Revived in Cold War, False Claims Act hones in on health care, mortgage fraud

ACFCS is commemorating the 150th Anniversary of the False Claims Act with a series of articles analyzing the law’s turbulent history and current role as a key US government fraud-fighting weapon. Enacted on March 2, 1863, in the midst of the Civil War, and nicknamed the “Lincoln Law,” the FCA was originally designed as a tool to combat war profiteering by providers of war material to the Union Army. Today the law, which imposes tough civil penalties for any “false or fraudulent claim” made to the US government, is applied extensively to many types of financial fraud, including health care and mortgage fraud.

 This is the second article in a 2-part series, examining the law’s rebirth in the mid-80s and its current usage against pharmaceutical giants and mortgage lenders. Part 1 can be viewed here.

Contractor fraud rises during the Cold War

In the 1980’s, at the height of the Cold War, the Reagan Administration poured billions in into defense spending in effort to outspend and out-build the Soviet Union. As the number of defense contractors increased, the government began receiving more and more reports of fraudulent activity, from the delivery of faulty and inferior materials to inflated invoices and overcharges. Federal agencies often lacked the ability or the resources to investigate, and after the 1943 amendments to the False Claims Act gutted protections and rewards to whistleblowers, private citizens had little incentive to report fraud on the government.

This was vividly illustrated by a high-profile whistleblower case brought by a former employee against General Electric for fraud in its government contract work. John M. Gravitt, a former employee at a General Electric aircraft engine facility in Ohio, was “laid off” after he refused his supervisor’s command to falsify his time vouchers. General Electric was routinely inflating its labor costs so that it could overcharge on its government contracts.

In 1984, Gravitt filed a whistleblower, or “qui tam,” suit under the FCA in the US District Court for the Southern District of Ohio, bringing General Electric’s fraud to the attention of the Justice Department. After intervening in the case, the Justice Department bullied Gravitt out of his role as relator. Instead of prosecuting, the Justice Department reached a settlement with General Electric for a fine of $234,000, warning Gravitt that if he resisted the settlement he would not be rewarded with 10% of the damages recovered, and would be responsible for the Department’s costs to reach settlement.

Congress revives FCA with second set of amendments in 1986

As Gravitt’s case was in progress, allegations of widespread fraud by defense contractors were receiving growing media coverage and public outrage. In response, Congress turned to the False Claims Act, mulling amendments to resurrect and strengthen the fraud-fighting statute after it had lain dormant for over 40 years. Gravitt was called to testify before panels in the House of Representatives and the Senate, and explained the negative effects of the 1943 amendments on whistleblowers.

Gravitt’s testimony was apparently taken to heart. Led by Senator Charles Grassley, Congress passed the second set of FCA amendments, restoring parts of the law that had been previously been watered down and adding strict new penalties.

The amendments lowered the bar for proving an FCA case, stating that a “preponderance of the evidence” must be shown in FCA cases, as with other civil cases. After the 1943 amendments, a “clear and convincing” standard of evidence had been applied by some courts. They also increased the rewards a relator could receive, guaranteeing a minimum of 15% and as much as 30% of any recoveries made in an FCA case.

Perhaps most significantly, the amendments increased the damages recoverable by the Act by mandating a civil penalty no less than $5000 and no more than $10,000 combined with three times the amount of damages sustained by the government.

The amendments also reinstated and augmented whistleblower protections, prohibiting retaliation by employers and ordering that defendants pay the legal fees and expenses of whistleblowers in successful FCA suits. They also allowed relators to stay on as plaintiffs in FCA suits even if the government chose to intervene.

“At [the] time, the focus was on defense contract fraud,” Republican Senator Charles Grassley said in a 2012 statement commemorating the 25th Anniversary of the 1986 amendments.

“Today, these qui tam provisions of the FCA have become the government’s most effective tool against health care fraud, especially in Medicare,” he continued. Grassley, along with Democrat Representative Howard Berman of California, authored the legislation that became the 1986 amendments to the FCA. Together the Senators wanted to “empower private sector whistleblowers to come forward with valuable information about fraud by government contractors.”

