Health Care Fraud

By Robin Page West

News coverage of the presidential campaigns shows that many Americans are worried about the skyrocketing cost of health care and prescription drugs and wonder whether the safety net of Medicare will be there for them when they need it. Although some blame the exorbitant cost of medical care on trial lawyers filing “frivolous lawsuits,” statistics culled through the years leave no doubt that health care fraud perpetrated by industry insiders plays a leading role in the country’s health care woes.

In February 2007 Lewis Morris, chief counsel to the Inspector General, testified before the Committee on Oversight and Government Reform of the U.S. House of Representatives about the impact of pharmaceutical industry fraud on the cost of health care. He said:

The Medicare and Medicaid programs have paid too much for prescription drugs because of fraudulent and abusive schemes targeted at federal health care programs. Some of this behavior increases health care program costs and can distort medical decision making by putting the financial interest of the prescribing physician ahead of the well-being of the patient. In other cases, unscrupulous providers exploit vulnerabilities in the reimbursement systems, resulting in additional costs to taxpayers.

Prosecutions of this type of fraud have resulted in $11 billion in fines and settlements during the past decade, according to testimony of Daniel Fridman, senior counsel to the U.S. Attorney General before a congressional subcommittee on health in April 2007.

Fighting Fraud

Limited only by the imaginations of the perpetrators, rampant health care fraud takes many forms, but a little-known federal statute dating from the Civil War and a number of more recently enacted tagalong state statutes allow private individuals to expose it, stop it, and be handsomely rewarded with a share of these billions of dollars in the process. Under the federal statute, known as the Federal Civil False Claims Act (FCA), private citizens with inside information about fraud can file a whistleblower suit to recover money stolen from the government, in which the government can recover three times the actual amount stolen and assess fines. Between 15 percent and 30 percent of the money recovered may go to the citizen whistleblower. Here’s an example of how it works.

In 1991 a Florida pharmacy called Ven-A-Care started receiving “reimbursements” from Medicare for drugs they had purchased for their patients. The reimbursements were more than double what Ven-A-Care had paid the manufacturer for the drugs.

Prior to 2005, Medicare Part B and Medicaid paid for prescription drugs based on the average wholesale price (AWP) reported by the manufacturer. Medicare no longer uses AWP, but many states continue to use it in their Medicaid programs. If a manufacturer reports an AWP different from the price it charges the doctor or pharmacy, the manufacturer creates a price differential between the doctor’s/pharmacy’s cost and the reimbursement from Medicaid. This differential is known as “marketing the spread,” and depending on how big the spread is, doctors and pharmacies who buy drugs for their Medicaid patients can reap huge profits.

As time went on, more drug salespeople marketed their products to Ven-A-Care by touting the higher profits on the spread rather than any therapeutic benefit to the patient.

Ven-A-Care’s principals felt this conduct was fraudulent. They tried reporting it at various levels of government, but Medicaid officials told them the reimbursement rate was correct. Reportedly, they complained in frustration to Medicare officials about an AWP of $400 for a nutrition drug for which they had paid $30; to drive their point home, they enclosed a toilet seat reminiscent of decades-earlier defense procurement abuses in which the Pentagon authorized wildly excessive payments to contractors providing parts such as toilet seats and hammers.

In 1994 they filed an FCA suit against 20 pharmaceutical companies, and the government got on board with them. In 2001 Ven-A-Care received a $1.6 million share of the federal government’s recovery against Bayer Corp.; in 2003, a $3.2 million share of the government’s recovery from Dey Pharmaceuticals; and in 2004, another $5.4 million from the government’s recovery against Schering-Plough’s Warrick Pharmaceuticals subsidiary. Roxanne Laboratories settled with the government for $10 million in 2005, and in 2006 GlaxoSmithKline settled a case alleging fraudulent misrepresentation of the AWP of two antinausea drugs for $150 million. Additional federal and related state lawsuits are reportedly ongoing.

