Potential Obstacle To Effective Internal Compliance Reporting System? The False Claims Act

Yes, you read the title of this post correctly.  Under the False Claims Act, a whistleblower is not required to report compliance concerns internally through a company’s internal reporting system before filing a “qui tam” court action.  Indeed, the False Claims Act — with its potential “bounty” of 15 to 30 percent of the government’s recovery — may actually encourage employees to file suit in the first instance, to qualify as an “original source,” and bypass the organization’s reporting system altogether, thereby frustrating a key component of an effective compliance program.  Whistleblower organizations have recently gone so far as to discourage individuals employed by health care providers from bringing compliance concerns directly to their employer so that they can get a share of the government’s recovery.

A provider or other entity participating in the Medicare or Medicaid programs, however, can mitigate that risk through, among other things, employee training and disciplinary policies encouraging good-faith reporting and the promotion of a culture of compliance, including setting the right “tone from the top.”

Internal Reporting System.  The cornerstone of any effective compliance program is developing and implementing a robust internal reporting system that employees can use to raise any compliance concerns on an anonymous basis.  Among other things, when compliance concerns are brought to the attention of the organization’s compliance personnel, the organization can investigate the issue and take appropriate steps to prevent or remediate any continued potential misconduct.  Likewise, having such a system in place may serve as a defense to liability under the False Claims Act.  Even if improper billing is found to have taken place, evidence that the organization has an effective, anonymous internal compliance reporting system may show that the improprieties were not the result of deliberate indifference or reckless disregard for such practices.

False Claims Act.  Plainly, the risk of treble damages and per claim penalties under the False Claims Act is a powerful incentive for a health care organization to implement an effective compliance program.  What is more, the provision for whistleblower awards under the False Claims Act can be an effective tool to aid the government in detecting and preventing overpayments by Medicare and Medicaid to fraudulent operators and other bad actors.  By allowing whistleblowers to file relator actions under seal and potentially share in any of the government’s recovery — as well as to seek damages for any retaliatory employment action — the False Claims incentivizes employees in the health care industry to come forward with information about fraudulent billing, without the fear of reprisal.

The Tension Between The Two.  At the same time, a whistleblower’s potential recovery can operate as a countervailing disincentive for an employee to report compliance concerns internally.  That is because under the False Claims Act, a qui tam relator is entitled to a “bounty” only if the individual is the “original source” of information to the government about the improper billing practices that are the subject of the relator’s action.  On the other hand, if an employee does dutifully report a compliance concern internally through the organization’s reporting system, and the organization itself reports any overpayments to the government or remediates the misconduct itself, the whistleblower may be unable to sue and recover any “bounty.”  As noted earlier, this point is not lost on the relator bar.

Overcoming The Tension.  How does a provider overcome the entreaties of the relator bar, along with the incentives under the False Claims Act whistleblower provisions, to convince employees with compliance concerns to avail themselves of the company’s internal reporting system?  At the outset, the reporting system may be both effective and credible to instill  confidence in the system so that employees will take full advantage of it – that is, the organization must deliver on its promise of anonymity and protection of good-faith reporting and must follow through on a timely basis with a thorough investigation and meaningful corrective action, if indicated.  Further, a robust reporting system, standing alone, will not be effective unless all other elements of an organization’s compliance program are working effectively as well, starting with a “culture of compliance,” reinforced by the executive team and management, and continuing with inservice compliance training, underscoring the importance of timely reporting and the anonymity and other protections afforded to reporting employees.

Likewise, the organization must have personnel and disciplinary policies that reward good-faith reporting and punish compliance lapses, both for engaging in unlawful conduct as well as for failing to report it.  That said, taking any disciplinary action against an employee who files suit as a relator, without ever having reported the compliance concerns in breach of the employee’s duties, is fraught with the risk that the termination or other action will be challenged as retaliation for filing the False Claims Act action, and that the cited ground — failing to report   — is allegedly merely pretextual.