Fraud by government contractors persists in Iraq and Afghanistan

The perpetration of fraud by government contractors remained an issue through the recent conflicts in Iraq and Afghanistan. The bipartisan Commission on Wartime Contracting in Iraq and Afghanistan found in their final report to Congress in 2012 that at least $31 billion has been lost to contract waste and fraud, although they estimate that number could be as high as $60 billion.

Commission Co-Chair and former Connecticut Representative, Christopher Shays, said, “We’ve had soldiers injured or electrocuted because of faulty wiring in base showers, and we’ve had federal officials tolerating a far greater supply of contract labor than was needed for military-vehicle maintenance. There is plenty of blame to go around.”

Obama signs FERA, amends, expands FCA

The latest amendments to the FCA came in 2009 when President Obama signed the Fraud Enforcement Recovery Act. Designed to strengthen the ability of US law enforcement to investigate and prosecute all forms of financial fraud, FERA included provisions that considerably broadened the reach of the FCA. The 2009 amendments to the FCA are the first set of amendments that did not arise because of an increase in wartime fraud.

The new amendments expanded the definition of “claim” under the FCA so that now persons or entities that indirectly receive government funds may be liable for FCA violations, even if they never directly present a claim to the government. FERA also widened the definition of conspiracy under the law to include “conspiring to violate any prohibition under the FCA,” not simply “conspiring to submit false claims.”

The amendments also enhanced protection for whistleblowers by extending the protections from retaliation already granted to employees under the law to contractors and agents.

Perhaps most importantly, the amendments added a new category for “reverse false claims,” or the wrongful retaining of overpayments by the US government.  The law now requires persons and entities to return overpayments, even if innocently received, or face liability under the FCA. The introduction of the reverse false claims provision was designed to directly target Medicare and Medicaid fraud schemes, which often rely on overbilling or   Estimates by the US Government Accountability Office of the losses from Medicare fraud and improper payments alone range from $50 – $70 billion per year.
The 2009 amendments led to an exponential rise in the number of FCA cases that involved health care fraud. According to the Department of Justice, from January 2009 to the end of the fiscal year 2012, the DOJ used the FCA to recover more than $9.5 billion in federal health care funds, a record for any four year period.

Health care fraud cases soar under FCA amendments

John Roth, Director of the Office of Criminal Investigations for the Food and Drug Administration, said , “The FDA’s Office of Criminal Investigations, in concert with its law enforcement partners…uses the FCA to protect the public from unscrupulous health care providers… Individuals who bring such fraud to the attention of the federal government have saved the federal taxpayer hundreds of millions of dollars.”

Roth described two versions of health care fraud:  Fraud in which parties “administer unapproved and counterfeit medicines (and then bill the federal government as if they had provided the legitimate product)” and fraud in which “unscrupulous drug manufacturers who would promote a medicine for a use not approved by the FDA, causing the government to reimburse providers for medicines whose use has not been proven to be safe and effective.” Medicare and Medicaid fraud are also common health care frauds.

The case that has been labeled the “largest case of health care fraud in US history” was brought under the FCA. GlaxoSmithKline, a British pharmaceutical company pleaded guilty to misdemeanor criminal charges and agreed to pay almost $3 billion in combined civil and criminal fines to settle allegations that the company broke US laws in the marketing and production of pharmaceuticals.

The case proceedings revealed that GSK perpetrated fraud against the US government since the late 1990s through 2007. In some instances, GSK targeted patients under the age of 18 when the FDA had only approved the drug for adults. Another drug, Wellbutrin was marketed for uses it was not approved for such as weight loss and treatment of sexual dysfunction. In a third instance, GSK failed to provide the FDA with safety data for a diabetes drug, Avandia.

With record recoveries and widespread use, FCA has bright fraud-fighting future

Currently, the “Lincoln Law” is being used more extensively than at any point in its 150-year history. The Department of Justice is harvesting record penalties for fraud under the provisions of today’s FCA. See statistics on FCA enforcement since the 1986 amendments here.

“No one should expect to get away with defrauding the federal government,” said Senator Carl Levin, Democrat from Michigan, “For 150 years now, the False Claims Act has helped defend us against corruption. The wisdom President Lincoln and Senator Howard showed in establishing the False Claims Act is demonstrated by the fact that this far-sighted law continues to serve as an effective defense against corruption to this day.”