Health-care Fraud and the False Claims Act: The Supreme Court Supports a Federal Weapon

15 Min Read By: Shelley R. Slade, Thomas A. Colthurst

Whistle-blowers, take heart. The Supreme Court is on your side. And that certainly includes those reporting health-care fraud.

In recent years, the federal government has turned to a Civil War era statute to attack health-care fraud and other types of fraud committed against taxpayer dollars. That statute, the False Claims Act (FCA), 31 U.S.C. ? 3729 et seq., permits the United States to recover treble damages and penalties of up to $10,000 per knowing false claim, and allows private whistle-blowers to sue in the name of the United States and recover sizable bounties.

In a critical decision in May, the Supreme Court for the first time addressed whether the False Claims Act’s whistle-blower provision withstands scrutiny under Article III of the U.S. Constitution. In Vermont Agency of Natural Resources v. United States ex rel. Stevens , 120 S. Ct. 1858, 146 L. Ed. 2d 836 (2000), the court confirmed the continued viability of this tool by holding that whistle-blowers do have standing to pursue claims under the FCA. After addressing this issue, the court did, however, hold that whistle-blowers may not sue states under this statute and left unclear whether the federal government could pursue those claims.

Stevens is basically good news for the FCA in that a recurring and troubling constitutional challenge to whistle-blower suits has been resolved. Left in place is a powerful, financial incentive that brings considerable fraud to light. However, the ruling also narrows the universe of fraud that will be brought to the attention of the Department of Justice, while containing language that likely will serve as ammunition for future defense challenges to FCA proceedings. This article discusses the expected effect of this decision in the context of the FCA’s history.

The False Claims Act permits either the federal government or a private party acting on the government’s behalf (a qui tam plaintiff, relator or colloquially, whistle-blower) to sue any “person” for damages and penalties caused by “knowing” false claims for government funds. The qui tam plaintiff can receive a share of any recovery. The government may assume control of the whistle-blower’s case, but if it does not, the whistle-blower may proceed on his or her own.

Although enacted in 1863, the FCA was used sparingly before the late 1980s. Courts had barred whistle-blower suits if the information were already known to the government. In addition, several federal circuit courts had imposed high standards of proof and scienter, requiring “clear and convincing evidence” and “intentional” false claims.

Congress removed these roadblocks in 1986. The amended FCA authorized whistle-blowers to bring FCA suits regardless of whether the government already was aware of the fraud, so long as they were “original sources” of any allegations that had been publicly disclosed.

Congress also specified that the burden of proof had to have the usual civil “preponderance of the evidence” standard and clarified that the act authorized suits against (1) the “ostrich with its head in the sand” who submits false claims with recklessness or with deliberate ignorance of their truth or falsity, and (2) those paid by third parties receiving federal funds under grants or contracts.

In addition, Congress raised the possible award for a proper qui tam plaintiff in cases taken over by the government from a maximum of 10 percent, to a guaranteed 15 to 25 percent of the recovery (depending on their contribution to the success of the action.) Congress also increased the government’s remedies from double to treble damages, and from $2,000, to $5,000 to $10,000 for each false claim.

It is important to note that Congress signaled its intent that the law be used to combat health-care fraud. The Senate Judiciary Committee explained that the law “is intended to reach all fraudulent attempts to cause the government to pay out sums of money or to deliver property or services . . . A false claim for reimbursement under the Medicare, Medicaid or similar program is actionable under the act.” S. Rep. No. 99-345 at 9.

As a direct result of the 1986 amendments, the government saw a tremendous increase in qui tam filings. The number rose from 33 in fiscal year 1987 to 483 in fiscal year 1999. By February 2000, the United States had recovered more than $3.5 billion through FCA qui tam cases, with $550 million of this amount having been paid to the private whistle-blowers who brought the cases. Initially, the greatest percentage of these recoveries involved defense-contract fraud. This changed as the magnitude of the health-care fraud problem became apparent.

