United States: Unheralded Provisions of 2005 DRA Will Require Additional Employee Fraud Training Effective January 1, 2007

On February 16, 2006, we circulated a client memorandum describing the Deficit Reduction Act of 2005, P.L. 109-71 (the "DRA"), signed into law by President Bush on February 8, 2006.¹ The legislation contains extensive provisions intended to reduce net Medicare spending by over $5 billion over five years, and cut Medicaid spending by over $4.7 billion, also over five years. Tucked away in this massive law is an item requiring all entities that make or receive at least $5 million in annual Medicaid payments to establish specific written policies and procedures to inform employees and others about certain federal and state false claims and whistleblower laws beginning January 1, 2007.² Implementing federal regulations are not required, although they may be forthcoming. To ensure that appropriate procedures are in place by that deadline, we recommend that entities with significant interactions with state Medicaid programs (including through their participation in the Medicaid rebate program) begin now to review their employee training and compliance procedures.

There are six new employee training and compliance requirements under the DRA, which are summarized below:

(1) Affected Entities. The new requirements apply to any entity that receives or makes annual payments of at least $5,000,000 under a state Medicaid plan. The inclusion of entities that make payments, along with entities that receive them, make these provisions applicable to a broad array of entities in the health care industry, including, for instance, pharmaceutical manufacturers that pay rebates to state Medicaid programs, along with providers that receive Medicaid payments for services rendered.

(2) Written Policies and Procedures. The DRA requires written policies and procedures. Training is not specifically required, but the provisions contemplate that entities dealing with state Medicaid programs will inform their employees of their policies.

(3) Who to Inform. The policies and procedures must inform all employees, including management, and anyone who could be considered a contractor or agent of the entity.

(4) Content of the Policies and Procedures. The policies and procedures must provide information on the following laws, including the role of such laws in preventing and detecting fraud, waste and abuse in federal health care programs:

• The federal False Claims Act;

• Federal administrative remedies for false claims and statements;

• State laws pertaining to civil or criminal penalties for false claims and statements; and

• Whistleblower provisions under the federal and state laws.

(5) Describe the Entity’s Policies and Procedures. The policies and procedures must also provide details regarding the entity’s policies and procedures for protecting fraud, waste, and abuse. (6) Employee Handbook. The entity must include in its employee handbook: (a) the specific discussion of applicable fraud and abuse laws, (b) the rights of employees who are whistleblowers to be protected from retaliation, and (c) the entity’s policies and procedures for detecting and preventing fraud, waste, and abuse.

The employee training and compliance provisions appear to have their genesis in a survey sent to large pharmaceutical manufacturers approximately two years ago by Senator Charles Grassley, chairman of the Senate Committee on Finance, inquiring about whether these manufacturers would voluntarily inform employees of the federal False Claims Act, including its qui tam whistleblower provisions. Senator Grassley was a principal sponsor in the Senate of the 1986 amendments to the False Claims Act that significantly strengthened its whistleblower provisions. Many of the individual companies responded that they did, or would, provide information to employees about the False Claim Act, but gave few specifics. The Pharmaceutical Research and Manufacturers of America ("PhRMA"), however, offered the collective view that too much internal emphasis on the False Claims Act and its whistleblower provisions would detract from internal compliance efforts, which encourage employees to work with their companies to proactively solve issues of fraud and abuse and make voluntary corrections. Senator Grassley disagreed with PhRMA, and used the individual letters to support his conclusion that these communications with employees should be required. This new DRA provision is the result.³

Companies must walk a fine line in terms of how they are communicating with their employees and agents about whistleblower activity. The statute requires providing detailed information to employees, yet companies will want to be careful not to encourage abuse of the whistleblower provisions. While there may be instances in which the False Claims Act is the appropriate approach, our experience has been that most of the time, employee use of internal compliance procedures will allow the company to better and more quickly address any issues it may have, and companies should encourage employees to make use of those procedures. Moreover, employees in particular need to understand the potential difficulty with jumping into a lawsuit that will necessarily put them in an adversarial relationship with their employer, which they may not fully understand if the provisions are not correctly explained. This is true even with the best safeguards against retaliation, because a whistleblower often ends up feeling extremely uncomfortable with co-workers and management of the company regardless of how the employer handles the matter. Furthermore, whistleblower actions can go on for years, and recoveries are always uncertain, as is the share that the whistleblower may take. Such actions also can cause great harm to the employer, as they are expensive, consume large amounts of resources, and can alienate employees from each other and from the company. This can be as damaging for the whistleblower as well as the employer.

Thus, the whistleblower option should be objectively described with both its benefits and risks, so that employees can make informed choices about how to pursue potential fraud and abuse issues that they believe they see. The focus must remain on the employee or agent seeking to do what is right, whether that means using the internal compliance procedure, or going outside. Whistleblower provisions should be viewed as only one tool of many, and appropriate only where the organization has not been responsive to internal compliance efforts. Communicating this to employees, yet still complying with state provisions enacted under the DRA, will not be an easy task.

In addition, this is a significant step for Congress to require an across-the-board health care compliance program as a condition of participation in the Medicaid program. As we have seen with individually-negotiated compliance programs, if the entity does not implement appropriate procedures, or if those procedures are not followed, the entity risks the federal or state government contending that the entity is liable under federal and applicable state false claims laws every time it submits a claim for Medicaid reimbursement. Thus, another layer of compliance now must be carefully implemented and strongly enforced, lest companies risk a new theory of liability for payments they receive from government sources.

Health care providers, pharmaceutical manufacturers, and any other entities that make or receive Medicaid payments exceeding $5,000,000 per year should review relevant procedures now to determine what changes, if any, are necessary in view of these new provisions. This will enable that appropriate procedures to be in place by the deadline of January 1, 2007, ensuring that employees, contractors, and other agents receive appropriate and balanced information.

This article is presented for informational purposes only and is not intended to constitute legal advice.