Congress could improve health care by reforming the False Claims Act

In a new Independence Institute working paper on the use and misuse of the False Claims Act (FCA), attorneys Mark W. Pearlstein and Laura McLane explain how an 1863 statute written to expose and punish Civil War contractors who billed for gunpowder and supplied kegs full of sawdust raises costs and threatens access to medical care.

The FCA authorizes private individuals to sue anyone they think is defrauding the federal government. Individuals filed more than 4,700 FCA actions between 2009 and June 2016. Awards range from $11,000 to $22,000 for each fraud detected, and the Act provides for treble damages. The spoils are divided among the person alleging the fraud, his attorneys, and the federal government. If the standard business practices of large firms come under fire, spoils can reach hundreds of millions of dollars. In 2014, the Department of Justice reported that FCA “recoveries” totaled $5.79 billion. Health care lawsuits accounted for $2.3 billion of that.

The federal government must investigate the claims in every FCA case. The initial investigation is done under seal. Defendants may be investigated for years, but not know about it until their business documents are subpoenaed. The individual alleging fraud can proceed with a case even if the government decides against it.

{mosads}Increasingly sophisticated groups of attorneys choose to continue. They sue any entity that receives federal payments, claiming that any failure to comply with complex administrative standards constitutes fraud. At the time the act was passed, the goal was to prosecute fraud cases in which a contractor billed the United States for nonexistent or worthless goods, not prosecute contractors for failing to adhere to specific manufacturing standards or minor differences of opinion.

Rather than working with contractors to improve their performance, the FCA is used as a blunt instrument to extract large sums from their business operations. The FCA has been used to sue nursing homes, hospitals, doctors, insurers, clinical laboratories, pharmaceutical manufacturers, software providers, managed care organizations, and universities funded by federal grants.

Plaintiffs allege too little care, too much care, billing errors, record-keeping violations, and differences in opinion about medical necessity.

The Department of Health and Human Services certifies provider performance using various methods. It has numerous administrative enforcement tools to influence the behavior of contractors in substantial but not complete compliance with its regulations. It seeks to work with contractors to improve their performance rather than penalizing them with huge fines that divert large sums of money from patient care, or simply shutting down facilities that are not in perfect compliance.

In 2015, the Fourth Circuit upheld a $237 million FCA verdict in United States ex rel. Drakeford v. Tuomey. A business entity related to Tuomey Regional Medical Center had part-time employment agreements with 19 surgeons and gastroenterologists. The physicians had agreed to use Tuomey facilities when they did procedures on their private patients. Plaintiffs argued that the contract violated the Stark Law because physicians who performed more procedures earned more.

The terms of the contract would have been perfectly legal had the physicians been directly employed by Tuomey and received productivity bonuses that depended on their surgical referrals to it. After 10 years of litigation, Tuomey settled with the federal government. The government’s terms were $72.4 million and the requirement that Tuomey sell itself to another health system. Many FCA defendants settle because they cannot afford to prove their innocence. The government often requires signing a Corporate Integrity Agreement as part of the settlement terms, giving it control of the defendant’s business activities for many years.

A judge in the Tuomey case wrote that the hospital was caught in “[a]n impenetrably complex set of laws and regulations that will result in a likely death sentence for a community hospital in an already medically underserved area.” He concluded that “even for well-intentioned health care providers the Stark Law has become a booby trap rigged with strict liability and potentially ruinous exposure — especially when coupled with the False Claims Act.”

Pearlstein and McLaine show that the aggressive use of the FCA in health care cases goes well beyond the traditional understanding of fraud. Unless Congress revises the statute, it will continue to harm patients by allowing routine second-guessing of physician decisions, raise costs by encouraging meritless whistle-blowing for money, and impair access to care as risk-averse participants bow out.

Linda Gorman is director of the Health Care Policy Center at the Independence Institute (@i2idotorg), a free market think tank in Denver.