Effective January 1, 2007, the Deficit Reduction Act of 2005 ("DRA") imposes new requirements on companies and threatens to increase whistleblower activity significantly. Although the law applies directly to healthcare-related entities that make or receive more than $5 million in state Medicaid payments, it is likely to have a substantial impact beyond the healthcare industry. For the first time, such healthcare businesses will be required to tell all employees about the opportunities and protections for whistleblowers. This requirement is likely to spread to other industries as they evaluate the government’s view of "best practices." The law also encourages states to enact false claims laws, thereby, as Senator Chuck Grassley (R-IA) noted, "mark[ing] a new day for the False Claims Act."
New Employee Education Requirements
States participating in Medicaid must now amend their State Plans to require any entity that receives or makes annual payments of at least $5 million to establish written policies that provide to employees, contractors and agents the following "detailed information":
- the federal False Claims Act and the administrative remedies in the Program Fraud Civil Remedies Act;
- any state civil or criminal penalties for false claims and statements, the whistleblower protections provided under federal and state false claims laws, and the role of such laws in preventing and detecting fraud, waste and abuse in federal healthcare programs; and
- the company’s policies and procedures for detecting and preventing fraud, waste and abuse.
This information, as well as a specific discussion of "the rights of employees to be protected as whistleblowers," must be included in employee handbooks.
These requirements are now "a condition of payment." On its face and in the context of concurrent legislative action, the DRA’s provision concerning these new employee education obligations appears to have been drafted to subject a wide variety of entities to its requirements. Thus, even entities such as drug manufacturers, which do not receive payments directly from state Medicaid programs but may pay more than $5 million in rebates to such programs, may be covered. Even for companies not in the healthcare industry, but nonetheless doing business with the government, the DRA’s new requirements are now likely to be viewed by regulators as the minimum standard for adequate compliance programs.
New Incentive to States for Enacting False Claims Acts
Under a second provision of the DRA, states with a qualifying false claims statute receive an additional 10% of any federal False Claims Act recovery of Medicaid funds obtained under that state’s statute. To qualify for the incentive, the state false claims law must generally be comparable to the federal False Claims Act, which includes whistleblower, treble damages and civil penalty provisions. Thus, most states will likely enact aggressive laws against fraud – and provide rewards for whistleblowers – and those laws typically apply to all industries doing business with the government.
What Entities Doing Business with State Governments Should Do
The healthcare-related compliance provisions of the DRA likely portend regulators’ use of those provisions’ new requirements to benchmark corporate compliance performance in all industries doing government business. Thus, every company that strives to present a strong compliance environment should scrutinize the provisions and consider the following steps:
- Review and Revise Policies, Procedures, Employee Handbooks and Training Materials. Companies should, and healthcare providers must, revise policies to contain the "detailed information" identified in the DRA for each of the 23 states that has a false claims statute and in which the company does business, encourage employees to use internal compliance procedures, and inform employees of the practical workplace consequences of suing or helping to sue their employer. To minimize adversarial whistleblower activity, companies should also take steps to insure that their employees feel that the company is receptive and responsive when they voice concerns about potential fraud or abuse issues. Whistleblowers typically are employees who do not feel appreciated. A company focused on a strong human resources function and open internal communication can minimize external whistleblower activity and address potential compliance problems at the earliest stages.
- Prepare for an Increase in State and Local False Claims Actions. All companies should evaluate their exposure to, and be aware of, the rise in state false claims suits. The recent swell of state and municipal false claims laws, and the DRA’s incentives for further proliferation of such laws, have emboldened states to pursue exclusively state false claims actions and to play more active roles in federal false claims litigation. Recently, BankAmerica paid $187 million, Navigant Consulting paid over $37 million, and Toshiba paid $30 million to resolve actions brought solely under the California False Claims Act.
- Monitor Federal, State and Municipal Legislation. At the state and local levels, pro-whistleblower legislators and advocacy groups are trying to leverage the DRA’s enactment to push for broad, pro-whistleblower false claims laws that cover not only Medicaid, but any alleged fraud on state or local governmental entities. To minimize exposure to false claims actions, companies should monitor federal, state and local pro-whistleblower proposals and ensure that any legislation aims to prevent fraud and not simply to provide an outsized incentive for disgruntled employees and their lawyers.
Goodwin Procter LLP is one of the nation's leading law firms, with a team of 700 attorneys and offices in Boston, Los Angeles, New York, San Diego, San Francisco and Washington, D.C. The firm combines in-depth legal knowledge with practical business experience to deliver innovative solutions to complex legal problems. We provide litigation, corporate law and real estate services to clients ranging from start-up companies to Fortune 500 multinationals, with a focus on matters involving private equity, technology companies, real estate capital markets, financial services, intellectual property and products liability.
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