New York Providers In The Qui Tam Crosshairs, as appeared in The New York Law Journal

Addressing the health care cost crisis by policing fraud.

Given the constant news coverage of the issue and the numerous candidate debates on the subject in presidential primary campaigns, it would be difficult for anyone to avoid considering how we might control continually increasing health care costs. In a country that spends significantly more of its gross domestic product on health care than any other nation, but lags in quality of outcomes, these economic issues are profoundly important. Moreover, New York's Medicaid program is the most benefit laden in the country and has experienced disproportionate inflation.

Both national and state legislators and executives, anxious about health care costs but unable to enact significant programmatic reform, have turned to something they feel they can effectively address: fraud, waste and abuse by providers.

The primary federal tool for this enforcement is the False Claims Act (FCA), 31 U.S.C. § 3729, which key members of Congress now are seeking to amend. The primary New York enforcement vehicle will be the recently enacted state False Claims Act, 2007 Bill Text NY A.B. 4308, Section 39, Article XIII, passed in order to qualify for certain financial incentives provided in the 2005 Federal Deficit Reduction Act (DRA), 42 U.S.C § 1396a(a)(68)).

Comparing the Two FCAs

The current version of the federal FCA provides that a person who commits any of several specified violations, particularly submitting or causing to be submitted a false claim for payment, 'is liable to the United States Government for a civil penalty of not less than $5,000 and not more than $10,000 [which has been cost-adjusted by regulation], plus 3 times the amount of damages which the Government sustains because of the act of that person.' 31 U.S.C. § 3729(a).

The New York state FCA closely tracks the language of the federal law, providing for treble damages and penalties of up to $12,000 for false claims made to the state or a local government, and 'qui tam relator' awards of up to 30 percent, the same outside amount available under the federal law.

The essential feature of the federal and state laws are their provisions for so-called 'qui tam' actions, i.e., lawsuits brought in the name of the government by private citizens known as 'relators,' functionally serving as assignees of claims owned by the sovereign. As of 1943, when Congress amended the FCA in response to the Supreme Court's decision in United States ex rel. Marcus v. Hess, 317 U.S. 537 (1943), 'parasitical' qui tam suits were precluded whenever the government had prior knowledge of the information in the complaint. The New York FCA embodies this bar as well.

Both statutes allow the respective governments to enter a qui tam action and assume sole responsibility for its conduct. The relator may continue the prosecution on his own if the pertinent government declines to take it over, and can maintain an active, though substantially subordinated role, even if a government intervenes.

If the governmental authority declines to intervene, the relator (in the words of the federal FCA) 'shall have the right to conduct the action' (31 U.S.C. § 3730(b)(4)(B)), and 'no person other than the Government may intervene or bring a related action based on the facts underlying the pending action. ' 31 U.S.C. § 3730(b)(5). State law is the same.

Given the fact that the government authority likely will continue to decline intervention in the vast majority of cases, the qualification of any given relator to proceed on his own is of paramount importance, particularly considering that the overall number of cases will grow if for no other reason than that the state has guaranteed that it will vigorously utilize its new law.

Under the federal FCA, 'no Court shall have jurisdiction over an action... based upon the public disclosure of allegations or transactions in a criminal, civil, or administrative hearing, in a congressional, administrative, or Government Accounting Office report, hearing, audit, or investigation, or from the news media, unless the action is brought by the Attorney General or the person bringing the action is an original source of the information.' 31 U.S.C.A. § 3730(e)(4)(A); Rockwell International Corp. v. United States, S.Ct., No. 05-1272, 2007 WL 895257, at *7 (March 27, 2007); United States. ex rel. Dick v. Long Island Lighting Co., 912 F.2d 13, 18 (2d Cir. 1990) ('[I]f the information on which a qui tam suit is based is in the public domain, and the qui tam plaintiff was not a source of that information, then the suit is barred.').

The New York state FCA embodies a directly analogous provision. It is likely that this area will provide the primary litigation battleground in the immediate future.

What Has Experience Taught?

Since 1986, total FCA recoveries, including qui tam cases, have exceeded $20 billion. The total attributable to qui tam settlements and judgments is about $12 billion.