However, with the proper messaging and training, coupled with a robust anonymous reporting system, the company can give its employees good reason to “do the right thing” and report compliance concerns to the company in the first instance, despite the lure of a False Claims Act bounty.

This post was written byBrian T. McGovern of Cadwalader, Wickersham & Taft LLP.
For more legal analysis check out the National Law Review.

DOJ Releases its 2016 False Claims Act Recovery Statistics

DOJ False Claims actOn Wednesday, the Department of Justice (DOJ) released its annual False Claims Act (FCA) recovery statistics, which revealed that Fiscal Year 2016 has been another lucrative year for FCA enforcement.  Based on these statistics, DOJ recovered more than $4.7 billion in civil FCA settlements this fiscal year — the third highest annual recovery since the Act was established.  Since 2009 alone, the government has recovered $31.3 billion in FCA settlements and judgments.  This is a truly staggering statistic.  It shows that the government’s reliance on the FCA to combat fraud will continue for the foreseeable future.

The healthcare and financial industries represent the largest portions of this year’s FCA recoveries.  In the healthcare industry alone, DOJ recovered a total of $2.5 billion based on federal enforcements.  DOJ also touted its instrumental role in assisting states recovering funds overpaid under state Medicaid programs.  From the financial industry, the government collected another $1.7 billion, largely as a result of enforcement actions arising from alleged false claims in connection with federally insured residential mortgages.

The number of new FCA matters through both qui tam and non-qui tam actions has increased since last year.  Interestingly, however, the statistics indicate that the share of settlements and judgments for relators declined—the percentage of the total recoveries from qui tam suits decreased from 80.7% in 2015 to 61% in 2016.  Most significantly, the percentage of recoveries for cases where the government declined to intervene decreased from 31% to 2.2% since last year.  Although the cause for this decline is uncertain, one could argue that this indicates that DOJ views the assistance of relators as less valuable in recent years.

Notwithstanding the specific observations related to the industries and types of actions resulting in recoveries this fiscal year, the statistics demonstrate that the FCA remains a powerful tool for the government’s fraud deterrence efforts.

Copyright © 2016, Sheppard Mullin Richter & Hampton LLP.

Supreme Court Determines that Seal Violation Does Not Mandate Dismissal

Supreme Court qui tam seal violationOn December 6, 2016, the Supreme Court of the United States decided State Farm Fire and Casualty Co. v. United States ex rel. Cori Rigsby and Kerri Rigsby. At issue was whether a qui tam relator’s violation of the seal requirement, 31 U.S.C. § 3730(b)(2), requires a court to dismiss the suit. In a unanimous decision, the Court concluded that violation of the seal does not mandate dismissal, affirming a lower court decision to deny the defendant’s motion to dismiss.

Section 3730(b)(2) requires qui tam complaints to be filed under seal for at least 60 days and provides that they shall not be served on the defendants until the court so orders. The purpose of the seal is to give the government time to investigate. In practice, the government often seeks numerous extensions while it investigates the conduct alleged in the relator’s complaint.

Justice Kennedy, writing for the Court, reasoned that the text of the False Claims Act (FCA) makes no mention of a remedy as harsh as dismissal. The Court also noted that the FCA was intended to protect the government’s interests, whereas mandatory dismissal would run contrary to those interests, as it would put an end to potentially meritorious qui tam suits. Although the Court made no definitive ruling as to what sanction would have been appropriate, it did note that dismissal “remains a possible form of relief,” while “[r]emedial tools like monetary penalties or attorney discipline remain available to punish and deter seal violations even when dismissal is not appropriate.”

We previously wrote about this matter, here.

