Maryland False Health Claims Act

Having passed both chambers, the Maryland False Health Claims Act of 2010 (“MFHCA”) has just been signed by Governor Martin O’Malley and will be effective October 1, 2010. The MFHCA creates a new cause of action. It authorizes private citizens to bring suit on behalf of the state to recover funds for false or fraudulent claims through a state health plan or program.[1] A MFHCA suit may be filed for activity that occurred prior to October 1, 2010, provided the limitations period has not lapsed (generally six years, but as long as 10 years in some situations).[2] As originally introduced, Senate Bill 279 was closely modeled on the federal False Claims Act (“FCA”).[3] However, as amended following lobbying efforts on behalf of hospitals and small providers, it significantly differs from the FCA. This article compares the FCA with the MFHCA. It begins with some background to the legislation. For the sake of context, the FCA is briefly summarized and cross-referenced to similar MFHCA provisions. The discussion of key provisions of the FCA that are absent from the MFHCA is highlighted in italics. This is followed by a chart which summarizes the main differences.

Legislative Goal

The Fiscal and Policy Note prepared by the Department of Legislative Services for Senate Bill 279 known as “Maryland False Health Claims Act of 2010” identified the federal incentives for states to enact anti-fraud legislation modeled on the federal FCA:

Background: In 2003, the U.S. Government Accountability Office added Medicaid to its list of high-risk programs, noting that the program’s size and growth, combined with insufficient federal and state oversight, put the program at significant risk for improper payments.

Federal Incentives: The federal Deficit Reduction Act of 2005 (DRA) established incentives for states to enact certain antifraud legislation modeled after the federal FCA. States that enact qualifying legislation are eligible to receive an increase of 10% in the share of recovered funds. The 10% increase in the state share of the recovery corresponds to a 10% reduction in the federal share.[4]

The Fiscal and Policy Note analysis provided an illustration of how a DRA-compliant act would benefit the state:

State Fiscal Effect: To the extent that the bill is approved by the Office of the Inspector General at the federal Department of Health and Human Services, DHMH special fund revenues increase under the bill beginning as early as fiscal 2011 due to increased fraud recoveries under the provisions of DRA. Under current law, any recoveries must be split between the State and federal government at the applicable Medicaid matching rates (normally 50/50). An approved State claims act would allow the State to retain an additional 10% share of recoveries. For example, in 2009, Pfizer Inc. reached a settlement with the federal government and states over allegations of health care fraud contained in nine qui tam cases. Maryland received $5 million from the settlement at the normal 50% State Medicaid share. DHMH-OIG advises that, had the State had a federally approved false claims statute, the State would have received $6 million.[5]

Although enactment of a State qui tam action has been hailed as a significant achievement, unfortunately, as explained within, it is not DRA-compliant. This is readily grasped by reviewing the remedies available under the FCA.

False Claims Act Lawsuits

Initiating a lawsuit is not to be undertaken lightly, as it is a stressful experience which most persons would prefer to avoid at all costs. This is especially true when the very act of filing suit might result in employer retaliation. Yet a highly effective mechanism exists for recovery of funds to the United States Treasury while simultaneously providing a significant economic incentive for the person who files suit. According to Department of Justice statistics, from 1987 through September 30, 2008 over $10 billion was recovered in health care fraud lawsuits based on the FCA, with the whistleblowers’ share being about $1.6 billion.[6] According to a recent Department of Justice Press Release, the FCA is “[o]ne of the most powerful tools” in combating health care fraud.[7] The Justice Department’s total recoveries in FCA cases since January 2009 exceed $3 billion.[8]

The FCA has been on the books since the American Civil War era. Originally designed to combat false claims submitted to the Union Army, the FCA applies to false or fraudulent Medicare and Medicaid claims submitted to the federal government for payment.[9] The law authorizes private citizens to sue on behalf of the federal government to recover funds paid for false or fraudulent claims. In the Medicare and Medicaid context, this could include such activity as billing for services or medical equipment neither needed nor received by the patient. It could further involve overcharging, mis-coding, pricing schemes, off-label marketing, kickbacks and failure to return overpayments. Perpetrators range from outright criminals running sham businesses to otherwise respectable physician groups or blue chip corporations. The variety of fraudulent schemes and scams is limited only by human imagination and greed, which is to say it is boundless.

