Is it time to reform the False Claims Act? The answer depends whom you ask: Critics argue that it leads to unfair penalties and unjust results for companies; others say it empowers whistleblowers to help the government conquer fraud.
The hotly debated subject took center stage on April 28 during a hearing, “Oversight of the False Claims Act,” held by the Subcommittee on the Constitution and Civil Justice. The FCA, one of the government’s most powerful weapons against fraud, prohibits companies from overcharging or otherwise defrauding the U.S. federal government. Its so-called “qui tam” provisions allow individuals to file lawsuits alleging false claims on behalf of the government, standing to gain up to 30 percent of recoveries if the government prevails in the action.
During the hearing, Jonathan Diesenhaus, a partner in the law firm Hogan Lovells, argued that the qui tam provisions “allow whistleblowers to spur investigations of wide-ranging allegations of misconduct, with very little evidence to substantiate those allegations.” In many cases, these investigations result from whistleblowers with “less than honorable intentions,” he said.
Even when the government determines that those allegations lack merit, or otherwise decides not to participate, they still trigger “two waves of cost and disruption that, in the case of a small business, can be crippling,” Diesenhaus said. The first wave comes when the company has to engage in a “resource- and time-intensive internal investigation,” he said. The second wave comes after the government closes its investigation and the whistleblower files litigation.
Others argued against Congress taking any steps to weaken and eliminate private rights of action under the FCA. Although whistleblowers occasionally move forward with a case that ends up unproven or gets dismissed for one reason or another, the FCA “provides more safeguards and oversight to protect against frivolous or ill-advised lawsuits than just about any other civil enforcement statute in the federal code,” said Neil Getnick, chairman of Taxpayers Against Fraud Education Fund, a non-profit group dedicated to combating fraud against the government.
Dennis Burke, chief executive officer of Good Shepherd Health Care System, a 25-bed non-profit hospital, provided supporting testimony on how frivolous complaints of false allegations can unduly punish a company. Specifically, he described how FBI agents raided his hospital in 2003, following a complaint made by a disgruntled former employee, and the damages that it caused.
“They combed through our records, taking boxes of billings, financial documents, contracts, medical records, and other information,” Burke explained. Hospital counsel ultimately was able to ascertain that a whistleblower case had been filed but, because the case was sealed, the nature of the investigation was kept confidential, he said.
To make matters worse, the court made the FBI affidavit for the raid public, and the allegations were reported in local newspapers. “These stories were extremely damaging to our hospital’s reputation,” Burke said.
“We need to examine ways to give those that do business with the government meaningful incentives to detect wrongdoing and self-report it to the government.”
Trent Franks (R-Ariz.), Chairman, Subcommittee on the Constitution and Civil Justice
The whistleblower had essentially thrown everything at the wall to see what would stick, alleging physician kickbacks, billing for services not rendered, misrepresentation of physician credentials, cost report irregularities, and much more. Ultimately, with the exception of some unintentional irregularities associated with Emergency Room billings, the Justice Department determined that the hospital had not defrauded the government and dropped its investigation.
By that point, however, recanting its “criminal” investigation was too little, too late. The hospital had endured a grueling three-year investigation, consuming hundreds of hours of staff time and over $1 million in attorney fees, consultation fees, and settlement costs, not to mention significant reputational damage, Burke said.
“We were subject to a humiliating raid and an investigation by the federal government due to a disgruntled former employee,” he said. “Having said that, we could just as easily have been the victim of a rogue employee who intentionally violated our policies and procedures. The ensuing process would have been the same.”
The Justice Department offered to settle the case with the hospital for $750,000, “which was very tempting to my board, but we knew the claims were unjustified and decided to take a stand,” Burke said. “Unfortunately, not everyone is in the position to take the same leap of faith due to the risks they face for doing so.”
Another contentious point discussed at the hearing concerned where whistleblowers should be required to report their concerns. Burke argued that whistleblowers should be required to demonstrate that they have brought their concerns to the attention of the company before bringing the matter to the government, so that other companies don’t endure the same fate at his hospital.
JONATHAN DIESENHAUS TESTIMONY
The following is from testimony by Jonathan Diesenhaus, a partner at law firm Hogan Lovells, during an April 28 hearing, “Oversight of the False Claims Act.”
The qui tam statute treats all targets as if they are the most culpable fraudsters. In a healthcare case, when a whistleblower files a case alleging that regulatory non-compliance amounts to fraud, the organization targeted by the allegation is often an entity engaged in the low-margin business of delivering health care services or supplies. Labeled a “fraudster” by a witness claiming to have inside information, the company first struggles through the disruption, diversion of resources and anxiety of a fraud investigation.
