Supreme Court tightens scope of False Claims Act

By Amy Lynn Sorrel

The U.S. Supreme Court recently narrowed the application of the False Claims Act in a decision experts say could have implications in health care fraud cases.

The ruling in Allison Engine Co. Inc. v. United States comes at a time when some federal lawmakers are seeking to broaden the scope of the act — which carries a penalty of triple damages. The decision could either force some reversal of those efforts or fuel the legislative fire, experts said.

The June opinion stemmed from a conflict in the lower courts over whether those who do not bill the government directly, but go through another entity that contracts with the U.S., can be held liable under the False Claims Act for fraudulently obtained funds.

The high court unanimously said yes, but with some limitations.

Justices clarified that the plaintiffs must show that the defendants intended to defraud the U.S. and not another entity, and that the alleged false statement was relevant to the government’s decision to pay the claim.

The ruling suggests that the statute was not meant to be an all-purpose remedy that allows the government to invoke the act any time federal funds are misused, said David Deaton, a health care fraud expert and partner with O’Melveny & Myers LLP in Los Angeles.

To convert the False Claims Act into a broader anti-fraud statute runs contrary to its purpose, which strictly is to protect the federal treasury, Deaton said. In the case of fraud against or by a government contractor, the proper avenue to prosecute must be determined. “The court said [under the act], it’s not enough to show that government money was somewhere involved,” he said. “Plaintiffs must show there was fraud on the government to obtain government funds.”

Impact on health care

Some legal experts said the decision could make it more difficult for whistle-blowers, who are sometimes physicians, to prove certain cases using the false claims statute, as opposed to other state or federal anti-fraud remedies.

For example, they could face hurdles alleging illegal off-label marketing by pharmaceutical companies, Deaton said.

“If what a manufacturer is really trying to do is increase market share and expand usage of a product, the question is whether that is something that can be brought under the False Claims Act if the purpose is not to obtain money from the government,” he said.

Los Angeles-area health care attorney Wayne J. Miller said that under the ruling, defendants still could be held liable for fraudulently billing the government through a Medicare Advantage plan or a state Medicaid managed care program. However, even though the courts have generally viewed these health plans as standing in the shoes of the government, such cases now may require additional proof. “Plaintiffs may have to work harder to show liability,” he said.

While the ruling could make it tougher for doctors and others acting as whistle-blowers, it could, on the flip side, help cut down on weak cases and offer extra defense to physicians who believe they wrongly are being sued under the false claims statute. Whistle-blowers, in successful cases, are rewarded financially for reporting fraud to the government.

A doctor may not be held liable for unwittingly participating in fraud, said Andrew L. Hurst, a Washington, D.C., expert on health care fraud and abuse, and a partner with Reed Smith LLP. Such situations might involve, for example, a physician employed by a hospital and paid by fraudulently obtained Medicare funds; or a medical supply company that deceptively sells equipment to a doctor, who ends up billing Medicare for the product.

Hurst said the act also may not apply in cases in which a whistle-blower alleges that a physician practice falsely certified to the federal government that it followed certain Medicare requirements, if the erroneous documentation had no tie to the government’s decision to pay.

“The question is, if the government knew about it, would they still pay?” he said. In some cases the government may cite a practice for noncompliance with Medicare requirements but still would pay the claim, he explained.

The recent ruling may help cut down on “creative” whistle-blower lawsuits that use such mistakes to assert a false claims act case, Hurst said. “The court said this is about government money and not finding new ways to find liability, and brought the focus of the act back in line.”

Federal legislation in the wings

Meanwhile, legal observers say the decision could impact federal legislation pending in the Senate and House Judiciary committees aimed at expanding liability under the False Claims Act.

Introduced in September 2007, the False Claims Act Correction Act runs counter to the high court ruling that lawsuits must show that the defendant intended to defraud the government, said Washington, D.C.-based false claims lawyer Robert S. Salcido.

The proposed bill would remove an existing prohibition against whistle-blower claims brought on the basis of publicly disclosed information or claims lacking specific proof, said Salcido, a partner with Akin Gump Strauss Hauer & Feld LLP. Only the government would have the authority to dismiss such claims, whereas now defendants also have the ability to make such a request, he said.

In addition, the legislation would broaden the pool of potential whistle-blowers to include government employees in certain circumstances, and increase the time frame for bringing federal false claims cases.

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