New False Claims Act Amendments Significantly Impact Health Care Entities And Their "Obligations" Regarding Overpayments

Late last week, President Obama signed into law the Fraud Enforcement and Recovery Act of 2009 ("FERA"), which includes significant amendments to the civil False Claims Act ("FCA") 31 U.S.C. § 3729 et seq. -- the government's chief weapon and enforcement tool against fraud in the health industry. The passage of FERA constitutes an exponential expansion of the liability provisions under the FCA. It also constitutes the first major amendment of the FCA in over 20 years. These amendments will have a substantial -- and adverse -- impact on virtually every person, company, and/or entity that either pays money to the government or receives Federal funds. Health care entities are likely to be the hardest hit by these changes. We at Crowell & Moring are especially concerned about the amendments to the "reverse false claims" component of the FCA, and its impact on our health care clients' "overpayment repayment obligations." After providing a summary of FERA's other key changes, we will address the "overpayment" issue in detail below.

General Amendments

Scope: In broad terms, FERA extends the FCA's reach to any false or fraudulent claim for government money or property irrespective of:

• whether the claim is "presented" to a government official or employee;
• whether the government holds title or has physical custody of the money; or
• whether the defendant specifically intended to defraud the government.

Intent: The FCA amendments contained in FERA effectively reverse the unanimous decision of the Supreme Court in Allison Engine Co. v. United States ex rel. Sanders, 128 S. Ct. 2123 (2008). Among other holdings, the Court in Allison Engine made clear that to establish liability under Section 3729(a)(2) of the FCA, the government must prove that a defendant when using a false record or statement "to get" a false claim paid or approved "by the government," intended for the government itself to pay the claim. In essence, Allison Engine stood for the proposition that, to establish liability under the FCA, there must be a clear link between a false claim and payment or approval by the government. As the Allison Engine Court cautioned, without this, the FCA would be "boundless" and tantamount to an "all-purpose antifraud statute." 128 S. Ct. at 2128, 2130. With the passage of FERA, then, you may consider the FCA as "boundless": FERA effectively eliminates this intent requirement by removing both the "to get" and "by the government" language from Section 3729(a)(2).

Materiality: The amendments establish a new express materiality requirement under the FCA, with the FCA now explicitly applying to situations where one "knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim" and/or "an obligation to pay or transmit money or property to the government, or knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the government." "Material" is defined as "having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property." Although "materiality" has long been considered an implied requirement to establish FCA liability by most courts, this statutory change now inserts the requirement into the black letter law itself.

Conspiracy: The amendments expand conspiracy liability under the FCA to include conspiracies to commit a violation of any other substantive section of the FCA. Previously, under the FCA, the conspiracy section covered only a conspiracy "to get a false claim paid or approved" and most courts had construed this to limit the conspiracy section to apply only to violations of Section 3729(a)(1) and only where the government paid the false claim.

Amendments to the FCA's Reverse False Claims Provisions and Their Effect on "Obligations" Regarding Overpayments

The changes to the "reverse false claims" component of the FCA could ultimately prove to be the most troublesome aspect of FERA for health care entities. Specifically, FERA amends the "reverse false claims" provisions of the FCA to expand liability to "knowingly and improperly avoid[ing] or decreas[ing] an obligation to pay or transmit money or property to the government." This amendment to the Act, a clearly dangerous expansion of liability and risk, also unfortunately, leaves significant confusion as to the scope of its ultimate application.

To begin - and contrary to some commentary - the amendment does change the law. The amendment now makes clear that, in order to establish a "reverse false claim" violation it is no longer required that the defendant be shown to have taken an "affirmative act," that is, creating a false statement or record, in order to "conceal, avoid or decrease" the obligation to repay the government. Instead, the mere ongoing possession of an overpayment, if there is an "obligation" to repay, can itself trigger an FCA violation. This amendment, while perhaps unfortunate, is somewhat straightforward, although other specific aspects of the amendment's coverage are not so easily understood.

The first confusing element of the amendment is its reliance upon and definition of the term "obligation." The term "obligation" (to repay an overpayment) is defined as "an established duty, whether or not fixed…" that arises from "a contractual, grantee, licensure or fee based relationship, from a statute or regulation, or from the retention of any overpayment." Importantly, then, the amendment itself does not establish any new "obligation" to repay. Instead, the "obligation" described is a derivative one, simply referring to other possible legal sources where that obligation may be found.

