materiality, the government must prove that the statement or document had a natural tendency to influence, or be capable of influencing, the decision of the decision making body to which it was addressed. It is not necessary, however, that the department or agency be actually misled or deceived.

Furthermore, the document need not actually be presented to the government. In many cases, the creation of the document alone violates the statute. An example would be making false entries in treatment notes required to be prepared and maintained to justify a service billed to the government or a private payer. (3)

Likewise, government prosecutors frequently utilize the False Claims Statute. This is the criminal analog of the Civil False Claims Act. The statute makes it a crime to knowingly make or present a false, fictitious, or fraudulent claim to a department of the United States. Violations are punishable by up to 5 years in prison, and a fine of up to $250,000 or twice the amount of the fraud. (4)


The Mail and Wire Fraud Statutes criminalize the use of the mails, common carriers, or interstate wire communications in the execution of a scheme or artiface to defraud. Mail fraud has two elements:

* Having devised or intending to devise a scheme to defraud (or to perform specified fraudulent acts)

* Use of the mail (or commercial interstate carrier, or interstate wire communications in the case of wire fraud) for the purpose of executing, or attempting to execute, the scheme (or specified fraudulent acts.) It is not necessary that the scheme contemplate the use of the mails as an essential element. It is sufficient for the mailing to be incident to an essential part of the scheme.

It is important to keep in mind that each use of the mails or interstate commercial carrier (in the case of mail fraud) and each separate interstate wire communication (in the case of wire fraud) are separate offenses. Violations are punishable by imprisonment for up to 20 years, and a fine of the greater of $250,000 or twice the amount of the fraud. (5)

Enacted as part of the HIPAA legislation and created as an alternative statute designed to cover schemes to defraud both public and private health insurance programs, the Health Care Fraud Statute makes it unlawful to knowingly and willfully execute, or attempt to execute, a scheme or artifice:

* To defraud any health care benefit program

* To obtain, by means of false or fraudulent pretenses, representations, or promises, any of the money or property owned by, or under the custody or control of, any health care benefit program, in connection with the delivery of or payment for health care benefits, items, or services

Violations are punishable by imprisonment of up to 10 years. If the violation results in serious bodily injury, the maximum term of imprisonment increases to 20 years. If the violation results in death, the maximum term of imprisonment is life. (6)

The Money Laundering Statute makes it a crime to engage in financial transactions involving the proceeds of certain specified offenses with the intent to:

* Conceal or disguise the nature, source, ownership or control of proceeds of specified unlawful activity

* Promote the carrying on of a specified unlawful activity

* Engage in tax evasion

* Avoid a reporting requirement (such as currency transaction reports)

Specified unlawful activities include mail fraud, wire fraud and other federal health care offenses as defined in the statute. Violations are punishable by up to 20 years in prison, and a fine of the greater of $500,000 or twice the amount of the funds laundered. (7)

Health care fraud and abuse frequently involves drug trafficking offenses as well. It is also unlawful for a physician, acting outside the scope of his medical practice, to distribute a controlled substance that he could dispense legitimately within the scope of his practice.

Pharmacists have a corresponding legal responsibility to ensure that the prescriptions they fill are legitimate. Filling a known invalid prescription is a violation of the Controlled Substances Act. (8)

In addition, the Federal Food, Drug and Cosmetic Act (FD & C) covers the manufacture, distribution, sale and use of prescription drugs and medical devices. The major criminal provisions of the act prohibit the introduction into interstate commerce or sale of unapproved, mislabeled or tainted drugs that have already moved in interstate commerce, as well as the dispensing of prescription drugs without a prescription issued by a licensed practitioner. (9)

Finally, the Anti-Kickback Statute is increasingly being used by the government to combat health care fraud and abuse. It prohibits the solicitation, offering, making or receipt of payment, directly or indirectly, overtly or covertly, for the referral of patients, goods or services for which compensation may later be sought under a public ally funded health care program.

A person making a referral is thought to be possibly motivated to make the referral by how much profit it will bring him rather than the need for the treatment or the quality of treatment the patient will receive. As a result, the patient receives substandard care and the federal treasury is depleted.

The term federal health care program, as used in this statute, means any plan or program that provides health benefits and that is funded, at least in part, by the federal government, other than the Federal Employees Health Benefit Plan. This includes Medicare, Medicaid and TRICARE. It does not include private health insurance plans that may be covered by some of the other federal or state health care fraud statutes.