© 2016 McDermott Will & Emery

DOJ Announces Dramatic Increase in False Claims Act Penalties

False Claims Act penaltiesOn May 6th, we posted about the possibility that the Department of Justice (“DOJ”) might dramatically increase False Claims Act penalties after the Railroad Retirement Board (“RRB”) nearly doubled the per-claim penalties it imposed under the FCA.  After nearly two months of anticipation, DOJ published an Interim Final Rule yesterday announcing that it intended to increase the minimum per-claim penalty under Section 3730(a)(1) of the FCA from $5,500 to $10,781 and increase the maximum per-claim penalty from $11,000 to $21,563.  These adjusted amounts will apply only to civil penalties assessed after August 1, 2016, whose violations occurred after November 2, 2015.  Violations that occurred on or before November 2, 2015 and assessments made before August 1, 2016 (whose associated violations occurred after November 2, 2015) will be subject to the current civil monetary penalty amounts.

The penalty increases proposed by DOJ are the same as those proposed by the RRB back in May.  The RRB’s increase resulted from a section of the Bipartisan Budget Act of 2015, called the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015 (the “2015 Adjustment Act”), which required federal agencies to update civil monetary penalties (“CMPs”) within their jurisdiction by August 1, 2016.  The 2015 Adjustment Act amended the Federal Civil Penalties Inflation Adjustment Act of 1990—which is incorporated into the text of the FCA—and enacted a “catch-up adjustment.”  Under the “catch-up adjustment,” CMPs must be adjusted based on the difference between the Consumer Price Index (“CPI”) in October of the calendar year in which they were established or last adjusted and the CPI in October 2015.

DOJ last raised the civil penalty amounts under the FCA to their current levels in August 1999, but because the 2015 Adjustment Act repealed the legislation responsible for the 1999 adjustment, DOJ looked back to 1986 when civil penalties were set at a minimum of $5,000 and a maximum of $10,000.  This calculation resulted in a CPI multiplier of more than 215% resulting in the new minimum per-claim penalty of $10,781 ($5,000 x 2.15628) and a maximum per-claim penalty of $21,563 ($10,000 x 2.15628).  Under the 2015 Adjustment Act, the increases are required unless DOJ, with the concurrence of the Director of the Office of Management and Budget, makes a determination to increase a civil penalty less than the otherwise required amount.  As to the FCA civil penalty, as well as scores of other civil penalties under DOJ’s jurisdiction, DOJ declined to seek this exception.

DOJ is providing a 60-day period for public comment on this Interim Final Rule.  Like the rest of the health care industry, we will be watching closely to see if commenters are able to convince the Department to reconsider these astronomical penalty amounts.

©1994-2016 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.

Supreme Court: False Claims Act & Materiality Requirement

False claims act Supreme courtThe U.S. Supreme Court has rendered a unanimous decision in the hotly-awaited False Claims Act case of Universal Health Services v. United States ex rel. Escobar.  This case squarely presented the issue of whether liability may be based on the so-called “implied false certification” theory.  Universal Health Service’s (“UHS) problem originated when it was discovered that its contractor’s employees who were providing mental health services and medication were not actually licensed to do so. The relator and government alleged that UHS had filed false claims for payment because they did not disclose this fact and thus had impliedly certified that it was in compliance with all laws, regulations, etc.  The District Court granted UHS’s motion to dismiss because no regulation that was violated was a material condition of payment. The United States Court of Appeals for the First Circuit reversed, holding that every submission of a claim implicitly represents regulatory compliance and that the regulations themselves provided conclusive evidence that compliance was a material condition of payment because the regulations expressly required facilities to adequately supervise staff as a condition of payment.

The Supreme Court vacated and remanded the matter in a manner that represents a compromise view of implied false certification.

The Court recognized the vitality of the implied false certification theory but also held that the First Circuit erred in adopting the government’s expansive view that any statutory, regulatory, or contractual violation is material so long as the defendant knows that the Government would be entitled to refuse payment were it aware of the violation.

Instead, the Court held that the claims at issue may be actionable because they do more than merely demand payment; they fall squarely within the rule that representations that state the truth only so far as it goes, while omitting critical qualifying information, can be actionable misrepresentations.   Here, UHS and its contractor, both in fact and through the billing codes it used, represented that it had provided specific types of treatment by credentialed personnel.  These were misrepresentations and liability did not turn upon whether those requirements were expressly designated as conditions of payment.