With increasing regularity, employees, and especially managers, need separate counsel—counsel the company is often obligated to pay for. Thanks to the wonders of e-mail, servers and the cloud, vast amounts of data needs to be collected and reviewed to respond to the inevitable subpoena for documents, books and records.And throughout, the organization and all its employees come to work each day and try to keep the business running and provide care to patients. And if the company is lucky enough to be among the 80 percent of defendants who DOJ decides, after investigation, not to sue, the company must turn immediately to funding the defense of costly declined qui tam litigation in federal court.
In qui tam litigation today, it doesn’t matter that a defendant had independently instituted a compliance program and attempted on its own to prevent not only regulatory non-compliance, but fraud. It doesn’t matter that it provides a service, drug, or device that the organization believes benefits the public. And it doesn’t matter that a whistleblower makes no allegation that the services provided were medically unnecessary or of poor quality, or that the device, drug, or procedure used was unnecessary or inappropriate. Because the allegation is that the company perpetrated fraud on the government, the government, the defense attorneys and the courts treat the allegation, even an allegation of regulatory non-compliance, with the seriousness such an allegation requires.
Source: House Judiciary Subcommittee on the Constitution and Civil Justice
Senator Charles Grassley, (R-IA), disagreed with the position that companies report concerns to their companies first. “In a perfect world, organizations would value input from their employees, work to fix the problems they identify, and go about their business,” Grassley said. “We do not live in a perfect world.”
“Whistleblowers need to be able to disclose wrongdoing outside of their organizations,” Grassley added. “They need strong protections regardless of who first receives their complaint. Protecting internal reporting is important, but requiring it only discourages many would-be whistleblowers with evidence of actual wrongdoing from coming forward.”
Stephen Kohn, executive director of the National Whistleblower Center, agreed. In his testimony, he argued that companies often structure their corporate compliance programs as arms of the company’s legal department, with the mission of protecting the company from regulatory sanction or liability for fraud. “Under the pretext of attorney-client privilege, companies use these programs to hide fraud and gag the ability of employees to blow the whistle,” he said.
Kohn cited as an example a 2014 appeals court case, In re KBR, in which defense contractor KBR succeeded in suppressing the public release of documents demonstrating widespread fraud, because the compliance department was an arm of the legal department and, thus, not independent. Such programs are a “trap for whistleblowers,” Kohn said. “The False Claims Act creates a safe, effective, and highly successful method for employees to disclose fraud in government programs to the appropriate authorities.”
Proponents of the FCA further argue that it’s doing exactly what it’s supposed to do: deterring fraud and protecting those who bring it to light. In fiscal year 2015, the Department of Justice for the fourth consecutive year obtained more than $3.5 billion in settlements and judgments from civil cases involving fraud and false claims against the government, which brings total recoveries from January 2009 to the end of the fiscal year to $26.4 billion.
Healthcare companies are most often the target of FCA claims. Of the $3.5 billion recovered in 2015, $1.9 billion resulted from companies and individuals in the healthcare industry for allegedly providing unnecessary or inadequate care, paying kickbacks to healthcare providers to induce the use of certain goods and services, or overcharging for goods and services paid for by Medicare, Medicaid, and other federal healthcare programs. FCA claims in connection with government contracts resulted in the second largest amount of recoveries, totaling $1.1 billion in fiscal year 2015.
Rep. Trent Franks (R-Ariz.), chairman of the House subcommittee that held the hearing, suggested that incentives be given to government contractors and government program beneficiaries that self-police and self-report potential FCA violations, similar to the financial incentives afforded to whistleblowers. “We need to examine ways to give those that do business with the government meaningful incentives to detect wrongdoing and self-report it to the government,” he said.
“False Claims Act violators who self-report generally receive the same penalties and face the same damages as those who are caught,” Franks said. “I think this makes very little sense.”
Rep. Steve Cohen (D-Tenn) vehemently disagreed, arguing that companies that cheated the government out of $48 billion in fiscal year 2015 aren’t suddenly going to self-report and give themselves up. “You catch the crooks,” he said. “That’s what you do.”
While the chances of FCA reform happening any time soon appear slim, a case currently being weighed by the U.S. Supreme Court could limit FCA liability. In recent years, whistleblowers increasingly have expanded FCA liability by using a so-called “implied certification” theory, which holds that a company may be liable under the FCA for submitting a claim to the government on the theory that in submitting the claim, the company is making an implied certification that it’s complying with relevant laws, regulations, and contractual requirements—even though those obligations are not specified when the service is provided.
Circuits have split over the viability and scope of the implied certification theory, with some circuits accepting a broad version, others a narrower version, and some questioning the theory entirely. Now, the U.S. Supreme Court in the case Universal Health Services v. Escobar will decide how to distinguish between laws and regulations that only the government can enforce from those Congress intended whistleblowers to be able to enforce through the FCA whistleblower statute.
Because the implied certification theory makes up the basis for many claims under the FCA, the Supreme Court’s decision could have a significant impact on healthcare companies, government contractors, and others that conduct business with the government. A decision is expected by the end of June.