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Health Law Alert: New False Claims Act Amendments Are Expected to Yield Record Recoveries - Practical Impact for Hospitals and Health Care Providers

By:  Christopher J. Churchill
Related Practice Area: Health Law

Recent passage of the Fraud Enforcement and Recovery Act of 2009 (FERA)¹ is expected to increase the government’s false claims recoveries to more than $2 billion annually. Experts agree that the FERA amendments represent the most significant expansion of the False Claims Act (FCA) in over 20 years. At the same time, the U.S. Department of Justice (DOJ) and Department of Health and Human Services (DHHS) have announced the expansion of their health care fraud enforcement efforts, as well as a major increase in government funding for enforcement activities by 2010. Together, these initiatives pose serious compliance risks for hospitals and health care providers that participate in government programs, such as Medicare and Medicaid.

Originally called the “Lincoln Act,” the FCA was enacted by Congress in 1863 to combat fraud during the Civil War. It is now the chief enforcement tool used by the government to recover overpayments to its contractors. The FCA also includes a qui tam provision that permits private citizens (or “whistleblowers”) to bring lawsuits on behalf of the United States to recover false claims paid by the government, and to keep a portion of the recovery.
 
Although the FERA amendments to the FCA affect all government contractors, they may have a greater impact on health care providers. In recent years, the health care industry has accounted for more than half of all FCA recoveries and has the highest industry percentage of whistleblower lawsuits. At the same time, liability for FCA violations can be severe. Penalties can reach $11,000 per false claim and three times the amount of damages sustained by the government as a result of the false claims. Therefore, hospitals and providers should act now to address the potential impact of the new FCA amendments to prevent more costly problems later.

The FERA amendments are significant in the following respects:

Health care providers that receive federal funds indirectly from government contractors may be liable for FCA violations. Prior to FERA, the FCA applied only to contractors who submitted false claims, or caused them to be submitted, directly to the government. FERA now expands FCA liability to include subcontractors and other recipients of federal funds, even if received indirectly, so long as the funds were used to advance a government program or interest. For example, a claim submitted by a hospital or to a Medicare Advantage Plan sponsored by a private insurer now may be subject to FCA liability.

A health care provider may be liable under the FCA for knowingly retaining an overpayment. FERA expands FCA liability to overpayments “knowingly” retained by a health care provider even in the absence of an affirmative false claim or statement.

Under FERA, a provider violates the FCA if it “knowingly conceals, or knowingly and improperly avoids or decreases an obligation” to refund an overpayment. The term, “knowingly” includes both actual knowledge and reckless disregard of an overpayment. For example, a hospital or provider may not face FCA liability for an overpayment that it received inadvertently. However, if it deliberately avoids discovery of the overpayment, liability may arise.

False claims are actionable if they are “material” to a government obligation, even absent an intent to defraud the government. FERA clarifies that FCA liability attaches to a false claim that is “material” to a government obligation, even without proof of an intent to defraud. FERA also resolves differing judicial decisions by confirming that although “materiality” is required under the FCA, courts may apply this term broadly. FERA defines “material” as “having a natural tendency to influence, or be capable of influencing” payment by the government. However, since the term “material” still requires courts to make a factual determination, FERA’s attempts to clarify this FCA element may be subject to continued judicial interpretation.

Whistleblower protections expanded. Before FERA, only employees of the company alleged to have defrauded the government were protected from retaliation or firing for reporting the misconduct. FERA now expands the FCA’s anti-retaliation provisions to protect independent contractors and agents as well. The FERA amendments also provide that any lawful efforts to stop violations of the FCA are protected from retaliation even if their efforts do not result in a formal FCA action. The practical impact of these provisions may be to provide employees and contractors with additional defenses in termination disputes that do not directly involve FCA investigations.

Statute of limitations issues. FERA clarifies that the filing of a whistleblower action tolls the statute of limitations for the government as well. If the government intervenes in the case, the government’s complaint relates back to the date of the original complaint so long as its claims arise from the same transactions or occurrences alleged in the complaint. However, in many whistleblower suits, the defendant does not get notice of the original complaint, because the complaint remains under seal for several years until the government decides whether or not to intervene in the case. For example, if a whistleblower suit is filed in 2009, a defendant may be required to defend allegations dating back more than ten years if the government decides to intervene in the case two years later. Thus, the FERA amendments to the FCA may hinder a defendant’s ability to defend itself, or to conduct its own investigation, until many years after the alleged conduct occurred.

Expansion of government investigations. The FERA amendments now permit evidence obtained by the federal government during an FCA investigation to be disclosed to third parties such as whistleblowers and state or local government agencies, or in connection with “official use” which includes sharing information with auditors, experts, and other third parties.

In addition to raising issues of confidentiality, this change is expected to significantly increase the number of parties with an interest in pursuing FCA cases against a health care provider. For example, new inter-agency teams have been formed to coordinate federal and state health care investigation efforts using shared information.

Practical Considerations for Health Care Providers

• Assess the Increased Risk of Liability. Because hospitals and providers now face a greater number of potential FCA actions as a result of the FERA amendments, they should assess their potential liability and risk areas. Providers should assign specific management responsibility, and retain outside experts if needed, to ensure compliance in those areas where their potential for FCA liability may be the greatest. This may include review of billing and refund procedures, medical recordkeeping, certifications and reporting practices, as well as contractual obligations to payors for claims/data accuracy (since they in turn may rely upon this information as Medicare/government contractors).

• Identify and Refund Potential Overpayments. Health care providers should be proactive in identifying potential overpayments through internal auditing and compliance monitoring, and promptly resolve any overpayments or FCA issues that are identified. This will become particularly important when Medicare’s Recovery Audit Contractors (RACs) begin their own targeted review of hospital/provider claims on behalf of the government. (See previous Alert, “Medicare RAC Audits Are Here to Stay: Ignoring Them May Be Costly.”)

• Update Employment and Compliance Policies. Health care providers should review their compliance policies and procedures to ensure they are taking appropriate steps to prevent false claims or conduct that might subject them to FCA liability. Also, because FERA has expanded the non-retaliation provisions of the FCA for employees as well as independent contractors, providers also should review their HR/contractor policies to ensure that they comply with these new requirements. 


¹FERA amends the False Claims Act, 31 U.S.C. § 3729 et seq.