The Court next turned to the False Claims Act’s materiality requirement, and stated that statutory, regulatory, and contractual requirements are not automatically material even if they are labeled conditions of payment. Nor is the restriction supported by the Act’s scienter requirement. A defendant can have “actual knowledge” that a condition is material even if the Government does not expressly call it a condition of payment. What matters is not the label that the Government attaches to a requirement, but whether the defendant knowingly violated a requirement that the defendant knows is material to the Government’s payment decision.

The FCA’s materiality requirement is demanding. An undisclosed fact is material if, for instance, “[n]o one can say with reason that the plaintiff would have signed this contract if informed of the likelihood” of the undisclosed fact.   When evaluating the FCA’s materiality requirement, the Government’s decision to expressly identify a provision as a condition of payment is relevant, but not automatically dispositive. A misrepresentation cannot be deemed material merely because the Government designates compliance with a particular requirement as a condition of payment. Nor is the Government’s option to decline to pay if it knew of the defendant’s noncompliance sufficient for a finding of materiality. Materiality also cannot be found where noncompliance is minor or insubstantial.

Moreover, if the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material. The FCA thus does not support the Government’s and First Circuit’s expansive view that any statutory, regulatory, or contractual violation is material so long as the defendant knows that the Government would be entitled to refuse payment were it aware of the violation.

The materiality requirement, stringently interpreted, and the fact that the First Circuit’s expansive view was rejected suggest that the game is far from over and that there still are viable defenses, facts allowing, to cases premised upon the implied false certification theory.

©2016 Epstein Becker & Green, P.C. All rights reserved.

False Claims Act: DOJ Appealing AseraCare Loss

False Claims ActOn May 27, 2016, the US Department of Justice said it will appeal to the Eleventh Circuit its loss in the False Claims Act (FCA) case against hospice chain AseraCare Inc. The government’s decision to appeal comes as no surprise, and it means that the substantial attention this case has received will continue.

As a reminder, this case, U.S. ex rel. Paradies v. AseraCare, Inc., focused on whether AseraCare fraudulently billed Medicare for hospice services for patients who were not terminally ill. AseraCare argued (and the district court ultimately agreed) that physicians could disagree about a patient’s eligibility for end-of-life care and such differences in clinical judgment are not enough to establish FCA falsity.

The government appealed three orders issued by the US District Court for the Northern District of Alabama. We previously posted about each of these three orders.

The first order on appeal is the district court’s May 20, 2015 decision bifurcating the trial, with the element of falsity to be tried first and the element of scienter (and the other FCA elements) to be tried second. The government had unsuccessfully sought reconsideration of this decision.  This is the first instance in which a court ordered an FCA suit to be tried in two parts.

The second order on appeal is the district court’s October 26, 2015 decision ordering a new trial, explaining that the jury instructions contained the wrong legal standard on falsity. This order came after two months of trial on the element of falsity and after a jury verdict largely in favor of the government.

The third order on appeal is the district court’s March 31, 2016 decision, after sua sponte reopening summary judgment, granting summary judgment in favor of AseraCare. In dismissing the case, the court explained that mere differences in clinical judgment are not enough to establish FCA falsity, and the government had not produced evidence other than conflicting medical expert opinions.

The government must file its opening brief 40 days after the record is filed with the Eleventh Circuit. We will be watching this case throughout the appellate process.

© 2016 McDermott Will & Emery

Whistleblower Wins Big in Case that Tests Limits of Confidentiality Agreements

Intimidation Of Whistleblower

Confidentiality agreements are common in corporate America. Many companies require new employees to sign them as part of the hiring process. In some industries like healthcare, privacy policies are elevated to a legal requirement. Can these agreements be used to stop an employee from reporting his or her employer for fraud or turning documents over to an attorney? The answer is “no” but there are some limits on what an employee can take and do with the information. The most recent case to examine the issue comes from the Northern District of Illinois.

