Whistleblowers Discover More Fraud than Internal or External Audits

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Fraud within companies is on the rise and whistleblowers are playing a crucial role in helping detect it, according to the eighth annual Global Fraud Report produced by Kroll and released in late November.

Health Care Whistleblower Lawsuits Bring in Another $375 Million for Government

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This has been quite a week for settlement announcements in the world of the False Claims Act. In the past two days, the Department of Justice has announced an additional $375 million in settlements initiated by whistleblower lawsuits. This follows the earlier Novartis announcement that it would pay $390 million to resolve.

Health Care Whistleblowers Account for 65% of False Claims Act Lawsuits

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Whistleblowers provide most of the leads to the Justice Department concerning health care fraud every year. In FY 2014, 93 percent of the cases opened by the Civil Division were started by a qui tam complaint, according to the prepared remarks of Principal Deputy Assistant Attorney General Benjamin C. Mizer at the Pharmaceutical Compliance Congress and Best Practices Forum on October 22, 2015.

Novartis Reports $390 Million Settlement in Kickback Case

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Novartis has reportedly agreed in principle with the Department of Justice to settle a whistleblower lawsuit brought under the False Claims Act for $390 million. The complaint filed by the DOJ in 2014 alleges that the company paid kickbacks to specialty pharmacies for prescriptions involving Myfortic and Exjade. The whistleblower filed the complaint informing the Justice Department of the potential fraud in early 2012 following the company’s $420 million settlement with the government in 2010.

Unnecessary Drug Testing & Kickbacks Cost Millennium Health $256 Million

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One of the nation’s largest urine drug testing laboratories settled a False Claims Act lawsuit today to resolve allegations that it billed Medicare and Medicaid fraudulently for unnecessary services and referrals influenced by kickbacks. In the settlement, Millennium Health (formerly Millennium Laboratories) agreed to pay $256 million. It appears that the company is going to enter Chapter 11 bankruptcy and shareholders are going to make an initial payment of $50 million toward the settlement.

The company agreed to pay $227 million to resolve allegations under the False Claims Act. The FCA is the government’s leading tool against fighting spending as a result of fraud. It provides for treble damages and has been used in the past few years to recover billions of dollars lost to health care fraud. It rewards whistleblowers with payments of between 15 and 30 percent of the amount recovered by the US Government.

Millennium was accused of misrepresenting the need for expensive testing to doctors by encouraging them to setup custom profiles which in fact became standing orders for additional testing that occurred without regard to individual patient need. Medicare prohibits the billing of services which are not reasonable and medically necessary.

Millenium also offered gifts (test specimen cups) to physicians to boost their testing referrals, according to the U.S. Government. I haven’t looked at the procedural history of the case in the context of the False Claims Act, but the specimen cup issue may have been brought to light by an antitrust lawsuit originally filed by one of its competitors. The Department of Justice weighed in on that case after the start of its investigation to say that the free testing cups were a violation of the Stark Law and Anti-Kickback Statute.

Ten million of the settlement amount covered a separate whistleblower lawsuit brought by a healthcare provider in Florida which reported the company for unnecessary genetic testing performed without regard to patient need.

The San Diego-based company has been under investigation since 2012. The settlement is another example of the Justice Departments ongoing pursuit of diagnostic testing companies. Earlier this year, another laboratory (Health Diagnostics Laboratory) settled allegations that it paid physicians improperly for the referral of blood sample testing. Health Diagnostics claimed that the payments were a reasonable amount for the work performed by the doctor.

An article in the Wall Street Journal in 2014 discussed the explosion of annual Medicare payments for high tech testing of urine for drugs. In 2007, less than $50 million was spent on such tests. In 2013, Medicare spent more than $600 million on the monitoring of patient treatment for pain and substance abuse. With the tremendous explosion of payments in this area, it is no surprise that the U.S. Government is looking into improper payments in this area aggressively.

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Doctor to Receive $18.1 Million for Reporting Illegal Contract Offer by Hospital

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Another hospital has settled allegations of violations of the Stark Law that were brought by a whistleblower lawsuit under the False Claims Act. This time, it was Tuomey Healthcare System, which had previously lost at trial, resulting in an order to pay $277 million for violations of the law, and in its Fourth Circuit appeal. It ultimately settled the case for $72.5 million from the South Carolina hospital system, which will be sold to Palmetto Health.