In 1992, the General Accounting Office released a report estimating that 10 percent of provider billings to Medicare were fraudulent. In 1993, Attorney General Janet Reno set health-care fraud as one of her top priorities. Subsequently, in the Health Insurance Portability and Accountability Act of 1996, Congress provided more than $150 million in new health-care fraud enforcement funds for the DOJ and the Department of Health and Human Services (HHS) for FY 1997, and 15 percent more each year thereafter until 2003 (assuming the government recovered at least as much in multiple damages and penalties in health-care fraud cases.)

By 1993, recoveries in FCA cases against health-care providers began climbing significantly, and, in 1997, surpassed the government’s recoveries from defense contractors. In Fiscal Year 1997, the government brought in almost $1 billion in False Claims Act judgments and settlements in the area of health-care fraud alone. By February 2000, more than half of the $3.5 billion that Justice had recovered under the amended qui tam provision since 1986 came from cases alleging fraud against HHS.

Most of the FCA cases in the health-care area have targeted private insurance companies, clinical laboratories, hospitals and other providers, although the government has also investigated the conduct of state agencies and state-owned medical facilities.

Examples of the latter cases include United States ex rel. Zissler v. University of Minnesota ($32 million settlement of grant-fraud claims) and United States ex rel. Kready v. University of Texas Health Science Center at San Antonio ($17.2 million settlement of allegations that the teaching hospital violated Medicare rules on billing for faculty doctors). (Also note Department of Justice press releases concerning additional settlements with state-owned teaching hospitals in the so-called “Physicians at Teaching Hospitals” or “PATH” project; and, U.S. ex rel. Denoncourt v. New York State Department of Social Services ($27-million settlement resolving claims that New York submitted false claims for funds to train Medicaid and other social service workers).

Since 1992, there have been dramatic increases in the size of recoveries in individual health-care fraud cases, both by the government and by whistle-blowers. After a $111-million settlement with National Health Laboratories in 1992, additional record settlements were reached with Smith-Kline Beecham Clinical Laboratories ($325 million), Blue Cross and Blue Shield of Illinois ($140 million), and National Medical Care ($375 million). In several health-care cases, whistle-blowers received more than $5 million of the government’s money.

On Nov. 13, 1999, the New York Times reported that Medicare spending had dropped for the first time in the history of the program, and that “efforts to rein in fraud” were at least partially responsible for the decline.

The government’s aggressive and very successful enforcement program was met by allegations by the hospital industry that the government was improperly and overzealously enforcing the statute, and prompted repeated defense challenges to the constitutionality of the whistle-blower provision.

The American Hospital Association (AHA) was particularly aggrieved by the department’s “national initiatives” that targeted violations of Medicare billing rules, and launched a grassroots campaign to persuade Congress to create new FCA defenses for health-care providers. The AHA was not successful, largely because the Senate recognized that the FCA effectively addresses a serious national problem. Nonetheless, to respond to the criticisms, in June 1998, Deputy Attorney General Eric Holder issued “Guidelines on the Use of the FCA in Civil Health Care Fraud Cases” to formalize policies on using the FCA, and, in doing so, provided the Senate with a viable alternative to amending the FCA.

Meanwhile, various court challenges to the FCA’s qui tam provisions were winding their way through the courts, mostly without success. By the fall of 1999, five courts of appeals had rejected the argument that relators lacked “standing” under Article III of the U.S. Constitution to bring claims on behalf of the government. Three courts of appeals had held that qui tam suits did not violate the “take care” clause in Article II, and the “separation of powers” doctrine, which gave the executive branch the power to decide how to enforce the laws, while the opposite conclusion was reached by one circuit in Riley v. St. Luke’s Episcopal Hospital, 196 F.3d 514, reh’g en banc granted, 196 F.3d 561 (5th Cir. 1999).

The Supreme Court finally put the Article III standing issue to rest in Stevens. Stevens is a qui tam suit filed by Jonathan Stevens against his former employer, the Vermont Agency of Natural Resources. Stevens claimed that Vermont had submitted false claims in connection with EPA-administered grant programs. The state had challenged the suit under the 11th Amendment, and on the ground that a state is not a “person” who can be sued under the FCA.