Since 2000, as a result of just 16 cases like this brought by whistleblowers under the FCA, drug manufacturers have paid more than $3.9 billion to resolve allegations of Medicare and Medicaid fraud. Although settling a case is not an admission or an adjudication of a defendant’s liability, some industry observers cannot help but infer intentionally fraudulent motives.

James W. Moorman, president of the Taxpayers Against Fraud Education Fund in Washington, D.C., observed in the organization’s March 7, 2007, online bulletin, False Claims Act Update and Alert (, that “These large pharmaceutical frauds are not billing errors—they appear to be carefully crafted business plans that involve kickbacks, false pricing, and deceptive accounting. Some are also crafted to circumvent laws prohibiting the marketing of drugs for inappropriate uses. These schemes steal money from America’s taxpayers and deprive America’s oldest, sickest and poorest of badly needed Medicaid services.”

In addition to pharmaceutical fraud, health care fraud takes other forms as well, including:

• Doctors, hospitals, medical labs, and nursing homes billing federal health care programs such as Medicare, Medicaid, the Department of Veteran Affairs, TRICARE, and the world’s largest employer-sponsored group health insurance program, the Federal Employees Health Benefits Program, for tests that were not performed, for more expensive procedures than actually were performed, or more than once for the same service, equipment, or procedure;

• Providers of health care equipment or services billing these government programs for medical care that should have been paid for by other insurance—for example, a car accident victim’s medical bills should first be paid for by automobile liability insurance before government programs are billed, under the Medicare as Secondary Payer law;

• Clinics paying kickbacks to physicians for referrals, setting up sham companies to feed inflated billings to Medicare, falsifying billing statements to patients to justify compensation for unnecessary tests and services; wheelchair companies paying kickbacks to doctors who prescribe high-cost wheelchairs when lower-cost equipment would be effective, and filing claims for equipment that is not needed or never provided;

• Doctors and administrators using doughnuts, candy, and other gifts to lure elderly and mentally ill patients into unnecessary respiratory treatments and then billing Medicare for the treatments;

• Psychiatric clinics, group daycare centers, and nursing homes taking mentally ill patients to the movies and billing Medicare and Medicaid for “group therapy”;

• Pharmacies “short-filling” prescriptions so Medicare and Medicaid pay for more pills than were actually dispensed to the patient;

• Home health care agencies billing Medicaid for taking care of patients in their homes on days the patients were not home; or

• Nursing homes billing Medicare for services rendered to deceased patients.

Qui Tam and the FCA

The statute the Ven-A-Care principals used to combat these abuses, 31 U.S.C. Sections 3729-33, known as the Federal Civil False Claims Act (FCA), the Qui Tam Statute, the Informer’s Act, and/or the Lincoln Law, was originally enacted to recruit civilian assistance in stopping dishonest suppliers to the Union military because the government’s all-consuming involvement in the Civil War hampered effective investigation and prosecution. Qui tam is shorthand for the Latin phrase “qui tam pro domino rege quam pro se ipso in hac parte sequitur,” meaning “who pursues this action on our Lord the King’s behalf as well as his own.”

The act allows a private individual with knowledge of past or present fraud against the federal government to sue on its behalf to recover compensatory damages, large civil penalties, and triple damages. The person bringing the suit (a qui tam whistleblower) is known as the “relator.” To state a cause of action under the act, in general, the plaintiff/relator must allege that the defendant:

• knowingly presented or caused to be presented a false or fraudulent claim for payment or approval to an officer or employee of the U.S. government;

• knowingly made, used, or caused to be made or used a false record or statement to get a false or fraudulent claim paid by the government, conspired to defraud the government by getting a false or fraudulent claim allowed or paid; or

• knowingly made, used, or caused to be made or used a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit money or property to the government.

The statute prohibits an employer from retaliating against an employee for attempting to uncover or report fraud against the federal government. If retaliation does occur, the relator may also be awarded “all relief necessary to make the employee whole,” including reinstatement, back pay, two times the amount of back pay, litigation costs, and attorney fees. (FCA relators do not need to be employees of the defendant, however.)