Because of the breadth of the statute, there are a number of exceptions that are found in the statute itself and in the Code of Federal Regulations. These exceptions generally involve employment, investment, business and contractual relationships that have been determined not to result in improper motivations for the making or referrals. (10)

In addition to the substantive offenses described above, the conspiracy statutes are favorites of government prosecutors. The main conspiracy statute has two parts:

1. A conspiracy to commit an offense against the United States, which means a conspiracy to violate another federal criminal statute

2. A conspiracy to defraud the U.S. or an agency of the country. Violations of this statute are punishable by up to five years in prison and a fine of up to $250,000. In cases of fraud, the maximum fine is the greater of $250,000 or twice the amount of the fraud. (11)

Furthermore, it is a crime to conspire to submit false claims to the United States and its departments and agencies. This conspiracy statute does not require the commission of an overt act in furtherance of the conspiracy. Violations are punishable by up to 10 years imprisonment, and a fine of up to $250,000 or twice the amount of the fraud. (12)

Finally, the Conspiracy and Attempt Statute, enacted as part of the Sarbanes-Oxley Act, creates a general attempt and conspiracy statute for the other offenses including the mail fraud, wire fraud and health care fraud statutes. The significance of this enactment is that the conspiracy statute adopts the penalties of the underlying sections, which has a five-year penalty provision. (13)

Information gathering

With a summary of the offenses in mind, I now turn to the government's investigatory techniques. In order for an investigation to begin, information must be made available to a government agency. Informants take a wide variety of forms.

One of the most common ways for the government to gain information about alleged fraud is a False Claims Act (FCA) relator. The FCA enables private individuals to bring a civil action in the name of the United States. Termed qui tam suits, the relators are entitled to a percentage of the government's recovery.

In some cases, the matter brought by the relator is also pursued criminally by the government. Current or former employees are most often the relators in qui tam suits. In addition, competitors may contact the government, particularly if they are put at a competitive disadvantage by the competitor's fraudulent activities.

In addition to employees and competitors, CMS may bring information of fraud to the government. CMS contracts with a variety of private contractors to process claims, conduct audits, detect fraud and ensure quality of care. These contractors have varying levels responsibility to detect fraud on the Medicare program and to act upon or refer the information to the appropriate contractor or law enforcement agency.

Finally, the government may be alerted to fraud by both criminal defendants and law enforcement. Defendants in criminal health care fraud cases sometimes offer information to the government regarding others engaged in health care fraud in an effort to receive a lesser sentence. Federal law enforcement agencies conduct data mining of billing data as part of their health oversight functions in an effort to detect known patterns of fraud.

The government knocks

One of the most dramatic ways a health care executive learns of an investigation is by the execution of a search warrant. The investigating agency obtains a warrant from the court authorizing the search of the premises for evidence. The court must be convinced that there is probable cause that evidence of a crime will be found at the searched location.

There is a preference in criminal health care fraud investigations for the use of search warrants to gather records from the targets offices due to the repeated instances of falsification of records that have occurred when subpoenas are used instead of search warrants. Although a search warrant cannot be sought for use in a purely civil investigation, the evidence obtained during the search in a criminal investigation can be used in support of a parallel civil fraud investigation.

Search warrants are executed with a variety of law enforcement agencies such as the FBI, ATF, as well as local law enforcement. The search is unannounced, and the occupants are restrained while evidence such as computers or patient records are removed.

Absent a search warrant, the first sign of an investigation may occur when the investigating agency contacts current or former employees. This is often accompanied by a letter of request for information. These initial contacts may be followed by administrative, civil or criminal subpoenas.

The various agency inspectors have the authority to issue subpoenas in carrying out their program oversight functions. The subpoenas are enforceable in the district court if necessary. IG subpoenas can be used in support of administrative, civil or criminal investigations. In addition, DOJ is authorized to issue administrative subpoenas for records needed in criminal health care fraud investigations.

Similar with warrants, while subpoenas may only be issued for the purpose of conducting a criminal investigation of the listed statutes, the records may be used in support of parallel civil fraud investigations as well.

Another sign of an impending investigation may be the receipt of a grand jury subpoena. This is one of the principal evidence-gathering tools used in criminal fraud cases. Recipients must rapidly determine whether they are the target, subject or witness in a grand jury preceding.

A grand jury subpoena may be issued for the production of records and other tangible things, for testimony, or for non-testimonial productions. Grand jury subpoenas are enforceable in the district court, and are rarely successfully challenged. Refusal to comply with a grand jury subpoena may result in civil or criminal contempt citations.

Finally and least commonly, the first sign of an impending investigation may be the receipt of civil investigative demands (CIDs). They may be issued for the production of documents, for responses to interrogatories, and for the deposition of witnesses. CIDs are mostly used to obtain documents and information to determine False Claims Act violations. (14)

Prosecutorial discretion

Once the investigation is concluded, and substantial evidence exists, the next step for the government is the decision whether to prosecute. Prosecutorial discretion lies with the United States or states district attorney having the appropriate jurisdiction.

In order to guide U.S. attorneys, the Deputy Attorney General Larry D. Thompson published a memo entitled "Principles of Federal Prosecution of Business Organizations" on January 20, 2003. This has become known as the Thompson Memo.