Before reaching Vermont’s challenges, the court determined sua sponte to address the threshold issue of whether relators had Article III standing to bring qui tam actions. Justice Scalia’s opinion for the court ruled that whistle-blowers do have standing because the bounty provision for relators operates as a partial assignment of the government’s damages claims under the FCA. Scalia noted “the long tradition of qui tam actions in England and the American colonies,” and concluded that the partial assignment suffices to give qui tam plaintiffs the “injury in fact” required for standing to sue in federal court. (120 S.Crt. at 1863)

This resolution of one constitutional question is qualified by Footnote 8, which states that two other constitutional issues remain open, specifically whether qui tam suits could pass muster under the Article II “take care” clause and the “appointments” clause of Article II, Section 2, which vests the president with exclusive power to select the government’s principal officers. (120 S.Crt. at 1865)

Proceeding to the central issue, the majority then held that qui tam plaintiffs may not sue states under the FCA. The majority applied to the FCA’s text the court’s “long-standing interpretive presumption that ‘person’ does not include the sovereign” and examined whether the statute’s liability provision (which imposes liability on “any person”) contained any “plain statement” that the term “person” includes states. (120 S.Crt. at 1866) The majority concluded that relators may not sue states because the FCA’s provisions “far from providing the requisite affirmative indications that the term ‘person’ included states for purposes of qui tam liability, indicate quite the contrary.” Id. at 1870.

The majority also noted that, “the current version of the FCA imposes damages that are essentially punitive in nature, which would be inconsistent with state qui tam liability in light of the presumption against imposition of punitive damages on governmental entities.” Id. at 1869. In doing so, the court for the first time found the FCA’s remedies to be punitive on their face.

Scalia seemingly took pains to limit the majority’s ruling to “private” FCA actions (that is, those initiated by qui tam relators.) He consistently used the term “qui tam” or “private” when referencing the suits at issue, and in a footnote distinguished Supreme Court holdings that authorize federal suits against states. Id. at 1866, n. 9. Moreover, Justices Ginsburg’s and Breyer’s concurring opinion explained that, “the clear statement rule applied to private suits against a state has not been applied when the United States is a plaintiff,” and commented that the majority’s decision left open the issue of whether the government may sue states under the FCA. Id. at 1871.

Notwithstanding the foregoing, it is not at all clear that the Supreme Court would authorize government FCA actions against states if the issue were squarely before it. The court not only held that the FCA lacks “affirmative indications” that Congress meant for the law to be used against states, it also concluded that the statutory language affirmatively indicates the contrary.

With regard to the most far-reaching issue decided by the court — whether whistle-blowers may sue at all under the FCA — Stevens is great news for the federal government’s health-care fraud enforcement efforts. The court’s resolution of the Article III standing question eliminates an issue that has bedeviled qui tam actions for years.

In finding Article III standing, the court affirmed the constitutionality of a masterfully crafted statute that turns silent witnesses into government informers. Moreover, the court put to bed an argument that has repeatedly delayed the resolution of qui tam cases and also handicapped the government’s efforts to expeditiously recover dollars lost to Medicare and other fraud. However, not all the possible constitutional challenges to the qui tam provision have been resolved, as Scalia’s Footnote 8 expressly stated.

Stevens’ main holding that private individuals cannot sue states under the FCA likely will adversely affect Uncle Sam’s ability to recover damages from state entities committing fraud on federal programs. While there may well be litigation to determine whether the court’s ruling affects municipal entities and state-owned medical facilities as well as state governing bodies, within the category of affected cases, Stevens will have unfortunate, chilling effects.

In the first instance, the government will be less likely to learn of the frauds involving states since whistle-blowers have lost the financial incentive to report such matters. In addition, the ruling may discourage federal agencies from pursuing these cases because of the legal uncertainty as to whether the government has a cause of action.

Finally, the court’s conclusive statement — bereft of any empirical analysis — that the FCA imposes damages “that are essentially punitive in nature” is likely to spawn litigation in a number of areas. For example, this language may be cited in support of challenges under the “double-jeopardy” clause of the Fifth Amendment of the Constitution in instances in which the government elects both to allege violations of the FCA and prosecute a provider under a criminal law.

