False Claims Act needs federal reform

Health care is big business for Middle Tennessee. With over 250 health care companies in Nashville alone, the industry generates nearly $30 billion and 200,000 jobs to the local community and is still growing fast.

Health care has also become big business for the federal government, but in a far different way. It’s the new target of government lawyers and plaintiffs’ attorneys: in the last two years, the health care industry has paid over $5.6 billion in settlements or judgments, by far the most of any industry.

The primary weapon used to obtain those funds is the federal False Claims Act (FCA). Enacted in 1863, the law was passed in response to suppliers selling the government unhealthy horses and other substandard goods during the Civil War. Significantly broadened since then, the FCA enables the government to receive up to triple its damages and large financial penalties. It also has a unique whistleblower provision that allows plaintiffs to sue on behalf of the government. The government can later take over the case if it chooses, but either way, if successful, the plaintiff (and their attorneys) can receive a big cut of the recovery — up to 30 percent.

While fighting fraud is vitally important, the blunt force of the FCA is often inefficient and unfair. For example, creative attorneys have pressed elaborate theories that don’t even require an actual false claim. Instead, the FCA is invoked even when companies supply the correct product at the correct price, but allegedly run afoul of some separate regulatory fine print, even if it’s not in their contract. Far from combating scofflaws selling sawdust as gunpowder, the FCA is increasingly applied to ordinary contractual disputes, regulatory compliance and honest mistakes.

Fortunately many courts have reined in these aggressive theories, emphasizing that the FCA was never intended to police technical compliance with complex regulations. Such judicial protections, however, only help those few who can afford to litigate long, expensive and risky cases. Far more often, individuals and companies are threatened with overwhelming consequences and have no choice but to settle even highly suspect cases.

A better course would be to sensibly reform the FCA. Last year, the U.S. Chamber of Commerce released such a proposal, which was subject of a recent congressional hearing in the House of Representatives. The proposal — “Fixing the False Claims Act: the Case for Compliance-based Reforms” — has many aspects, but three stand out:

• Incentivize companies to adopt proactive compliance programs, making abuses less likely to occur and preventing litigation. In return, companies that adopt such strict measures could avoid the most catastrophic FCA penalties.
• Limit the weakest theories of liability and raise the intent standard, which would return the FCA to its original purpose and align it with similar fraud statutes.
• Reform the whistleblower provisions to avoid the government overpaying whistleblowers and their attorneys.

Let’s be clear: the FCA is an important tool for government enforcement. But it also has been ineffective at stopping fraud before it happens, led to unfair and coercive settlements and spawned a growing body of parasitic litigation. For places like Middle Tennessee where health care is a significant part of the economy, those problems will increasingly impose real costs that will be felt across the region. Thoughtful reforms can improve the FCA’s effectiveness at fighting fraud while avoiding its unfair and litigious effects. That’s a win-win for everyone.

Republished with permission. “False Claims Act needs federal reform” first appeared in The Tennessean on September 15, 2014.