The Fraud and Abuse Conundrum

Professor Joan H. Krause
Institute for Health Law
Loyola University Chicago School of Law

The federal health care programs are governed by an enormous number of legal provisions, which span tens of thousands of pages. And it sometimes seems that health care providers participate in these programs at their peril, facing sanctions that include civil penalties, exclusion, and even imprisonment for violation of the myriad laws, regulations, and administrative provisions that apply. Yet despite these powerful tools, the government still estimates that more than $13.5 billion in improper payments are made each year in the Medicare program alone.

Now providers face liability under yet another anti-fraud law, with the potential for imposing millions of dollars in penalties: the Civil False Claims Act (FCA), a Civil War-era statute prohibiting the knowing submission of false or fraudulent claims to the federal government. Violators are subject to penalties of $5,500 to $11,000 for each claim submitted plus three times the amount of the government’s damages – making the law a powerful addition to the government’s anti-fraud arsenal. In addition, the FCA’s qui tam provisions permit a private “whistleblower” who sues on behalf of the government to keep 15%-30% of the proceeds, creating a powerful incentive for private individuals to police the health care sector. 

Since the 1986 amendments that modernized the Act and made it more lucrative to pursue qui tam actions, the growth in health care-related FCA suits has eclipsed that of other industries. In 1987, only 12% of qui tam cases involved the federal health care programs administered by the Department of Health and Human Services; by 1998, that number had risen to 61%. The growing use of the FCA has led to increased recoveries: in 1999, the government obtained $524 million in health care judgments, settlements, and administrative penalties. While the government has also increased the number of criminal sanctions and exclusions imposed on health care entities, recoveries and settlements under the FCA remain a cornerstone of anti-fraud efforts.

As the number of FCA suits have grown, so too have the types of activities to which the law is applied. Initially, the FCA was invoked in fairly straightforward false claims cases, such as health care providers who billed the government for services that were never provided, or “upcoded” to bill for more expensive types of services. But gradually, more creative theories have emerged. Since the mid-1990's, the FCA has been used in situations where health care services were provided as claimed, but where the defendants arguably violated some underlying legal requirement (such as the Anti-Kickback or Stark self-referral law) in furnishing those services. These defendants allegedly violated the FCA by falsely certifying on their billing forms that they were in compliance with relevant laws and regulations when they provided services to federal health care program beneficiaries. The Fifth Circuit has agreed that false certifications of compliance can violate the FCA, at least where such certification is a prerequisite for payment.

The latest category of FCA suits combines the traditional billing-for-services-not-rendered approach with violation of regulations concerning quality of care. Recently, the government has negotiated several high-profile settlements with nursing homes on the theory that the homes billed the government for “inadequate” care. When a nursing home fails to provide required nutritional and pharmaceutical services, or otherwise fails to provide the care necessary to “attain or maintain the [resident’s] highest practicable physical, mental, and psychosocial well-being,” the government has argued that the facility’s bills for services are false. Despite criticism that “quality” is an inherently subjective issue for which the federal health care programs provide no clear standards, and which should be addressed through the administrative licensing and discipline system, quality of care clearly has become one of the government’s top fraud priorities. Although quality cases have so far focused on nursing homes, the government has expressed interest in using this theory to pursue underutilization by managed care organizations as well.

While protecting patients (as well as the financial viability of the federal health care programs) is a laudable goal, not everyone agrees with the expanded use of the FCA. Rarely are these cases as straightforward as traditional false claims. Instead, they tend to involve disagreements over not only the facts involved, but also the laws with which the defendants were supposed to comply. Defendants in some of the large-scale anti-fraud investigations, such as the Physicians at Teaching Hospitals (PATH) initiative, have argued that for many years the government’s instructions were unclear, inconsistent, and largely unenforced. Although suits to enjoin the use of the FCA in these cases generally have not been successful, even the courts have expressed some discomfort with the government’s strict enforcement posture.

The criticism is due, in part, to the powerful nature of the FCA penalties. Per-claim penalties quickly can reach astronomical proportions, particularly for health care providers who submit hundreds of relatively small bills each week (such as physician offices). In one notorious case, a psychiatrist who was accused of submitting 8,000 false claims of approximately $30 each – for total damages of $245,392 – was sued by the government for $81 million. Faced with this enormous liability (as well as the specter of exclusion from federal health care programs), it is not surprising that many providers opt to settle FCA allegations. 

In many ways, FCA settlements look like win-win propositions: the government receives compensation for the fraud, and the health care provider assures that it can remain in business. Yet the down-side is that settlement removes many of the factual and legal issues from judicial scrutiny. In court, a provider might successfully argue that the government’s interpretation of the laws and regulations is incorrect, or that the provider’s good faith (albeit mistaken) interpretation should preclude extensive civil or criminal liability. When the case is removed from detailed judicial oversight, these legal issues remain unsettled. The focus shifts from reasoned legal arguments to informal negotiation with federal officials over whether the case warrants investigation at all – in other words, from judicial interpretation to prosecutorial discretion.

So are prosecutors and qui tam relators running amok, or they helping to apprehend legions of crooked health care providers? Not surprisingly, the truth is probably somewhere in-between. For years, the federal health care programs represented a virtually bottomless pot of money; regulations were ambiguous and often unenforced, and only the most egregious offenders were pursued. But with growing concerns over the federal budget and the continued viability of the Medicare Part A Trust Fund, the government logically turned its focus to reducing program costs. 

Yet anti-fraud enforcement is – or at least should be – only one part of the overall health care agenda. Unfortunately, it sometimes seems that successful enforcement is being allowed to dictate regulatory policy, rather than vice versa. The power of anti-fraud rhetoric, and the accompanying multi-million dollar settlements, should not be allowed to obscure the regulatory problems that exist in federal health care programs. Egregious cases of fraud should always be prosecuted to the fullest extent of the law. But rather than labeling health care providers as “fraudulent” for using ambiguous or unenforced reimbursement provisions to their advantage – often with at least the tacit approval of government agents – perhaps our resources would better be spent on clarifying the relevant legal provisions and recouping funds improperly paid out.

A legitimate enforcement regime requires, first and foremost, clear standards against which provider behavior can be measured. Substituting strict enforcement for regulatory clarity may be financially successful in the short-term, but ultimately breeds distrust in the provider community and fosters continuing confusion regarding program rules and regulations. It is easy for the enforcement machine to take on a life of its own, and for current problems to be blamed on “bad apple” providers. But federal health care programs will remain viable only if enforcement takes its rightful place: as a powerful tool to enforce a clear regulatory agenda.