Factors that may be used in deciding whether to prosecute include the nature and seriousness of offense, pervasiveness of wrongdoing, corporate history of similar conduct, corporate cooperation, established compliance programs, corporate remedial actions, collateral consequences resulting from prosecution, adequacy of individual prosecution, and adequacy of remedies. (15)

Criminal vs. civil prosecution

Once the decision is made to prosecute violation of health care fraud statutes, the next step is determining whether to pursue criminal or civil proceedings.

Parallel proceedings are the simultaneous or successive investigation or litigation of separate criminal, civil and administrative actions involving a common set of facts. DOJ policy requires that all health care fraud cases be evaluated at the intake stage to determine whether they are appropriate for both civil and criminal remedies.

The preference is for parallel track proceedings whenever feasible. Most successful health care fraud prosecutions also trigger some parallel administrative agency action as well. This is often in the form of exclusions or corporate integrity agreements (CIAs) in lieu of exclusion.

The organization's response

When government contact occurs, the physician executive needs to quickly ascertain their status as a target, subject or witness in the investigation. In addition, health care executives must understand their rights and those of their employees. Common sense dictates several basic principles.

Topping the list is the admonition to never lie to any investigating authority and under no circumstances should anything be destroyed. As we have seen in recent high publicity cases, obstruction of justice counts. Furthermore, The Sabanes-Oxley Act makes it a criminal offense to destroy documents even in "anticipation of an investigation."

Likewise it is extremely important to clarify attorney representation. Corporate attorneys represent the corporate entity and not individual directors or executives.

Equally important, strict confidentiality of the investigation must be maintained. Individuals must never speak about any aspect of an investigation other than to counsel. Spouses and friends will inevitably be deposed and put at significant risk under oath if they have second-hand information. In addition, the attorney client privilege may be waived by discussing the case with other individuals.

The health care organization's board must be immediately notified and educated as an internal investigation commences. Public relations strategies and public disclosure are of paramount importance. Lenders will be notified with adverse effects on credit ratings. In addition, public organizations will be required to file SEC documents with resulting investor fallout.

Resolution and settlement

Suffice it to say that most investigations terminate with the entry of a plea with the imposition of significant fines and CIAs. While it is beyond the scope of this review, the goal of the defense is to structure a plea agreement that minimizes punishment and collateral consequences. This is accomplished by pleading to minimal mens rea standard and misdemeanor instead of felony.

Collateral damages are significant and may include payer exclusions for individuals, corporations and subsidiaries, licensure and certification revocation, as well as adverse financing consequences. Finally, it must be noted that pleas may be the basis for future civil litigation including medical negligence as well as serve as summary judgment for other actions.

Health care fraud and abuse will continue to be investigated and prosecuted by the federal government. In addition, state and local governments are looking to get a piece of the pie. It is crucial for physician executives to keep abreast of the complex laws and regulations affecting the health care system.

Christopher Spevak, MD, MPH, MBA, JD, is a physician attorney practicing in Washington, D.C. He is the physician director of government relations of the Mid-Atlantic Permanente Medical Group and a clinical associate professor; at Georgetown University Medical Center. He may be contacted at 202-210-1989 or

Disclaimer--This article contains the advice, opinions, statements and views of the author and does not necessarily represent the advice, opinions, statements or views of Georgetown University Medical Center, the Mid-Atlantic Permanente Medical Group, PA or its physicians. The content of this article is provided solely for informational purposes: it is not intended as and does not constitute legal advice. The information contained herein should not be relied upon or used as a substitute for consultation with legal, accounting, tax, career and/or other professional advisors.


1. Centers for Medicare and Medicaid Services

Accessed July 11, 2006

2. Centers for Medicare and Medicaid Services

Accessed July 11, 2006

3. 18 U.S.C. 1001, 1035 (2006)

4. 18 U.S.C. 287 (2006)

5. 18 U.S.C. 1341, 1343 (2006)

6. 18 U.S.C. 1347 (2006)

7. 18 U.S.C. 1956 (2006)

8. 21 U.S.C. 841 (2005)

9. 21 U.S.C. 331 (2005)

10. 42 U.S.C. 1320a-7b (2005)

11. 18 U.S.C. 371 (2006)

12. 18 U.S.C. 286 (2006)

13. 18 U.S.C. 1349 (2006)

14. 31 U.S.C. 3733 (2005)

15. United States Department of JusticeThompson Memorandum

Accessed July 11, 2006

By Christopher Spevak, MD, MPH, MBA, JD
COPYRIGHT 2006 American College of Physician Executives
No portion of this article can be reproduced without the express written permission from the copyright holder.
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Title Annotation:Health Law Update
Author:Spevak, Christopher
Publication:Physician Executive
Geographic Code:1USA
Date:Sep 1, 2006
Previous Article:Do you want us to hide information or release information? Make up your mind.
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