The False Claims Act ("FCA"), 31 U.S.C. 3729, et seq., once an arcane, Civil War era relic, has enjoyed unprecedented growth over the past twenty years. In 1988, cases brought under the FCA returned $350,000 to the federal government; through the first nine months of 2006, they returned over $3.1 billion. And, the statute's powerful remedies and impressive returns are finally getting noticed.
On December 3, 2006, the New York Times profiled the whistleblower in a major FCA case against a major oil company. Two days later, the CBS Evening News featured a story about an FCA settlement in which healthcare giant Omnicare agreed to pay $102 million to settle Medicaid fraud cases in 42 states. Also making news that same day was the case of Rockwell International Corp. v. U.S. ex rel. Stone , which was before the Supreme Court on oral arguments addressing a critical restriction on a whistleblower's ability to bring lawsuits under the FCA. Little more than a week later, the incoming Chairman of the Senate Judiciary Committee, Sen. Patrick Leahy (D-VT), specifically mentioned the False Claims Act in public remarks at Georgetown University, where he vowed to use his power to press the Justice Department to accelerate and prosecute aggressively FCA lawsuits involving Iraq-related defense contracts.
Not only are these high-profile stories evidence of the past and present success of the FCA as a tool for regulatory enforcement, but they also add fuel to the FCA fire. Despite its track record of success over the past twenty years, the FCA remains relatively unknown to the general public. But, as knowledge of the FCA and the financial rewards reaped by successful whistleblowers increases, so will the number of FCA lawsuits. The whistleblowers in the Omnicare case will receive over $7 million, adding to the more than $1.5 billion in payouts to whistleblowers over the past twenty years. In criminal law parlance, the publicity about FCA cases and its rewards for whistleblowers has provided potential whistleblowers with the means and the motive - all they need now is opportunity.
I. History Of The False Claims Act
Originally known as the "Lincoln Law," the FCA was enacted at the urging of President Lincoln in 1863 in response to fraud perpetrated by Civil War contractors that sold defective weapons to the Union army. The FCA fell into disuse, but was revitalized in 1986 when Congress amended the Act to provide for increased monetary awards, greater financial incentives for relators, and a lower burden of proof. More than 6,500 FCA cases have been filed by relators since the 1986 amendments, and the defendants in those cases have come from virtually every program involving federal funds.
From 1986 to 1992, most cases targeted defense contractors, in keeping with the statute's history. Since 1996, however, roughly half of all FCA cases filed and more than two thirds of all FCA recoveries have involved healthcare fraud. Healthcare cases have proven to be the most lucrative area for relators and the government: the fifteen highest FCA recoveries involve the healthcare industry, including a $900 million settlement reached with Tenet Healthcare this past summer, the largest FCA recovery ever.
II. FCA Basics
The FCA prohibits those doing business with the government from submitting false claims for payment or making false statements in support of claims for payment. Civil lawsuits against violators can be brought directly by the United States (through the Attorney General) or by a whistleblower (a "relator") on behalf of the government. When a relator files an FCA case, he or she does so under seal. The lawsuit remains under seal while the government investigates the relator's claims, a process that can often take years. The government may also elect to expand its investigation to include criminal matters, which can lead to simultaneous civil and criminal proceedings against a company. Once it has completed its investigation, the government may intervene in the suit and take over its prosecution (the relator remains as a party), or it may decline to intervene. If the government declines, the relator may still pursue the action on behalf of the government. Statistics show that defendants fare far worse when the government intervenes, and thus, it is to a defendant's advantage that the government declines.
The FCA has two unique components that make it a powerful tool for regulatory enforcement. First, the hallmark of the statute is that it allows suits to be brought by private citizens, who are usually company insiders with access to critical information about their employer's operations that serves as the basis for their FCA claims. This mechanism allows the government to learn of fraud it would otherwise not uncover. Relators are rewarded handsomely for their efforts - a successful relator can receive up to 30% of the total recovery. In addition, the FCA prohibits retaliation against employees for pursuing an FCA case, whether or not the case is ultimately successful, and provides remedies including reinstatement, damages, and reasonable attorneys' fees.
