The False Claims Act

Based on trends over the past decade, it came as no surprise that the healthcare industry was responsible for the overwhelmingly largest percentage of the recoveries — $1.7 billion of the $2.2 billion recovered.

Unscrupulous healthcare providers engage in a variety of deceptive schemes that ultimately result in fraudulent claims that are submitted to government healthcare programs, such as Medicare, Medicaid and TRICARE.

In FY 2022, healthcare companies, pharmacies and laboratories entered into settlements with the government to resolve allegations involving: substandard skilled nursing services in nursing homes; providing medically unnecessary medical services and surgeries; enrolling patients for hospice services who were not terminally ill; unauthorized switching to higher cost medications without medical need or a valid prescription; and billing for for unnecessary urine drug, psychological, and genetic testing.

When a federal healthcare program is implicated, the payment of kickbacks can potentially lead to False Claims Act violations  as well as criminal liability.  One such case involved a pharmaceutical company that paid over $843 million to resolve allegations that it paid illegal kickbacks to physicians who spoke at or attended programs involving certain of the company’s drugs.

In another kickback case, a durable medical equipment manufacturer paid more than $24 million to resolve allegations that it paid unlawful kickbacks to suppliers to induce them to select the company’s respiratory equipment. The company allegedly provided the suppliers with physician prescribing data at no cost even though the company knew that it  was a valuable tool that helped suppliers market to physicians.

Fraud by defense contractors during the U.S. Civil War was the impetus for the enactment of the False Claims Act. More than a century and a half later, government contractors consistently remain near the top of the DOJ’s annual list of False Claims Act recoveries.

In FY 2022, a government contractor agreed to pay $8.4 million to resolve allegations that it failed to provide certified cost or pricing data when it negotiated rates with the Army Corps of Engineers for the repair and restoration of Puerto Rico’s power grid caused by a hurricane.  According to the government’s complaint, the Army Corps of Engineers paid inflated rates for labor, equipment and basecamp services due the alleged violations of the Truth in Negotiations Act.

In a separate action, seven South Korea-based companies agreed to pay $3.1 million to resolve allegations they engaged in a bid-rigging conspiracy involving construction and engineering contracts for U.S. military bases in South Korea.  According to the government’s allegations, the companies conspired to suppress and eliminate competition during the bidding process on 15 contracts which caused the Army Corps of Engineers to pay substantially more than if there been competitive bidding.  

In another case, an Aircraft Parts Foundry agreed to pay $500,000 to resolve allegations that it failed to preform contractually required testing and falsified test results for parts used in military aircrafts.  According to the complaint allegations, the company failed to perform the required metallurgic tests on large metal castings that it supplied to prime defense contractors, including Bell Helicopter, Sikorsky Aircraft and Boeing.  The amount of the settlement was based on the company’s ability to pay.

To the surprise of no one, a significant portion of the $5 trillion spent by the government on COVID stimulus was lost to illicit schemes and fraud. The Small Business Administration’s Office of Inspector General has identified more than 70,000 loans totaling over $4.6 billion that potentially involve fraud.

DOJ has pursued a number of cases involving improper payments under the Paycheck Protection Program (PPP), including borrowers that improperly received duplicate or inflated loans or were otherwise ineligible for a PPP loan. In FY 2022, DOJ recovered over $6.8 million by resolving 35 separate actions brough under the False Claims Act.

In addition to borrowers, DOJ also brought an action against a lender that allegedly made a PPP loan to an applicant that it knew was ineligible. According to the allegations, the bank knew that the sole owner of a medical practice was facing criminal charges for prescribing opioids at the time he applied for the loan.

Another case involved the misuse other pandemic-related resources.  A Florida-based not-for-profit corporation paid $1.75 million to resolve allegations that it  arranged for hundreds of ineligible individuals to receive COVID-19 vaccinations, including the corporation’s board members; donors and potential donors; and 300 other ineligible individuals who were invited by the Vice Chairman of the Board of Directors and his brother.

Customs Fraud – two New York based apparel companies, and their owner, agreed to pay $6 million to settle civil fraud claims brought under the False Claims Act. The two clothing companies engaged in double invoicing schemes in which they fraudulently underreported the value of goods that were imported from China. As a result of their fraud, the companies avoided paying millions of dollars in customs duties for more than a decade. The owner of the company pled guilty for his role in the fraud and was sentenced to six months in prison. In addition to the False Claims Act settlement, the owner was ordered to forfeit $1.6 million in the criminal proceedings. The anonymous whistleblower who filed the qui tam complaint was awarded more than $1.2million from the recovered proceeds.

Education Fraud – a New Jersy based educational services provider agreed to pay $1.1 million to resolve False Claims Act allegations that it fraudulently obtained federal funds for afterschool tutoring services that it never provided. The program was intended to help underprivileged school students in the New York City public school system.  The program was funded entirely by the U.S. Department of Education through grants to the New York City Department of Education, and the provider was paid $72.80 per hour for each student that it tutored.

Under the terms of its contract, the company was required to certify the truthfulness and accuracy of its attendance records. When the company allegedly submitted false certifications of its attendance records as part of its requests for payment, it allegedly resulted in False Claims Act violations.  The government only became aware of the alleged fraud after a whistleblower had filed a qui tam complaint.

Mortgage Fraud – a mortgage company agreed to pay $24.9 million to resolve allegations that it violated the False Claims Act by knowingly approving ineligible loans that later defaulted which resulted in mortgage insurance claims to the Federal Housing Administration (FHA). The company also allegedly failed to self-report deficient loans that it had identified and failed to comply with rules requiring quality control programs to prevent underwriting deficiencies. The whistleblower who reported the fraud was the former head of quality control for the company. He received a reward of nearly $5 million from the government’s recovery.

In late 2021, DOJ announced the start of its Civil Cyber-Fraud Initiative which will hold accountable anyone that engages in fraud that places the government’s highly sensitive information and systems at risk.

DOJ intends to pursue contractors and grant recipients that provide deficient cybersecurity products or services; misrepresent their cybersecurity practices or protocols; or violate their obligations to monitor and report cybersecurity incidents and breaches. False Claims Act violations could potentially arise from the government’s procurement of information technology, software, and cloud-based storage.

One of the benefits of the Cyber-Fraud Initiative cited by DOJ is obtaining reimbursement for the government and taxpayers when losses result from a company’s failure to meet their cybersecurity obligations. The DOJ has made clear that it intends to utilize the False Claims Act in furtherance of this objective.