On May 9th, U.S. Magistrate Judge Sidney Schenkier dismissed a counterclaim brought by LifeWatch Services against a whistleblower in a federal False Claims Act case.

Matthew Cieszynski was a certified technician working for LifeWatch. His job was to conduct heart monitoring tests. LifeWatch conducts remote heart monitoring testing throughout the United States. Patients can wear heart monitor devices anywhere in the world and have those devices monitored through telemetry. Cieszynski’s job was to look for unusual or dangerous heart arrhythmias. The testing results would be passed to the patients’ cardiologists who use the data to diagnose and treat various heart ailments.

When first hired by the company in 2003, Cieszynski signed a confidentiality agreement that said in part, “you agree that both during your employment and thereafter you will not use for yourself or disclose to any person not employed by [LifeWatch] any Confidential Information of the company…” The agreement also restricted Cieszynski’s ability to access computer systems and records or remove information from the company’s premises.

In 2006, Cieszynski signed a HIPAA confidentiality statement.

Years later, Cieszynski became concerned that LifeWatch was sending some of the heart monitoring work offshore to India in violation of Medicare regulations. He became especially concerned that some of the Indian workers were not properly certified to review and interpret the heart monitoring data.

In 2012, Cieszynski believed that a patient died because of an improper diagnosis made by an unlicensed offshore technician. That is when he became a whistleblower and filed a False Claims Act lawsuit in federal court. In order to file his lawsuit, he provided what he believed were important company documents to his lawyer. Those were later turned over to the government.

Under the Act, complaints are filed under seal and served on the government instead of the defendant. This allows regulators and prosecutors to investigate the merits of the case in secret. Usually the case is unsealed when the government decides to intervene or allow the whistleblower’s counsel to pursue the case. Until unsealed, the whistleblowers identity is not disclosed.

When the complaint was unsealed, LifeWatch Services discovered that Matt Cieszynski was the person who brought the suit.  Their response was to file a counterclaim against Cieszynski for violating his employment agreement and the separate HIPAA nondisclosure agreement.

On May 9th, Magistrate Judge Schenkier dismissed LifeWatch’s counterclaim in a case widely watched by both members of the plaintiffs and defense whistleblower bar.

In dismissing the counterclaims, Judge Schenkier discussed the “strong policy of protecting whistleblowers who report fraud against the government.”

The court recognized the legitimate need for companies to protect confidential information. Those needs must be carefully balanced against the need to prevent “chilling” whistleblowers from coming forward, however.

In deciding that the counterclaim against Cieszynski should be dismissed, the court examined a number of factors. Those include:

  • What was the intent of the whistleblower when taking the documents? Here Cieszynski took them for the sole purpose of reporting what he believed to be fraud. There was no evidence that he sought to embarrass the company.

  • How broad was the disclosure? In this case there was no disclosure to the public or competitors. Cieszynski only provided documents to his lawyer and the the government.

  • The scope of the documents taken from the employer. Although LifeWatch claimed Cieszynski took more documents than were necessary to prosecute his case, the court said it wouldn’t apply hindsight and require a whistleblower to know exactly what documents the government might need. Since the documents were reasonably related to what the government could need, Judge Schenkier elected not to second guess Cieszynski.

There are limits to what a person can take and what he or she can do with those documents. For example, disclosing trade secrets to competitors or releasing sensitive healthcare information to the public will not likely elicit sympathy from the court.

In a case like this, however, courts will give the benefit of doubt to the whistleblower. Especially when there has been no public disclosure and no real harm to the defendant. Although LifeWatch claimed harm, the court found the only harm was the “fees and costs associated with pursuing the counterclaim – which is a self-inflicted wound.”

Corporate counsel should think long and hard before bringing counterclaims against whistleblowers. Not only are courts generally unsympathetic to these challenges, the fee shifting provisions of the False Claims Act can make these cases expensive for the defendants. Under the False Claims Act, defendants must pay the relator’s (whistleblower) lodestar legal fees if the relator prevails.

Article By Brian Mahany of Mahany Law

© Copyright 2016 Mahany Law