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Federal False Claims Act – Lincoln’s Law Applied to Health Care

When Congress originally passed the False Claims Act (31 USC §§ 3729-3733), no one had the health care system in mind.  The False Claims Act was also commonly referred to as the “Lincoln Law”.  The original law was focused on unscrupulous vendors who provided overpriced and often faulty supplies to the military during the Civil War.  In modern times, the False Claims Act has been commonly applied when claims are made under Federal health care programs.  The application of the law that ware originally intended to penalize war profiteers leads to draconian results when applied to the health care industry where numerous smaller claims are made by a provider every day.  However, because this law has become a significant source of revenue for the Federal government, we are not likely to see any politicians running to adjust the law to make it consistent with the realities of the modern health care system.

The Lincoln Law was unique in several ways.  The law created “qui tam” rights that permit individuals to bring suit alleging false claims and to retain a portion of the award.  The amount of potential award available to a qui tam claimant depends on whether the government chooses to take over the case after it is brought.  With Federal remedies of nearly $22,000 per claim, potential claimants have a real chance for a payday.  In fact, private litigants are often even more inflexible than the Federal government when it comes to settling a potential fraud claim.

The False Claims Act was strengthened in 1986 in response to some of the much publicized $1,000 toilet seats and other abuses with respect to companies supplying the United States military.  The 1986 amendments to the False Claims Act provided for treble damages plus civil penalties of between $5,000 and $11,000 per claim.  These legislative changes were intended to add real incentive for “qui tam” litigants to bring fraud claims.  Just a few months ago the per claim penalty under the False Claims Act was increased to a minimum of $11,000 and a maximum of nearly $22,000.

The health care industry was never the real target of the False Claims Act.  In fact, when the original “Lincoln Law” was passed in the 1860’s, there was no federal health care program in existence.  From the inception of the False Claims Act through the 1986 amendments, the primary target had been the suppliers to the defense industry.  The defense industry generally makes claims on a monthly or other periodic basis for large amounts of supplies.  Although the 1986 amendments added substantial penalties for making false claims, the impact on the defense industry does not come close to matching the impact on health care providers.

In health care, a single hospital may make hundreds of claims to the federal government per day.  False claim allegations can cover a number of years, greatly increasing the number and value of claims that may be at issue.  When treble damages plus $11,000 to $22,000 per claim are applied on top of the actual amount of a “fraudulent” claim, the obligation amount can become staggering.

When coupled with new regulations that impute False Claims Act liability based on the failure to repay an overpayment, the result can be really quite absurd and greatly disproportionate to the level of culpability involved.   For example, a simple overpayment created by a routine billing error that is not properly identified can result in potential False Claims Act liability in the millions of dollars.  Under new Federal law, failure to repay a known overpayment within 60 days creates a False Claim.  However, actual knowledge is not required.  Identification of the overpayment can be imputed if the provider should have discovered the overpayment.

Even though the False Claims Act was not originally designed to target the health care industry, there does not seem to be any momentum toward mitigating these extreme results.  To the contrary, the government is quite content to leave these disproportionate penalties in place as part of its effort to reduce cost of health care (and to generate additional revenues) by assessing astronomical fines against health care providers and to hold these penalties over their heads to force health care providers to take extreme actions to prevent compliance problems.  The government is taking a “return on investment” approach to health care fraud enforcement.  The False Claims Act allows the government to put its thumb on the scale in the “return on investment” game.  The qui tam provisions provide the government with “quasi agents” who may be disgruntled employees or others who can scout out potential claims, bring them to the governments attention, and take a piece of the financial reward.

Providers have only one real way to reduce the disproportionate impact of the False Claims Act on their operations.  This is to create an effective compliance program that proactively detects problems so they can be addressed and corrected before they create excessive risk.  Compliance programs are an outgrowth of the federal sentencing guidelines that permit reduced corporate penalties for fraud if an “effective” compliance program will actually reduce the risk of a violation occurring or depending because it forces the organization to proactively look for compliance problems and correct them before they become insurmountable.  An effective compliance program will also include regular training to staff which also reduces the risk of compliance problems.