As the 1986 qui tam amendments took force, non-qui tam cases substantially outnumbered qui tam filings, but the substantial monetary incentives have influenced complainants to file lawsuits rather than merely reporting alleged fraud to government agents. Thus, starting in 1995, the number of qui tam FCA filings, began to exceed non-qui tam filings, and in recent years, has come to outnumber them by about four to one.

Although over the last several years the number of qui tam filings actually has gone down slightly, perhaps suggesting that the law is a deterrent, one thing has remained constant since 1986: The federal government consistently has declined to intervene in about 80 percent of the cases filed by relators. This discernment has paid off. More than 90 percent of the amounts received in settlements and judgments in qui tam cases has come in the 20 percent of the matters in which the government has intervened.

For 2006, the latest year for which full data are available, the government recovered about $1.7 billion in non-qui tam FCA cases, and about $1.4 billion in qui tam cases; relators litigating in cases that the government declined recovered only about $16.6 million. Recently published 2007 data are about the same.

Starting in the 1990s, cases involving health care have provided the overwhelming majority of FCA filings and recoveries.

Few of these cases actually go to trial. Indeed, many providers complain that they are forced to settle, not because of the strength of the cases against them, but because of the risk of administrative exclusion from federally financed health care programs like Medicare and Medicaid.

In any event, by far the largest FCA recoveries in the most recent years have come in health care cases, with several of those recoveries approaching and exceeding $1 billion.

For New York Providers

The New York FCA, like the federal law, doesn't just pertain to health care claims, but Medicaid was the prime focus of the DRA, and as of Oct. 1, 2007, and every Jan. 1 thereafter, health care entities that receive $5 million or more in Medicaid funds in New York state are required to provide written certification of their compliance with the DRA.

These entities must inform their employees, contractors and agents about federal and state False Claim Act provisions, penalties and protections and the entity's policies and procedures regarding the prevention of waste, fraud and abuse. Similar compliance also is required for those providers of care, services and supplies for whom the medical assistance program is a substantial portion of their business, and all of those entities licensed under Articles 28 or 36 of the Public Health Law or 16 or 31 of the Mental Hygiene Law.

New York has hired an experienced former federal prosecutor to run the Office of Medicaid Inspector General. He has pledged to the federal government that the state will recover in excess of $1 billion in the immediate future through the use of the new state FCA. Much of this will come from resolution of coordination of benefits and other regulatory matters, but a large share is predicted to come from cases involving alleged fraud.

Many of these cases will be the traditional frauds in which services have been billed for but not provided. However, in his past career, the Medicaid Inspector General has emphasized false certification theories, i.e., alleged fraud for services actually provided but where compliance with legal requirements and standards allegedly was falsely certified. Judicial decisions have supported this approach and, as noted, the DRA has provided New York with a program that mandates certifications. Without substantial and effective compliance efforts, New York providers will be greatly at risk.

Initially, the OMIG is likely to bring a significant number of cases itself, but the qui tam bar is likely to follow on its heels. The national and state legislatures have expressed a strong expectation that state Medicaid fraud cases be pursued expansively and, as described earlier, relators are free to carry on cases where the government has refused to intervene.

Again, the public disclosure/original source jurisdictional bar will be ever-important on the defense side, but there is no telling at this point whether state court judges will be as stringent in applying this bar as federal court judges have been.

Amending the Federal FCA

In the wake of several recent judicial decisions, a bipartisan group of legislators has introduced 'The False Claims Correction Act of 2007.' Among the proposals in this bill is one that would substantially lower the jurisdictional bar to 'parasitic' relators.

As noted, the FCA provides that if a matter has been disclosed to the government, and the Department of Justice then declines to intervene in a relator's suit, the relator may proceed, but only if he or she is the 'original source' of the information. This jurisdictional bar was intended to prevent relators from reaping windfalls when what they report is already in the public domain

In Rockwell International Corp. v. United States, supra, the Supreme Court denied an FCA recovery to an individual whose theory of fraud had been rejected by the government, which proceeded on grounds entirely unmentioned by the relator and unknown to him. The Court, in holding that the relator was not an original source, reiterated that such status is dependent upon direct and personal knowledge. Thus, under the current state of the law, someone who is a mere echo, who provides the government no ascertainable benefit, cannot share in a recovery generated by government agents or others.