The double-jeopardy clause provides that no “person [shall] be subject for the same offence to be twice put in jeopardy of life or limb” and bars successive criminal punishments for the same offense. Hudson v. United States, 522 U.S. 93, 98-99 (1997). Under certain circumstances, a civil sanction can be deemed criminal punishment for purposes of the double-jeopardy clause. Id..

The court’s characterization of the FCA as “essentially punitive” also may be cited in support of challenges to FCA actions under the Eighth Amendment’s proscription against “excessive fines.” This clause applies to penalties so long as they are “punitive in part” (United States v. Bajakajian, 524 U.S. 321, 329, n. 4, and 331, n. 6 (1998)), and applies whether the penalties are criminal or civil (see, for example, United States v. Ahmad, 2000 U.S. App. LEXIS 11728, at 31, n.4).

However, there are responses to these constitutional arguments if they arise in litigation. With regard to double jeopardy, even if the government uses a traditional criminal law along with the FCA to address the same offense, a court nonetheless could find that the FCA’s damages are not a “criminal penalty” subject to the constraints of the double-jeopardy clause since “only the clearest proof will suffice to override legislative intent and transform what has been denominated a civil remedy into a criminal penalty.” United States v. Ward, 448 U.S. 242, 249 (1980).

Courts must resolve the question of whether a civil remedy is, in fact, a criminal penalty, through an analysis of seven factors. See Hudson, supra, 522 U.S. at 99-100. While several of these factors examine whether the sanction is considered punishment, several other factors, including whether the sanction involves an affirmative disability or restraint, and whether a purpose other than punishment is assignable to it, point to a conclusion that the FCA’s damages and penalties are not “criminal” punishment.

The government also could answer the excessive-fines argument on its merits. A court may only find a “penalty” subject to the excessive-fines clause to violate the clause if it is “grossly disproportional to the gravity of a defendant’s offense.” United States v. Bajakajian, 524 U.S. at 334. This analysis is case-specific and fact-intensive. In Bajakajian, the Supreme Court reviewed a forfeiture of $357,144 from a traveler who failed to declare that he was transporting more than $10,000 out of the United States. The court found an Eighth Amendment violation. The court noted that his offense was an isolated “reporting” offense unconnected to other illegal activities, and caused minimal harm, “no fraud on the U.S.” and “no loss to the public fisc.” Id. at 337-39.

Recently, the Fourth Circuit distinguished Bajakajian in a case involving an elaborate, long-running, currency-transaction reporting scheme that was related to customs and tax fraud, and put at risk numerous players. Ahmad, supra.

Health-care fraud cases often involve thousands of relatively small claims submitted over a period of years. Defendants conceivably could be liable for FCA penalties many times in excess of the actual damages since the penalties could be assessed at the statutory maximum of $10,000 per claim plus treble damages even when the amounts of the individual claims are much less than $10,000. But unlike Bajakajian, such cases ordinarily involve persistent misconduct, damage to the federal treasury, and considerable societal harm, and so, under Ahmad’s rationale, heavy penalties are more likely to survive an Eighth Amendment challenge.

Moreover, the government can avoid both the double-jeopardy and excessive-fines arguments through careful prosecutive and litigation choices. Since the double-jeopardy clause prohibits successive prosecution only for the “same offense,” the double-jeopardy issue will not even arise if the criminal prosecutors either (1) charge a provider with an offense that does not include knowing, false claims as elements, or (2) prosecute the provider for specific health-care claims not covered in the allegations in the civil action. See Blockburger v. United States, 284 U.S. 299, 304 (1932) (setting forth “same elements” test).

With regard to excessive fines, the government can and does refrain from reflexively seeking statutory penalties in addition to treble damages for every false claim. In fact, it rarely seeks penalties in negotiated settlements — which are how civil FCA disputes are usually resolved.

Stevens has not resolved all the questions about the FCA’s use, and some of its language may be used in future challenges to the statute. But the court has resolved the Article III standing question and in doing so has sent a strong signal that this useful statute will remain important in fighting health-care fraud.

By: Shelley R. Slade, Thomas A. Colthurst

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