The FCA does not seek to impose punishment or provide remedies for innocent billing errors. The fraudulent claim must be presented “knowingly,” meaning with actual knowledge of the information, or with deliberate ignorance or reckless indifference to the truth or falsity of the information.[10] There is a similar requirement for liability premised on false information made or used to support a false or fraudulent claim.[11]

The persons filing FCA lawsuits are typically called “whistle-blowers.” (In legalese, these are qui tam lawsuits brought by “relators.”) Basically, any person who is aware of false or fraudulent conduct can qualify to bring suit.[12] Typically, this is a current or former employee of an organization or corporation such as a medical practice, nursing home, hospital, clinical laboratory, health insurance company, durable medical equipment company and drug and medical device manufacturers and distributors. Some employees aware of and troubled by fraudulent schemes may be afraid to come forward due to a fear of retaliation by the employer. It can easily be imagined that a vindictive employer might be inclined to fire a whistle-blowing employee. This is obviously a legitimate concern, and it is addressed in the FCA.

Remedy for Retaliation

If an employer resorts to a retaliatory firing, significant relief is available in the form of reinstatement with double back-pay together with interest and reasonable attorneys’ fees and costs.[13] In addition, the FCA was recently amended to extend protection against retaliation to agents and contractors of the party involved in fraudulent schemes.[14] This provides protection to such groups as medical staff physicians who may not be employees of a hospital or medical facility yet could be subjected to more subtle retaliation for whistle-blowing in the guise of negative peer review.

Pre-Suit Procedures

Unlike the typical private lawsuit, a FCA lawsuit must first be filed under seal[15] (which means it is not a public record). This is designed to give the federal government time to investigate and decide whether it will take primary responsibility for litigating the case rather than have it exclusively handled by the whistle-blower’s private lawyers.[16] Broad pre-suit powers of investigation and discovery are conferred upon the Attorney General, including rights to obtain documents, take depositions and receive answers to interrogatories.[17] In the event that the case is taken over by the Justice Department, the whistle-blower and his counsel continue to play a vital role in cooperating and providing evidence necessary to prove the case.

Potential Recovery

If the lawsuit is successful, the private citizen may be entitled to a substantial portion of the recovery. Even when the government takes the case, the whistle-blower remains entitled to an award of up to 25 percent of the settlement or judgment against the wrongdoer.[18] This encompasses both damages and the civil penalty. A person violating the FCA is liable to the United States Government for a civil penalty of at least $5,500 and not more than $11,000 per violation plus three times the amount of damages sustained by the Government.[19] If the Government does not proceed with the case, the whistle-blower is still allowed to conduct the case.[20] Upon prevailing under these circumstances, the FCA directs that the whistle-blower shall receive a reasonable sum for collecting the civil penalty and damages which shall be not less than 25 percent or more than 30 percent of the proceeds.[21] The FCA also mandates payment of reasonable attorneys fees.[22] The plaintiff’s share of the proceeds may be reduced by the court if the action was “brought by a person who planned and initiated the violation of section 3729.”[23]

The FCA provides an important deterrent to overzealous pursuit of marginal or baseless lawsuits. Contrary to the typical “American Rule” which provides that each party bears their own attorneys’ fees and expenses, the FCA, under certain extreme circumstances, provides that the loser may have to pay. Only when the Government declines to intervene, the unsuccessful whistle-blower could be ordered to pay the defendant’s attorneys’ fees and expenses if the action was “clearly frivolous, clearly vexatious, or brought primarily for purposes of harassment.”[24]

Bar to FCA Lawsuits

A significant limitation on a FCA lawsuit is that it must be based on “original source” information.[25] This means the whistle-blower must have “direct and independent knowledge.”[26] If the basis of the lawsuit has already been subjected to public disclosure in an earlier lawsuit, criminal case, administrative action or in the news media, the case will be barred, unless the person bringing suit is an original source of the information.[27] This is to discourage “parasitic” or “echo” lawsuits. Thus, it is important to be the first to come forward and file suit. As with other civil lawsuits, a FCA case must be brought in timely fashion. The FCA generally provides that the case must be brought within six years of the date of violation, although the statute of limitations may be extended to 10 years under certain circumstances.[28]

