The president signed into law on May 20 the Fraud Enforcement and Recovery Act of 2009, S. 386, (FERA). This legislation makes material changes to the civil False Claims Act (FCA), which is the primary civil enforcement tool used by the federal government to deter and sanction health care fraud. While the main focus of FERA is to beef up the federal government's ability to fight fraud in the financial industry, changes to the FCA, 31 U.S.C. § 3729, apply equally to the health care industry.

Changes to the Law

Health care companies should consider changes to the FCA in the following key areas.

Fraud Against Government Contractors and Grantees

According to a Judiciary Committee report published in March, the FCA was amended "to clarify and correct erroneous interpretations of the law" that were decided in Allison Engine Co. v. United States ex rel. Sanders, 128 S.Ct. 2123 (2008) and United States ex. rel. Totten v. Bombardier Corp., 380 F.3d 488 (D.C. Cir. 2004).

The Supreme Court held in Allison Engine that "a defendant must intend that the Government itself pay the claim" for there to be a violation of the False Claims Act. As a result, when a subcontractor in a large government contract knowingly submits a false claim to a general contractor there can be no liability unless the subcontractor intended to defraud the federal government, not its general contractor. FERA revises the FCA to remove this intent requirement.

Similarly, a number of courts have read Totten to mean the FCA does not reach false claims that are (1) presented to government grantees and contractors, and (2) paid with government grant or contract funds. To fix this, FERA amends the FCA to clarify that liability attaches whenever a person knowingly makes a false claim to obtain money or property, any part of which is provided by the government without regard to whether the wrongdoer deals directly with the government; agent acting on the government's behalf; or with a third-party contractor, grantee or other recipient of such money or property.

Conspiracy

The FCA applies to individuals who knowingly conspire to defraud the government. Some courts have interpreted the conspiracy provision narrowly, suggesting that conspiracy does not apply to a violation of some provisions of the FCA, such as the delivery of less government property than promised or making false statements to conceal an obligation to pay money to the government. FERA revises the FCA by clarifying that conspiracy liability can arise whenever a person conspires to violate any of the provisions in Section 3729 imposing FCA liability.

Retention of Overpayments

FERA revises the definition of an "obligation" to include "the retention of any overpayment." With this new definition, according to the report from the Judiciary Committee, the FCA may be violated once an overpayment is knowingly and "improperly" retained or concealed.

Expanded Whistleblower Protection.

FERA extends protection from retaliation to contractors and agents, as well as employees who are discharged, demoted, suspended, threatened, harassed or in any other manner discriminated against in the terms and conditions of employment because of lawful acts done in an effort to stop one or more FCA violations.

More Investigative Tools

FERA expands the U.S. Department of Justice's ability to investigate alleged violations of the FCA. Through use of a civil investigative demand, the DOJ can subpoena documents and depose witnesses before filing an FCA action. FERA expands the ability of the government to use evidence gathered through a civil investigative demand. FERA also allows the government to recover its costs for bringing an FCA action from the defendant.

Statute of Limitations

FERA clarifies that the filing of a qui tam action effectively tolls the statute of limitation, and if the government intervenes in a qui tam case, the government's complaint relates back to the original complaint as long as its claims arise out of the conduct, transactions or occurrences in the original complaint. This amendment effectively reverses the line of cases following the Second Circuit's opinion in United States v. Baylor University Medical Center, 469 F.3d 263 (2nd Cir. 2006), which held that the government's post-intervention complaint does not relate back to the relator's FCA complaint.

Implications for Health Care Companies

The FERA amendments will likely result in an increase in FCA claims filed against health care providers. In addition, the amendments may improve the government's ability to establish liability in some situations, given Congress' clear intention to close what it saw as judicially created "loopholes."

Here is the bottom line for health care providers:

  • Risk of Investigation and Liability Has Increased. FERA increases the scope of liability under the FCA and removes several defenses that were previously available to some defendants. For example, false claims submitted to a Medicare Advantage plan may now be within the scope of the FCA. Further, the cost of defending and potentially settling a FCA matter increased because defendants are now obligated to pay the government's costs.
  • Repayment Obligations Have Increased. While the debate about whether there is (or the scope of) an affirmative legal duty to refund overpayments to the Medicare program will likely continue, by including "retention of an overpayment" in the definition of a government obligation, FERA opens the door to the argument that the improper retention of an overpayment creates liability under the FCA.
  • Retaliation Exposure Has Increased. FERA expanded the non-retaliation provisions of the FCA to include independent contactors. As such, both employees and independent contractors now have a right of action against health care companies for alleged retaliation for their efforts to prevent or remedy alleged violations of the FCA.
  • Core Defenses to Unfounded Accusations Still Exist. While FERA will likely make it easier for the Government to establish liability in some cases, honest and ethical health care companies remain able to refute unfounded allegations of fraud. Many of the longstanding legal defenses to alleged FCA violations remain in place (e.g., Rule 9(b) pleading, materiality, the public disclosure bar). These defenses must be considered as part of any company's response to an investigation of alleged FCA violations.

Conclusion

As the government intensifies efforts to prevent and punish fraud, health care companies should ensure they are effectively managing risk associated with new laws and regulations, such as the amended FCA. Part of that risk management strategy should include the establishment and maintenance of an active compliance program. While budgets are tight everywhere, a central goal of any compliance program is to reduce the risk of becoming a target of enforcement action. Like preventative medicine, proactive compliance activities are an important strategy for reducing exposure to the massive liability that can be imposed under the FCA.

Health care companies which must respond to allegations of fraud or regulatory noncompliance under the FCA should mount a strategic and thoughtful defense. An effective defense strategy should include closely scrutinizing all allegations against the company and strongly presenting thoughtful and well developed responses.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.