Although the sponsors present no evidence that the public disclosure/original source jurisdictional bar has created any disincentive to the reporting of fraud, they would erase the jurisdictional bar, and only allow dismissal upon the motion of the Attorney General.

They also would narrow the definition of a 'public disclosure' to the point of rendering the term nearly useless as a screen, requiring only that a public disclosure be dependent upon the allegations concerning all of the essential elements of liability (ostensibly both factual and legal), and it be made 'on the public record,' or have 'been disseminated broadly to the general public.'

These terms are essentially undefined. Nor would a relator create a public disclosure from having obtained the essential information from an official source through a Freedom of Information Act request or other 'information exchanges' with law enforcement officials or government employees generally. Moreover, the relator would not be disqualified, unless 'he derived his knowledge of all of the essential elements of liability' from the public disclosure.

If enacted, the proposal only would lead to increased expense and litigation of federal fraud matters, in New York and everywhere else. It would be unlikely to lead to the revelation of otherwise undisclosed large case frauds of the sort that have been producing the overwhelming percentage of FCA recoveries, although it probably would lead to unnecessary payouts to relators who have contributed nothing of a material nature.

Another controversial aspect of the 2007 bill is its provision that would allow FCA actions to be brought by employees of the federal government. There is no similar provision in the new state law.

This proposal, which raises ethical and employment issues, has been considered before but has not been enacted. The current sponsors would allow a federal employee to proceed if he or she had reported the alleged fraud up the employment chain of command or to an Inspector General, and 12 months had elapsed from the time of disclosure without the Attorney General's having filed an action based on the information. The same over-generous definition that elsewhere would apply generally to an original source would protect the reporting government employee.

Government employees are legally obligated to report improprieties of which they learn in the course of their official duties. That is at least one of the things for which the public pays them. It is unclear why such employees ought to be provided an alternative mode of compensation or reason why their best efforts should be applied on behalf of themselves rather than on behalf of their public employer. However, if they gain this ability, either through legislation or judicial fiat, again there is a risk to providers of increased and increasingly protracted litigation.

Interestingly, the sponsors of the False Claims Corrections Act propose to amend the FCA's requirement that the claim at issue must have been presented to an officer or employee of the U. S. government or to a member of the armed forces.

Understandably applying the plain language of the statute, the D.C. Circuit has held that requests for payment presented to an Amtrak employee, albeit that Amtrak is a federal grantee, were not 'presented' to a government employee. United States ex rel. Totten v. Bombardier Corp., 380 F.3d 488 (D.C. Cir. 2004). The Supreme Court recently granted certiorari to review a decision on a related issue that arose in the Sixth Circuit, United States ex rel. Thacker v. Allison Engine, Inc., 471 F.3d 610 (6th Cir. 2006), cert. granted Oct. 29, 2007.

The sponsors would strike the current language and focus instead on the requirement that what is being sought is government money or property, and would have it that the claim could be submitted to anyone. Besides representing a current line of defense, these cases provide additional interest.

The question of whether submission of a claim for payment to a state Medicaid official constitutes presentment to an officer or employee of the U.S. is arguably an open one. If the pending bill passes, the issue is moot. However, depending upon what the Supreme Court holds, the question may take on greater life.

Query: Is the passage by many states, including New York, of FCAs fomented by the federal DRA and intended to deal with Medicaid false claims in state courts, evidence of the fact that Congress views Medicaid claims administration as something outside the workings of the federal government and hence outside the federal FCA?

Conclusion

False Claims Act regimes have proven to be a useful and powerful weapon in the federal and state governments' fight against fraud. However, the jurisdictional bar has been an important protection to defendants.

The advent of the New York state FCA and its related certification regime, and recent legislative and judicial developments pertinent to the federal FCA portend both changes in the law and increased litigation and risk, particularly to New York health care providers. Strong compliance and good counsel are mandatory.

Stuart M. Gerson, a former Assistant Attorney General for the Civil Division of the U.S. Department of Justice and acting Attorney General, is a senior litigation partner in the New York and Washington, D.C. offices of Epstein Becker & Green.

Copyright 2007 ALM Properties, Inc. All rights reserved. Reprinted with permission.