Test to Determine if State Act Satisfies Criteria for Federal Incentive Payment

As enacted by section 6031 of the Deficit Reduction Act of 2005, section 1909 of the Social Security Act (Act) provides a financial incentive for States to enact false claims acts that establish liability to the State for the submission of false or fraudulent claims to the State’s Medicaid program. If a State false claims act meets certain requirements, the State is entitled to an increase of 10 percentage points in the State medical assistance percentage, as determined by section 1905(b) of the Social Security Act, regarding any amounts recovered under a State false claims act.

Under section 1909(b) of the Act, the Office of Inspector General (“OIG”) is required to determine, in consultation with the Attorney General of the United States, whether a State has in effect a law relating to false or fraudulent claims submitted to a State Medicaid program that meets these enumerated requirements. On August 21, 2006, OIG published a notice in the Federal Register that sets forth OIG’s guidelines for reviewing State false claims acts. The guidelines invited States to request OIG’s review of State laws to determine if the laws meet the requirements of section 1909(b) of the Act. OIG also invites states with draft legislation to submit their drafts for informal review and discussion before the draft legislation is passed. (The FISCAL AND POLICY NOTE to SB 279 is silent as to whether the draft legislation was submitted to OIG.)

The Inspector General’s guidelines for evaluating whether a State statute meets the requirements of section 1909 are set forth as follows [Requirements not met by MFHCA are italicized in bold.]:

Under section 1909(b)(2) of the Act, a State law must contain provisions that are at least as effective in rewarding and facilitating qui tam actions for false or fraudulent claims as those described in 31 U.S.C. 3730-3732. When evaluating a State law to determine whether it meets the requirements of section 1909(b)(2) of the Act, OIG will consider whether the law provides for the following:

1. A provision that authorizes a person (relator) to bring a civil action for a violation of the State false claims act for the person and for the State, which will be brought in the name of the State.

2. A provision that requires a copy of complaint and written disclosure of material evidence and information to be served on the State Attorney General in accordance with State Rules of Civil Procedure.

3. A provision that provides that when a relator brings a qui tam action, no person other than the State may intervene or bring a related action based on the facts underlying the pending action.

4. Provisions that set forth rights of parties to qui tam actions, including:

● If the State proceeds with the action, the State has primary responsibility in the action, but the relator shall have the right to continue as a party to the action; and

● If the State elects not to proceed with the action, the relator may conduct the action but the State may intervene at a later date upon a showing of good cause.

5. Provisions that reward a relator with a share of the proceeds of the action or settlement of the claim, including:

● If the State proceeds with an action brought by the qui tam relator, the relator receives at least 15 percent of the proceeds of the action or settlement of the claim [comprised of both civil penalty and damages], and may receive a higher percentage depending on the relator’s contribution to the prosecution of the action;

● If the State does not proceed with an action, the relator receives at least 25 percent of the proceeds of the action or settlement, and may receive a higher percentage depending on the relator’s contribution to the prosecution of the action; and

● The court is authorized [“required” per § 3730(d)] to award the relator an amount for reasonable expenses, including attorneys’ fees and costs, to be awarded against the defendant.

6. A statute of limitations period not shorter than 6 years after the date of the violation is committed, or 3 years after the date when facts material to the right of action are known or reasonably should have been known by the State official charged with the responsibility to act in the circumstances, whichever occurs last.

7. A provision that establishes the burden of proof, for each of the elements of the cause of action including damages, no greater than a preponderance of the evidence.

8. A provision that provides a cause of action for relators who suffer retribution from employers for whistleblower activities related to the State false claims act.

OIG is required to consider whether the State law is at lease as effective in rewarding and facilitating qui tam actions when compared to the provisions at 31 U.S.C. 3730-3732. State false claims acts may include procedural rights, reductions in relator awards, jurisdictional bars, and other qui tam provisions similar to those found in the FCA that do not conflict with the requirements of section 1909(b)(2) of the Act. However, if such provisions are more restrictive than the provisions in the FCA, OIG may determine that a State law is not as effective in rewarding or facilitating qui tam actions. OIG will make such determinations on a case-by-case basis and in consultation with DOJ.