Health care entities and their counsel know all too well, however, that identifying and confirming any potential legal "obligation" to repay an overpayment in the health care regulatory scheme is not a simple task. While the government would assert otherwise, in our view certain statutory sources purported to support a "repayment obligation" are either not at all clear or are actually nothing of the sort (see, for example, 42 U.S.C. § 1320a-7b(a)(3), where statutory language defies rationality or reason in its elliptical description of the potential disclosure (not repayment) obligation of an "individual," or see the Stark Law's confusing statutory "refund" requirement -which certainly establishes an "obligation" to refund Stark-tainted payments - but not to the government - to the beneficiary. 42 U.S.C. § 1395nn(g)(2). Thus, while the "reverse false claims" amendment renders illegal any knowing failure to meet a repayment "obligation," the new amendment does not resolve the question as to which "obligations" it is referring.

The amendment's use of the "knowingly" scienter standard also adds confusion to the mix. Under the FCA, "knowingly" is defined not only to comprise "actual knowledge" of a "falsity," but also includes "deliberate ignorance" or "reckless disregard" of the "truth or falsity" of a claim or statement. 31 U.S.C. § 3729(b). Assuming the same interpretation of the term would apply in the amendment to the "reverse false claims" language, the question arises as to what responsibility is placed upon the potential "possessor" of an overpayment to identify the existence of that overpayment. Then, once identified, how quickly must steps be taken to transmit money back to the government in order to cleanse one's hands of the "illegal possession" - or is that even possible? Of particular interest here is the dilemma faced presently by a "designated health service" entity considering what its "obligation" might be now, with the passage of the amendment, to immediately assess (or re-assess) the current or historical potential that Stark violations may have led to overpayments. The amendment's scienter element raises the difficult question of whether it behooves such an entity to now undertake such a re-assessment, or whether just the opposite might be the case, under the theory that such a re-assessment would go beyond what is required to avoid being deemed "deliberately ignorant" of an "obligation to repay." Depending upon how terms like "deliberate ignorance" or "reckless disregard" are interpreted and applied, varying decisions on this issue - and vastly different ramifications - may arise.

Beyond the present tense, and arriving at decisions as to what to do about current potential overpayments, equally difficult questions arise as to what the "knowingly and improperly" standards require of the potential possessor of overpayments on an ongoing basis.¹ For example, how often must an entity check for overpayments to avoid being "reckless" or "deliberately ignorant"? How quickly must overpayments be returned to avoid liability? Once an overpayment has been identified - and even when motivations are pure - the questions do not end: to whom should the repayment be made (especially now that HHS-OIG has gotten out of the self-disclosure business for Stark-based violations)? Finally, will the repayment resolve the FCA problem, or could repayment trigger the risk of further investigation or even a whistleblower action?

These are difficult issues with which our clients must grapple. While these questions linger, however, what is clear from the amendments is that whatever the scope of the "failure to return overpayments" obligation might turn out to be, the "knowing and improper" failure to meet that obligation - nothing more - now clearly falls within the ambit of the False Claims Act, and is punishable under the FCA's draconian treble damage and per claim fines and penalties. Perhaps worse, such failures will now also be grist for the whistleblower law suits authorized by the FCA.

In sum, the recent amendments to the FCA brought on by FERA are not good news for anyone doing business with the federal government; health care entities are certainly no exception. The health care regulatory framework, by its very nature, leaves murky a core issue in interpreting the "reverse false claims" amendment that is: what constitutes a repayment "obligation" in the first place. This blurriness, coupled with the huge risks attendant to a failure to repay, places particularly difficult burdens on health care entities. On top of these difficulties, sorting through federal agencies for a place to resolve overpayment issues only adds to the complexity of finding the right avenue for dealing with a "repayment obligation."

In this high risk environment, the guidance of careful and thoughtful legal counsel is essential in identifying these new, even more threatening FCA risks, and in fashioning potential solutions.

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¹The legislative history appears to indicate that Congress included the term "improperly" in order to alleviate a health care entity from potential FCA liability for retaining an "overpayment" in anticipation of a periodic or annual reconciliation with the government, an event particularly common to the Medicare reimbursement scheme. However, the FCA does not define "improperly," an omission that could lead to confusion and litigation regarding the boundaries between overpayments improperly or properly retained.