In this case, the hospital entered into contractual relationships with area specialty physicians after becoming concerned that it would lose referrals of surgical procedures from them. The part-time employment agreements required them to send their cases to Tuomey and paid bonuses based in part on their referrals. The Stark Law prohibits the payment of anything of value to physicians based on their referrals of business paid for by the federal healthcare programs. One of the individuals that Tuomey offered a contract to reported them to the Department of Justice.

Many people have the mistaken impression that only an individual who works for a company can bring a whistleblower lawsuit. This is not true. Any individual that has nonpublic information sufficient to demonstrate fraud can file a lawsuit. However, insiders are typically the most likely individuals to have such information so they have gotten. Job seekers, industry experts, consultants, competitors and other individuals can also report health care fraud to the U.S. Government.

The resolution to this case came after a long legal battle, with two trials in a U.S. District Court and two appeals. The first verdict led to an order of payment of $45 million for Stark Law violations but was overturned on appeal. The second jury found Tuomey liable for additional misconduct under the False Claims Act. Tuomey began exploring a sale of the company while facing the largest potential penalty levied against a community hospital. The board and management determined a sale was its best option due to financial difficulties. Based on the discounted recovery, it seems likely that the Justice Department took these into account when reducing the fine against the community hospital.

In September, there were two other hospital settlements of cases under the False Claims Act for kickbacks in violation of the Stark Law. These two settlements totaled almost $200 million in recoveries for the United States Government.

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Massive Implantable Defibrillator Settlement under False Claims Act Approaches

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The Department of Justice is reportedly nearing settlements with hundreds of hospitals over their fraudulent billing of Medicare for defibrillators. Medicare covered the $40,000+ defibrillators for the primary prevention of arrhythmia unless they were implanted within 90 days of bypass surgery or 40 days of a heart attack. Doctors implanted the medical devices in patients and then fraudulently billed Medicare in spite of the guidelines.

This is expected to be the largest settlement in terms of the number of hospitals and the amount for a group of hospitals. In 2013, 55 hospitals settled a national investigation for $34 million into the use of cement in fractured vertebrae, a procedure known as kyphoplasty. The government is reportedly using data mining techniques this time around to assist them in their investigation.

The cardiac investigation dates back to at least 2012, when Modern Healthcare reported that the Justice Department was simultaneously emailing hundreds of hospitals with questionnaires concerning their use of the devices. At that time, Modern Healthcare obtained a document from the DOJ called the “Medical Review Guidelines/Resolution model”. It divided the possible scenarios for hospital billing of patients into categories which included those covered by the National Coverage Determination and/or excluded from the investigation, that the government had used its discretion to determine it would not bring enforcement (referred to as buckets), and those which would be included in an enforcement action.

The enforcement action(s) included certain coding errors, patients who were previously qualified but did not have an implantation until they were not within the coverage window, and those where it was not medically indicated. The calculation identified that the hospitals would be charged for the difference between the code they used and the correct code, as well as a per hospital multiplier of damages based on a variety of factors including knowledge, compliance efforts and patient harm.

At least six healthcare systems have already publicly reported the amount of their settlements to shareholders. Tenet announced a settlement of $12.1 million and HCA indicated their number was $15.8 million.

It will be interesting to see how the credit for this victory is shared. It seems likely that there are a number of whistleblowers out there, insiders who reported their hospital to the federal government through a qui tam lawsuit and may be in line for a reward as part of the settlement. The False Claims Act requires the DOJ to pay eligible relators between 15 and 25 percent of the award (in cases like this one where the government has not declined to intervene in the case). However, there are various rules such as the first to file rule and public disclosure which could limit those payments.

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Record Stark Law Settlement Under False Claims Act

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Two hospital systems have recently settled allegations by whistleblowers under the False Claims Act that they improperly rewarded physician referrals under the Stark Law, with one believed to be the largest settlement of its kind. Broward Health will pay $69.5 million in a settlement announced last week and Adventist Health will pay $118.7 million in an unrelated case with multiple whistleblowers.

The Stark Law prevents hospitals from paying doctors for referrals of Medicare patients. By restricting the financial incentives for treatment of patients insured by government health care programs, the law helps fight unnecessary overbilling.

There have been a number of large settlements in the past year of similar cases involving its corollary, the Anti-Kickback Statute (“AKS”). The AKS applies more broadly, as it covers the payment of referrals to individuals other than doctors. A few of these cases have contained allegations of both kickbacks to physicians and others, implicating both laws.