* * *

D. Civil Penalty Provisions

Under section 1909(b)(4) of the Act, the State law must contain a civil penalty that is not less than the amount of the civil penalty authorized under 31 U.S.C. 3729. OIG will review a state law to determine if these provision include a provision that sets at least treble damages (or double damages in instances of timely self-disclosure and full cooperation) and civil penalties at amounts of at least $5,000 to $10,000 per false claim.[29]

SUMMARY OF DIFFERENCES

It is apparent that the MFHCA lacks provisions determined to be vital to the FCA and contains other restrictions not found in the FCA that make it less effective in rewarding and facilitating qui tam actions:

FCA

1) ● Civil penalty not less than $5,500 and not more than $11,000 per violation plus;

● An amount equal to three times the amount of damages the government sustains. § 3729(a)(1)(G).
2) ● The court may reduce the award if the plaintiff planned and initiated the violation. § 3730(d)(3).
3) ● Plaintiff shall receive reasonable attorneys’ fees and expenses and shall be awarded against the defendant. § 3730(d)(1).
4) ● If government declines intervention, plaintiff may proceed with action. § 3730(c)(3).

● If government declines intervention, plaintiff shall receive not less than 25 percent and not more than 30 percent of the civil penalty and damages shall be paid. § 3730(d)(2).

5) ● If government declines intervention and defendant prevails, the court may award the defendant its reasonable attorneys’ fees if the claim was “clearly frivolous, clearly vexatious, or brought primarily for purposes of harassment.” § 3730(d)(4). Thus, attorneys’ fees not available to defendant when Government intervenes.

MFHCA

1) ● No minimum civil penalty; and maximum per violation of $10,000. § 2-602(B)(I).

● No right of private person to compensatory damages award.

● For state only, additional amount of not more than three times the damages sustained by the state. § 2-602(B)(II).

● In deciding the “appropriate” amount of civil fines and damages, the court shall consider multiple potentially mitigating factors (e.g., history of billing compliance, remedial action) and “where appropriate, give special consideration” to the defendant’s “size” and “financial condition.” § 2-602(C)(1), (2).
2) ● The court may reduce plaintiff’s share of the award if the plaintiff planned, initiated “or otherwise deliberately participated in the violation on which the action was based.” § 2-605(B)(1).

3) ● The court may award attorneys’ fees to prevailing plaintiff. § 2-605(C)(1).

4) ● If state declines intervention, the case is dismissed. § 2-604(A)(7).

● If the state initially intervenes, it may elect at any time to withdraw its intervention, and the case shall be dismissed regardless of plaintiff’s objections. § 2-604(B)(3).

5) ● If defendant prevails, even when government intervenes – the only way suit may be bought – attorneys’ fees may be awarded to defendant if the action was “brought primarily for purposes of harassment or otherwise brought in bad faith.” § 2-605(C).

Conclusion

Maryland’s False Health Claims Act differs significantly from the FCA. The MFHCA’s omission of several significant provisions featured in the federal statute and addition of restrictive measures makes it not at least as effective in rewarding and facilitating qui tam actions as the federal FCA. Looking into the future, if the MFHCA is amended at the 2011 session of the General Assembly to address the issues noted above, the OIG will be open to consider the MFHCA to determine its eligibility for Maryland to receive an additional 10 percentage points with respect to any amount recovered under the MFHCA. Although MFHCA is not DRA-compliant, it represents a step forward. With a year’s experience, perhaps the General Assembly will see the wisdom of passing amendments to enable Maryland to obtain the maximum available recoveries.

