ABA Health eSource
July 2009 Volume 5 Number 11

A Brave New Word:
Recent False Claims Act Amendments And Their Impact On Health Care Entities

By Robert T. Rhoad, Esq., and Matthew T. Fornataro, Esq., Crowell & Moring LLP, Washington, DC


I. Introduction

In late May, President Obama signed into law the Fraud Enforcement and Recovery Act of 2009 (“FERA”), which significantly amends the civil False Claims Act (“FCA” or “Act”) 1 , a principal tool in the Government’s efforts to fight fraudulent claims for payment made to the Government. FERA greatly expands the potential for liability under the FCA, and it is the first major amendment to that Act in over 20 years. The FCA amendments are in large part a reaction to recent court decisions, including the Supreme Court’s decision in Allison Engine Co. v. United States ex rel. Sanders, in which the Court held the Government was required to “prove that the defendant intended that the false record or statement be material to the Government's decision to pay or approve the false claim.” 2 The FERA amendments also clearly establish the FCA’s materiality requirement and conspiracy liability. Perhaps most significantly, however, the FERA amendments greatly enhance entities’ obligations with regard to overpayments and “reverse false claims.” These significant changes have the potential to adversely affect every person, company, or entity that pays money to the Government or receives federal funds. Health care entities, in particular, may be the hardest hit by these amendments.

II. Demise of Allison Engine

In what is perhaps its most direct change, the FERA amendments strike down the Supreme Court’s decision in Allison Engine. That case, handed down just last year, stood for the proposition that in order for the Government to prove liability under the FCA, the Government was required to show a clear link between a false claim and the Government’s payment -- i.e., the Government needed to show that the defendant intended the Government itself to pay the claim. Without such a clear link, the Supreme Court indicated that the FCA would be “boundless” and tantamount to “an all-purpose antifraud statute.” 3 The FERA amendments effectively eliminate the Supreme Court’s requirement of a clear link between alleged fraud and the Government’s payment. In essence, the Government need no longer prove that the relator intended to get the Government to pay any allegedly false claim.

III. Expanded Conspiracy Provisions

The amendments also expand conspiracy liability under the FCA to include conspiracies to commit a violation of any other substantive section of the FCA. Previously, under the FCA, the conspiracy section covered only a conspiracy “to get a false claim paid or approved” and most courts had construed this to limit the conspiracy section to apply only to violations of Section 3729(a)(1) and only where the government paid the false claim.

IV. Explicit Materiality Requirement

The amendments also establish an express materiality requirement, which explicitly pertains where one “knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim.” “Material” is defined as “having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property.” Previously, the FCA did not expressly have a materiality requirement, however many courts required such a finding as an implied standard within the Act. FERA amends the FCA to make this materiality requirement clear.

V. Reverse False Claims & Overpayment “Obligations”

Perhaps the greatest expansion of the FCA’s power, however, is the change pertaining to the FCA’s reverse false claims provisions and their effect on “obligations” regarding overpayments. FERA amends the “reverse false claims” provisions of the FCA to expand liability to “knowingly and improperly avoid[ing] or decreas[ing] an obligation to pay or transmit money or property to the Government.” Under this provision, there is now no longer a need for a person to have taken an affirmative act -- a false statement or record -- in order to conceal, avoid, or decrease the obligation to the Government. While it is clear that this change constitutes a vast expansion to the FCA’s reach, the new metes and bounds of its scope are anything but clear. Indeed, confusion will likely arise over the use of the terms “obligation” and “knowingly” and their practical application.

Under the amendment to the FCA’s false claims provisions, it is now sufficient for liability purposes that the defendant be found to have merely retained an overpayment where there was an “obligation” to repay the Government. “Obligation” is confusingly defined as “an established duty, whether or not fixed” that arises from “a contractual, grantee, licensure or fee based relationship, from a statute or regulation, or from the retention of any overpayment.” Therefore, while there is no new “obligation” to repay an overpayment, the amendment describes a derivative “obligation” by referencing other possible legal sources where that obligation may be found.

Health care entities and their counsel know very well that identifying such potential “obligations” to repay an overpayment within the complex healthcare regulatory scheme is not a simple task. For example, the Stark Law has a confusing statutory “refund” requirement, which establishes an “obligation” to refund Stark-tainted payments. Such payments, however, go not to the Government, but to the beneficiary. 4 Also see, for example, 42 U.S.C. § 1320a-7b(a)(3), where the statutory language elliptically describes the potential disclosure (not repayment) obligation of an “individual.” In order to meet the new FCA “obligation” to repay money to the Government, counsel and health care entities must navigate these and numerous other statutory and regulatory provisions in order to identify areas in which repayment obligations might exist to avoid potentially making any “reverse false claims.”

Furthermore, the amendment’s use of the “knowingly” scienter standard also adds confusion. Under the FCA, “knowingly” is defined not only to comprise “actual knowledge” of a falsity, but also includes “deliberate ignorance” or “reckless disregard” of the “truth or falsity” of a claim or statement. 5 So, assuming the same usage of the term in application to FERA’s “reverse false claims” language, a question is raised with regard to what responsibility is placed on the potential “possessor” of an overpayment to identify the existence of that overpayment. Likewise, it is unclear how quickly an entity must act to transmit money back to the Government in order to cleanse itself of the illegal possession.

For example, in the case of a “designated health service” entity in the Medicare context, it may be critical to consider, with the passage of the FERA amendments, what its “obligation” might be immediately to assess (or re-assess) the current or historical potential that any physician self-referral (Stark Law) violations may have on its repayment obligations. Depending on how terms like “deliberate ignorance” and “reckless disregard” are interpreted and defined, vastly different ramifications may arise.

Regarding current potential overpayments, equally difficult questions arise. For example, how often must an entity check for overpayments to avoid being “reckless” or “deliberately ignorant”? How quickly must overpayments be returned to avoid liability? Once an overpayment is identified, and even when the entity’s motivations are pure, the questions do not end: to whom should the repayment be made? Perhaps most importantly, will the repayment itself resolve the FCA problem, or could repayment trigger the risk of further investigation or even a whistleblower action? These are merely some of the many difficult questions with which lawyers and their clients must grapple in the wake of the FERA amendments.

VI. Conclusion

The new amendments are bad news for anyone doing business with the federal Government, and health care entities are no exception. Due to the extremely complex health care regulatory framework, the complications that may arise from these statutory changes may only be magnified for health care entities. By its very nature, these amendments leave murky a core issue in interpreting the “reverse false claim” amendment. Such difficulties only heighten the risks that are attendant to FCA liability -- including the potential for treble damages. On top of these difficulties, sorting through federal agencies for a place to resolve overpayment issues only adds to the complexity of finding the right avenue for dealing with a “repayment obligation.” It will become essential to see how these new amendments begin to be interpreted in the courts, and navigating these new FCA risks will take careful and thoughtful legal counsel.

1 31 U.S.C. § 3729 et seq.

Allison Engine Co. v. United States ex rel. Sanders, 128 S. Ct. 2123 (2008).

3 Id. at 2130.
4 42 U.S.C. § 1395nn(g)(2).
5 31 U.S.C. § 3729(b).

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