There is also an ongoing case against Tuomey Healthcare System involving the Stark Law which received a verdict against the hospital of $237 million. Over the summer, Tuomey lost their appeal to the Fourth Circuit. A news article at the time indicated that the hospital was considering its legal options and involved in settlement discussions with the U.S. Government.

Broward Health was accused of paying cardiologists more than $1 million using medical director jobs which were largely a sham designed to boost their compensation

The allegations against Adventist weren’t immediately clear from the press release. Lat year, Adventist indicated it self-reported violations of the Stark Law to the Department of Justice.

Both the Stark Law and the AKS place certain permitted conduct within a safe harbor or exclusion to only target the types of conduct that Congress and regulators have found objectionable. If the conduct violates one or both laws, they also implicate the False Claims Act, which will reward whistleblowers with 15 to 30 percent of the recovery for reporting information to the U.S. Government.

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EB-5 Program Renewal Debate Spurs Fraud Talk

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There have been a number of articles and an Office of Inspector General report about the EB-5 visa program recently as the 25 year old program must be renewed by Congress for the tenth time by September 30, 2015 or it will expire. One of the reasons we are seeing that it hasn’t been renewed yet is that the EB-5 program is fraught with potential fraud for both investors and the government.

Because of their desire for a visa to the United States and language differences, Chinese investors can be particularly susceptible to scammers. U.S. Government investigators have identified at least 35 cases of securities fraud in the EB-5 program, according to a Government Accountability Office report. The Securities and Exchange Commission has received more than 100 tips about potential securities fraud violations involving the EB-5 program from Jan. 2013 through Jan. 2015. These reports have no doubt been facilitated by the SEC’s whistleblower program.

The applications to the U.S. Citizenship and Immigration Services also raise fraud concerns. The documentation is paper based and funds may come from prohibited sources such as the drug trade.

There have been two notable enforcement actions in this area, one leading to a sizable whistleblower reward and the other leading to the first enforcement action against two firms acting as unlicensed broker-dealers for the EB-5 program, raising $79 million.

For those not familiar with it, the federal EB-5 visa program allows immigrants and their families to get a green card if they invest at least $1 million ($500,000 in rural areas or high unemployment areas) and create 10 or more jobs.

Investments in the program are set to hit $3.6 billion this year, according to an industry trade group. This number has accelerated substantially since 2008 when there were investments of $321 million in the year. The first year to hit the maximum number of EB-5 visas was last year (2014), when the U.S. State Department issued 10,000.

The combination of Canada’s decision to limit immigration and the need for alternative financing for businesses because of the recession caused the program to balloon. Eighty-five percent of EB-5 visas in 2014 when to immigrants from China. South Korea, Mexico, Taiwan and Vietnam make up the rest.

The leading area projects is in construction and real estate, where the investments lead to hotels, hospitals, offices, housing projects and mixed-use developments.

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Senate Bill Proposes Time Extension for SEC Fraud Fighting

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Senator Jack Reed introduced legislation last week to extend the statute of limitations for civil monetary penalties brought by the SEC from five to ten years. The proposed bill would give the Securities and Exchange Commission additional time to discover and investigate financial fraud before the clock runs out on its ability to bring a lawsuit.

In 2013, the Supreme Court unanimously declared that the five year statute of limitations starts running when the law is broken and not when the government discovers that misconduct occured. The case involved a violation of the Investment Advisers Act of 1940. The decision for the Court in Gabelli v. SEC was written by Chief Justice Roberts. The Court rejected application of the discovery rule and set the start to the clock ticking on potential government enforcement at the time the cause of action accrues.

Given the complexity of financial products and the determination that there has been fraud against investors or another violation of the federal securities laws, a short window for the SEC to bring an enforcement action makes it even more important that the securities regulator encourages whistleblowers to file tips under the SEC program.

Earlier this year, the CFTC brought an action for market manipulation and spoofing in the case of the 2010 Flash Crash near the five year statute of limitations for such cases. The CFTC reportedly received assistance in that investigation from a whistleblower tip.

Senator Reed has another piece of legislation in front of the Senate to increase the maximum civil penalty that can be imposed by the SEC for a violation of federal securities laws. Similar legislation has been proposed to increase the potential penalties for delayed recalls that can be issued by the NHTSA.


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