[1] Md. Health General Code Ann. § 2-604(A) (2009 Repl. Vol.).
[2] Id. § 2-609(B).
[3] 31 U.S.C. § 3729 to 3733.
[4] FISCAL AND POLICY NOTE Senate Bill 279 Department of Legislative Services Maryland General Assembly 2010 Session at p. 7.
[5] Id. at p. 8.
[6] See http://www.usdoj.gov/opa/pr/2008/November/fraud-statistics1986-2008.htm.
[7] See Press Release, Federal Bureau of Investigation Field Office, U.S. Dep’t Justice, National Dental Management Company Pays $24 Million to Resolve Fraud Allegations (January 20, 2010), available at http://washingtondc.fbi.gov/dojpressrel/%20pressrel110/wfo012010.html.
[8] Id.
[9] Medicare is a federal health insurance program for persons age 65 or older, some disabled persons under age 65, and persons with End-Stage Renal Disease, regardless of age. Groups who may be eligible for Medicaid, a federal-state program of health and long term care, include pregnant women, children of families with limited income, persons with various disabilities and certain persons with Medicare. Nationally combined Medicare and Medicaid spending reached $885.4 billion in 2009. See C. J. Truffer, et al., Health Spending Projections Through 2019: The Recession’s Impact Continues, Health Affairs, doi: 10.1377/hlthaff.2009.1074 (Published online Feb. 4, 2010) (“Health Affairs”). This figure is over $200 billion more than an earlier estimate by the Congressional Budget Office of $677.4 billion for these programs. See Congressional Budget Office, The Budget and Economic Outlook’s Fiscal Years 2008 to 2019, CBO’s March 2009 Baselines for Medicare and Medicaid, available at www.cbo.gov (last visited 12/4/09).
[10] 31 U.S.C. § 3729(a)(1)(A); (b)(1); See MFHCA § 2-601(F) (unlike the FCA, expressly exempts “mistakes” or “negligence”); § 2-602(A)(1).
[11] 31 U.S.C. § 3729(a)(1)(B). See MFHCA § 2-602(A)(2).
[12] 31 U.S.C. § 3730(b)(1). See MFHCA § 2-604(A)(1).
[13] 31 U.S.C. § 3730(h)(1) & (2). See MFHCA § 2-607(A), (B)(2)(II), (IV), (V) (also expressly providing for injunctive relief § (B)(2)(I) and punitive damages, § (B)(2)(VI)).
[14] 31 U.S.C. § 3730(h)(1). See MFHCA § 2-607(B).
[15] 31 U.S.C. § 3730(b)(2). See MFHCA § 2-604(A)(3)(II).
[16] See 31 U.S.C. § 3730(b)(2). The government has 60 days, which can be extended for good cause shown. Id. at § 3730(b)(3). See MFHCA § 2-604(A)(3)(II)(3), (4)(I).
[17] 31 U.S.C. § 3733(a). See MFHCA § 2-604(B)(2).
[18] 31 U.S.C. § 3730(d)(1). See MFHCA § 2-605(A)(I).
[19] 31 U.S.C. § 3729(a)(1)(G).
[20] Id. at § 3730(c)(3). The right to bring suit when the government declines to intervene is critical to achieve the goals of the FCA. Although intervention may be declined based on an assessment that the case lacks merit, it is also a certainty that the government often decides not to intervene simply due to a lack of resources. For all practical purposes, the government must allocate its resources to only those cases with the greatest potential sums at stake. Simply stated, the government lacks the resources to intervene in every meritorious case. Yet, fraudulent billing schemes by 10 different defendants each causing losses of $1 million are just as significant as the sole defendant whose scheme bills $10 million in fraudulent claims. By requiring dismissal of claims the state declines to pursue, the MFHCA in effect creates a de facto exemption for all but the most egregious billing schemes.
[21] 31 U.S.C. § 3730 (d)(2).
[22] Id.
[23] Id. at § 3730(d)(3).
[24] 31 U.S.C. § 3730(d)(4). See MFHCA § 2-605(C)(2).
[25] 31 U.S.C. § 3730(e)(4)(A). See MFHCA § 2-606(D)(1).
[26] 31 U.S.C. § 3730(e)(4)(B). See MFHCA § 2-606(D)(2).
[27] 31 U.S.C. § 3730(e)(4)(B). See MFHCA § 2-606(D)(2)(I).
[28] 31 U.S.C. § 3731(b). See MFHCA § 2-609(A).
[29] 71 FR 48552, August 21, 2006 at pp. 48553-48554 (emphasis added).