The second striking feature of the FCA is its penalty provisions. The FCA has dual damage provisions, providing for treble damages plus penalties of up to $11,000 per false claim. These penalties often work together to create massive damages. The per-claim penalty provision is particularly useful in high volume healthcare practices, where, for example, submission of a large number of false patient invoices can result in millions in penalties, even if the government suffers only nominal damages. In defense procurement cases, the treble damages provision often provides the greatest impact, as the value of defense contracts often stretches into the billions of dollars.
III. Recent Trends
Three recent trends indicate that FCA cases are likely to increase in the future, in both the healthcare and defense arenas. Legislative developments have resulted in an expansion of the FCA's reach in the healthcare arena. On the defense side, contracts involving the Iraq war are ripe targets for whistleblowers. As Senator Leahy indicated, the new Democratic majorities in the House and Senate will likely pressure the Justice Department to dedicate resources to pursuing aggressively cases alleging defense fraud.
A. Use of the FCA in the Healthcare Industry
Because the government pays in excess of $500 billion in annual Medicare and Medicaid expenditures, the healthcare industry will likely continue to be a prominent target of FCA suits. In addition, three legislative developments will likely result in an increase of FCA cases in the healthcare industry: (1) Medicare Part D; (2) the Deficit Reduction Act; and (3) state false claims acts.
The new Medicare Part D program ("Part D") took effect in January 2006 and provides broader prescription drug coverage to Medicare participants through a variety of approved private plans. Because many more drugs are covered, the marketing, prescription, and provision of these drugs now fall within the ambit of the federal healthcare regulatory structure. In addition, the technical requirements of Part D itself are incredibly complex, creating vast new avenues for False Claims Act liability. Because of the massive expenditure of public funds that will occur under Part D, the government has indicated that it will monitor closely for potential violations. Jim Sheehan, an assistant U.S. Attorney for the Eastern District of Pennsylvania has said publicly that Part D will "drive a new federal false claims agenda" and will be "a new avenue for whistleblowers."
If Medicare Part D is a new avenue for whistleblowers, then the federal Deficit Reduction Act of 2005 (the "DRA") requires their employers to provide the roadmap. The DRA requires entities that receive $5 million or more per year in Medicaid payments to create written policies and procedures for preventing fraud, waste, and abuse and to include those procedures in the employee handbook along with a description of the FCA and its protections for whistleblowers. Essentially, employers are required to provide a tutorial to potential whistleblowers. Because the DRA makes compliance with these requirements a condition of receiving Medicaid reimbursement, failure to comply could result in the forfeiture of all Medicaid payments during the period of noncompliance, and any false certifications of compliance could give rise to an FCA lawsuit.
Finally, the DRA provides financial incentives for states to enact their own false claims acts. The DRA provides that a state that has a false claims statute that meets certain minimum standards in effect on January 1, 2007 earns an additional 10 percent of any Medicare/Medicaid funds recovered under that statute. This requirement, of course, creates a strong incentive for states to enact their own FCA statutes. Currently, the District of Columbia and 18 states: Arkansas, California, Delaware, Florida, Hawaii, Illinois, Indiana, Louisiana, Massachusetts, Michigan, Montana, Nevada, New Hampshire, New Mexico, Tennessee, Texas, Utah, and Virginia; have enacted their own false claims statutes. In large part because of the enactment of the DRA, an additional 17 states have FCA legislation pending. The existing and pending state statutes vary - some address Medicare/Medicaid fraud only, others largely parrot the federal FCA, and a few even include additional liability provisions. While the primary target of state statutes is Medicare/Medicaid fraud, they have the potential to expand FCA liability for other entities that do business with a state government. It is common practice for a relator alleging fraud that involves both state and federal dollars to file under the federal FCA and the appropriate state act simultaneously. Indeed, the Omnicare settlement featured by CBS included a $52.5 million settlement with the state of Michigan, the largest civil fraud settlement in state history.
B. Use of the FCA in Defense Procurement
FCA cases involving defense contractors have had a much lower profile during the past few years, as the government racked up some staggering settlements with companies in the healthcare industry. That lower profile, however, may be short-lived. With the Iraq war came a host of new defense contracts. Because the investigation period for a complex FCA case can often last several years, there may be a number of major FCA cases against defense contractors that are still under seal. As Senator Leahy indicated, Congress may use its oversight power to ratchet up the focus on defense contracts. This higher profile may result in employees of defense contractors being more aware of the financial opportunities offered by the FCA, leading to an increase in FCA cases.