FCA cases must be filed under seal. In most cases, the defendant is not served until the government completes its investigation, which can take years. The purpose of the seal is to allow the government to investigate the allegations in secret. The statute has a number of provisions relating to the filing and conduct of the litigation that must be scrupulously observed so as not to frustrate the government’s investigation or jeopardize the relator’s right to share in any recovery. Among these is a requirement that at the time of filing suit the relator must serve the government with all evidence in her possession that supports her claim. Unlike conventional litigation, because the FCA cases are front-loaded as described above, prudent relator’s counsel will not use post-filing discovery to document the fraud; rather, this must be done in advance of filing using documents and information already at the disposal of the qui tam relator.

The government has a choice of whether to take over (“intervene in”) the case or allow the relator to pursue the case on her own (“decline”). Because a qui tam case is more likely to result in a recovery if the government intervenes, relator’s counsel will try to shape the case to encourage a positive intervention. This requires a clear understanding of the regulatory framework involved, the facts alleged, how the affected federal agency feels about those facts, and how those facts and regulations fit into the FCA.

The courts have jurisdiction over only one FCA case per fraud. This means that if the government has already brought such a case, or if some other relator has filed the same case first, any subsequent cases are barred. One of the risks an attorney takes when undertaking a qui tam case is that someone else may have already filed this case, and all his work will be for naught. Because the previously filed case will have been sealed, it is usually impossible to determine whether a contemplated qui tam action will be barred by a previously filed one.

The FCA has returned billions of dollars to the federal treasury by enlisting the aid of citizens who have knowledge of health care fraud schemes. Taxpayers do not pay for the investigation or prosecution of these frauds because the treble damages and fines authorized in the statute allow these costs to be recouped from the defendants. In the health care arena, $15 is returned for every dollar the government invests in FCA cases. More than 180 pharmaceutical fraud cases involving more than 500 drugs are now under investigation.

The success of the federal statute in combating health care fraud led to the enactment of certain sections in the Deficit Reduction Omnibus Reconciliation Act of 2005 (S.1932) targeted at leveraging the power of the FCA. The federal government shares federal FCA recoveries in cases based on state Medicaid fraud by paying the state a share commensurate to its costs in implementing its Medicaid program. Section 6031 of the Deficit Reduction Omnibus Reconciliation Act increases state awards from FCA litigation by 10 percent if the state has adopted a false claims statute as strong as the federal version. The following states, along with the District of Columbia, New York City, and Chicago, have enacted their own false claims qui tam statutes, paving the way for recovery of health care dollars stolen at the municipal and state levels: California, Delaware, Florida, Georgia, Hawaii, Illinois, Indiana, Louisiana, Massachusetts, Michigan, Montana, New Hampshire, New Mexico, New York, Nevada, Oklahoma, Tennessee, Texas, and Virginia.

Section 6032 further publicizes the anti-fraud whistleblower laws by requiring entities receiving or making Medicaid payments of $5 million or more annually to include detailed information about the provisions of the federal and state false claims acts, including the rights of whistleblowers, in their employee handbooks.

Although the amount of money recouped by these antifraud statutes is mind-boggling, and the potential rewards for bringing a fraud perpetrator to justice are tempting, would-be whistleblowers need to think long and hard before undertaking a qui tam case. Not every relator rings the bell the way the Ven-A-Care plaintiffs did. A report released by the U.S. Government Accountability Office early in 2006 reported that of the 5,000-plus FCA cases filed between 1987 and 2005, just over 700 resulted in judgments or settlements. The median relator’s share in these cases was approximately $125,000, about half of which went to counsel and the Internal Revenue Service. The median length of time before a government-intervened case is concluded is 38 months. 

Robin Page West is a principal in the Baltimore, Maryland, firm of Cohan, West, Rifkin & Cohen, P.C., and author of Advising the Qui Tam Whistleblower: From Identifying to Filing a Case under the False Claims Act , published in 2001 by the American Bar Association. She may be reached at .

Copyright 2007

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