The False Claims Act: What You Should Know and Potential Cases of 2016

John Shinkle via Politico
U.S. News /13 Feb 2016

The False Claims Act: What You Should Know and Potential Cases of 2016

Enacted in 1863, the False Claims Act (FCA) was established by Congress out of concern that suppliers of goods to the Union Army during the Civil War were defrauding the Army. This act allows for any persons under the qui tam provision to bring an action against an entity they believe to be defrauding the government or presenting a false or fraudulent claim for government reimbursement.

The qui tam provision permits persons to file lawsuits on the Federal Government’s behalf for claims under the FCA. Those persons or whistleblowers are also known as relators and can be awarded anywhere between 15-30% of the total recovery. This act, also known as “Lincoln’s Law,” was not used much after its inception until the act was significantly amended in 1986.

What Are Examples of False Claims?

Medicare or Medicaid fraud includes a variety of illegal practices — including billing for procedures that were never performed, payments to physicians or hospitals from pharmaceutical companies in exchange for promoting their drugs, payment for non-existent or “ghost” patients, unbundling tests to bill them separately at greater cost, falsifying of research grant applications and inaccurately coding medical bills by claiming that patients require more expensive procedures than necessary.

The government recovered over $2 billion in claims under the FCA for fiscal year 2014. Johnson & Johnson paid over $1 billion to resolve FCA claims for the promotion of certain prescription drugs. Because the company promoted the drugs for uses not approved by the FDA and covered by federal health care programs, subsequent claims to federal health care programs were allegedly fraudulent. The government also alleged that Johnson & Johnson paid kickbacks to Omnicare, Inc., the largest pharmaceutical provider to nursing homes and long-term care facilities. In a separate settlement, the Justice Department settled a claim against Omnicare for $116 million.

During the same year, the government recovered an additional $333 million from a settlement with two major providers of hospital services, Community Health Systems, Inc. and Halifax Medical Center. Community Health Systems, Inc. paid $98.15 million to settle a claim that it had allegedly overbilled for patients who could have received services in a less costly outpatient setting.

Halifax Medical Center and Halifax Staffing Inc. faced allegations of violating the Stark Law and settled with a claim for $85 million. According to the Stark Law, if a physician has a financial relationship with a hospital, the hospital cannot bill Medicare for certain services when that physician refers patients.

Defense contracts are another area where the government has been defrauded through false claims. Examples of this include overbilling for items purchased through government contracts, substitution of substandard parts without the government knowledge, inflation of costs and expenses in violation of the Truth-in-Negotiations Act and non-compliance with specifics of contracts.

In 2013, the Boeing Company paid $23 million to settle an FCA claim originally filed by a whistleblower. The allegations resulted from false labor costs for the maintenance of C-17 Globemaster aircraft in a contract between Boeing and the U.S. Air Force.

Financial fraud under the FCA has come to light with other large settlements in recent years. In August of 2014, the U.S. Justice Department announced that it reached a $16.65 billion settlement with Bank of America Corporation, the largest settlement with a single entity in U.S. history.

The settlement relates to the Justice Department’s investigation into the sale and underwriting of its mortgage loans. The bank did concede that it made misrepresentations about the quality of those loans to Fannie Mae, Freddie Mac and the Federal Housing Administration. As part of the settlement, Bank of America and Countrywide Financial Corporation, its subsidiary, have agreed to pay $1 billion to settle claims under the FCA.

What Evidence Indicates That Whistleblower Lawsuits Are on the Rise?

In a record breaking fiscal year ending September 30, 2014, The U.S. Justice Department reports that it obtained $5.69 billion in settlements and judgments from civil cases involving fraud and false claims. This was the first time recoveries exceeded $5 billion, and total recoveries from January 2009 through the end of the fiscal year 2014 were $22.75 billion, over half the recoveries since Congress amended the False Claims Act in 1986.

Over half of the $5.69 billion recovered in 2014, nearly $3 billion, related to Federal Claims Act lawsuits filed under the qui tam provision. Those qui tam complainants received $435 million for their efforts, often at great risk to their careers. Qui tam complainants have increased from 30 in fiscal year 1987 to over 700 for fiscal years 2013 and 2014. While the majority of law firms represent whistleblowers or contractors, a rare few represent both giving them a unique insight as to how to represent either side.

2016: The Future of the False Claims Act

The U.S. Supreme Court has granted certiorari to hear Universal Health Services, Inc. v. Escobar, a case from the First Circuit Court of Appeals. The petitioner’s subsidiary in this case operates a mental health clinic which receives federal and state reimbursement through MassHealth, the state Medicaid program. Carmen Correa and Julio Escobar, respondents, are the mother and step-father of Yarushka Rivera, a former patient of the clinic who died in 2009 from complications of a seizure.

The Supreme Court is tasked with answering the following questions:

  1. Whether the “implied certification” of legal falsity under the FCA applied by the First Circuit is viable.
  2. If the implied certification is viable, whether the contractor’s reimbursement claim can be considered false absent a specific contractual provision stating that compliance is a necessary requirement of payment.

Federal circuit courts are in disagreement with regards to implied certification. In United States v. Sanford-Brown, 788 F.3d 696 (7th Cir. 2015), the Seventh Circuit rejected implied certification based upon the following reasoning: “We conclude that it would be equally unreasonable for us to hold that an institution’s continued compliance with the thousands of pages of federal statutes and regulations incorporated by reference into the program participation agreement (PPA) are conditions of payment for purposes of liability under the FCA. Although a number of other circuits have adopted this so-called doctrine of implied certification, we decline to join them and instead join the Fifth Circuit.” Id. at 711-712.

The Second and Sixth Circuits accept the concept of implied certification but recognize that the falsity of a claim can only occur if payment is expressly conditioned upon compliance.

The Third, Ninth, Tenth and Eleventh Circuit Courts limit the application of implied certification to cases where compliance with a certain statute or regulation is necessary only when expressly stated as a condition of payment.

In contrast, the First, Fourth and D.C. Circuits have held that conditions of payment do not need to be expressly identified.

Why the Supreme Court Review Is Significant

Only the Fifth and Seventh Circuit Courts have rejected the theory of implied certification — leaving a majority of circuit courts which embrace the theory. If the Supreme Court agrees with a majority of the circuit courts and embraces the implied certification theory, contractors may need to spend additional funds to ensure compliance with all regulations and statutes prior to submitting claims for payment.

An increase of litigation may result if implied certification is applied throughout all the circuits. And while the government will still need to prove its case for violations of the FCA, companies will have already expended great amounts of money to defend against false claims.

In summary, government contractors must be vigilant in compliance with statutes and regulations to avoid claims under the FCA. And if the Supreme Court sides with a majority of the circuit courts and accepts implied certification, those contractors will need to become extra vigilant to protect themselves against future liability.

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