Real healthcare fraud exists in the United States. Whether in for-profit or nonprofit healthcare settings, billing for services that were not provided or were not medically necessary or intentionally billing more than appropriate through code manipulation is plainly wrong. The Department of Justice (DoJ) and the Office of the Inspector General of the Department of Health and Human Services (HHS OIG) are right to investigate and punish those involved in such corrupt activities, which cost the taxpayers billions of dollars, inhibit the delivery of necessary care, and taint the healthcare industry.

A disturbing trend is emerging, however, in which the same agencies, often with the involvement of “whistleblowers” who stand to make millions of dollars, are pursuing nonprofit hospitals under the False Claims Act (FCA), which carries potentially catastrophic penalties. 

There are several factors behind this trend. First, billions of dollars are at stake in healthcare fraud claims. The government estimates that fraud amounts to 3% to 10% of the more than $800 billion spent annually by state and federal governments on Medicare and Medicaid.

Accordingly, federal and state agencies are ramping up their enforcement efforts with multi-agency, cross-jurisdictional task forces, such as the Medicare Fraud Strike Force and the Health Care Fraud Prevention & Enforcement Action Team. 

Second, the Qui Tam provisions of FCA are extremely lucrative to potential whistleblowers. FCA carries treble damages and additional per-claim penalties. Under the act, private citizens can file an action on behalf of the US and obtain up to 30% of the judgment. 

Third, FCA has been the vehicle for significant government recoveries. Using FCA, the US government collected almost $2 billion in the fiscal year ending September 30, 2009. That figure represents the bulk of the $2.4 billion that the government recovered that year in settlements and judgments involving alleged fraud against the government. Not surprisingly, Congress has made it easier to recover against hospitals by expanding FCA through the Fraud Enforcement and Recovery Act of 2009. Additional legislation to broaden the reach of FCA is pending.

Rock and a hard place

For the right cases, it is good policy to use FCA to pursue claims of healthcare fraud. But often, the use of FCA is a policy choice that attaches an exorbitant penalty to what are often defensible violations of federal law. 

The Physician Self-Referral Law (Stark) is a civil statute that prohibits certain financial relationships between physicians and hospitals, among other provisions, and requires repayment for referrals that violate the law. The Anti-Kickback Statute is a criminal law that imposes fines and jail time for making payments to induce referrals. 

In some jurisdictions, however, the courts have allowed the government to forgo direct Stark or Anti-Kickback claims in favor of pursuing allegations of civil violations of FCA, with its treble damages and per-claim penalties ($5,500 to $11,000 per claim).

Many nonprofit hospitals find themselves between a rock and a hard place when facing such allegations. Often, the allegations are defensible, involving gray areas of regulatory interpretation or technical errors that form the predicate violations. The government’s use of FCA, however, raises the stakes to intolerable levels. 

Hospitals are faced with the Hobson’s choice of trying the case, with the possibility of a catastrophic judgment, or paying a settlement that is disproportionate to any harm. The vast majority of hospitals settle and pay the government (and whistleblowers) millions of dollars.

Case in point

Recent settlements highlight the impact of this aggressive use of the FCA. In August 2009, Covenant Medical Center in Waterloo, Iowa agreed to pay $4.5 million to settle allegations that it submitted false claims to Medicare by having financial relationships with five doctors that may have violated the Stark Law. 

DoJ asserted that the hospital compensated the doctors at rates above fair-market value in return for referrals. Under the government’s theory, any Medicare or Medicaid charges for services to patients referred by those five doctors were tainted and subject to repayment at three times the amount of payment plus a per-claim penalty. Considering that such arrangements are often in place for years before being challenged, the possible damages can reach tens of millions of dollars.

Although the complete factual record is not available in the Covenant matter, if the case had proceeded to trial, the government presumably would have sought damages that amount to multiples of the settlement. Covenant was faced with the untenable choice of defending the case at trial and risking catastrophic loss or paying the government millions of dollars. 

As a result, the government extracted $4.5 million dollars from a community hospital in Waterloo, Iowa. In settling the case, Covenant issued a statement that it denied liability and that its decision to resolve the case was based only on business concerns about the expense and uncertainty of pursuing the protracted litigation. 

DoJ and HHS OIG have the discretion to seek much more modest sums and can use means other than FCA to ensure compliance with the law. It’s unlikely that using FCA to squeeze the maximum dollars out of nonprofit hospitals for possible violations of highly technical statutes serves the best interests of either US patients or US taxpayers.

Pending bills

We recommend that hospital executives oppose the expansion of FCA and similar laws. There are several bills pending in Congress that propose to expand liability and reduce defenses in such actions, including Senators Leahy’s and Kaufman’s Health Care Fraud Enforcement Act and Senator Grassley’s Fighting Medicare Payment Fraud Act.  

Hospital executives may also want to support a congressional fix for the potential catastrophic liability from technical or insignificant violations of Stark. A genuine amnesty program, without penalty, for voluntary disclosures of violations would make more sense. HHS OIG and DoJ should also have more flexibility in fashioning appropriate remedies.

In addition, it’s critical to get good professional advice when embarking on a practice or agreement that could touch on a gray area of compliance and to document that advice to reflect the provider’s good faith efforts. And, of course, an ounce of prevention from a rigorous compliance program is far more effective than the pound of cure required to respond to an investigation.

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