Health Care Fraud –What the Prudent Health Care Provider Should Know 

By Robert S. Bennett & David M. Medearis

Allegations of health care fraud hit home as the government continues its war on health care costs. Last year the Department of Justice (DOJ) issued subpoenas to physicians in Texas and across the country in connection with ongoing investigations into pharmaceutical marketing practices. These investigations stem in part from a settlement reached last October by the DOJ and TAP Pharmaceutical Products Inc. (“TAP”) regarding fraudulent marketing practices TAP had committed over the past decade in order to promote the company’s advanced prostate cancer drug, Lupron.[i] TAP agreed to pay the Government $875 million to resolve the Government’s allegations that the company had bribed physicians in violation of the Medicaid Anti-Kickback Statute, conspired to submit false billing claims to Medicare and Medicaid and conspired with providers to violate the Prescription Drug Marketing Act, which prohibits the sale of drug samples.

The United States Attorney General recently stated that the detection and prevention of health care fraud is one of the Government’s top priorities.[ii] There are various Federal and State law enforcement agencies involved with this pursuit and an array of remedies available to deal with providers suspected of fraud. These remedies range from steep fines or prison sentences to civil lawsuits or exclusion from federal funded health care programs, sometimes called the administrative death sentence. Of course, providers can also have their licenses suspended or revoked.

The Government boasts that the TAP settlement represents the largest criminal fine ever paid in a health care fraud prosecution.[iii] According to Health and Human Services Inspector General, Janet Rehnquist, “[I]n recent years, the pharmaceutical industry has come under increasing scrutiny for its pricing, sales, and marketing practices. The OIG, together with other government agencies, will use all available enforcement authorities, where appropriate, to address these practices.”[iv] Several weeks following the TAP indictments, a former pharmaceutical sales representative of Parke-Davis division of Warner-Lambert Co. charged that Parke-Davis officials were also engaged in illegal marketing activities in connection with that company’s epilepsy drug, Neurontin.[v]

As lawmakers struggle to deal with the “Medicaid mess” that has resulted from over enrollment and a multibillion-dollar budget shortfall, [vi] unwary providers could have more to worry about than reimbursement cuts and skyrocketing malpractice insurance. It is no secret that the pharmaceutical industry in particular has been under attack by multiple fronts over rising pharmaceutical expenditures. The General Accounting Office recently requested detailed sales and pricing data from eleven major drug manufacturers and issued a subpoena to Pfizer.[vii]  These investigations may be to fish for another potential TAP “conspiracy,” and perhaps another big payout from a company who would rather pay-up as TAP did in order to avoid a protracted battle with the Government at a time when corporate scandals and stock plunges have become common. The anti-industry sentiment has gone so far, that in the current climate even some Medical students are afraid to accept a free pizza provided by a pharmaceutical company sponsored lecture for fear of the appearance of some possible unethical influence it may have.[viii] 

With the ever-growing maze of billing regulations and fraud statutes, providers should take extra caution not to get caught up in the government’s war on health care costs. In the current political climate even a simple mistake or misinterpretation of a law or regulation can result in major legal problems. Several recent federal appeals cases illustrate how complex federal laws and aggressive federal prosecutors can become disastrous to honest providers. For example, two former executives of HCA Inc., the nation's largest hospital owner, were convicted in 1999 of Medicare fraud.[ix] One executive was sentenced to 33 months imprisonment and the other to two years. After spending a small fortune and nearly four years to prove their innocence a Federal Circuit Court in Florida finally reversed their convictions stating, “competing interpretations of the applicable law are far too reasonable to justify these convictions.”[x]

In recent months the DOJ has been reviewing pharmaceutical sales and market records obtained from pharmaceutical sales representatives to find evidence of illegal activities between pharmaceutical companies and physicians, such as federal health care program providers receiving illegal remuneration, in the form of free samples, expensive gifts, and forgiveness of debt. The DOJ is also aggressively pursuing physicians in Texas and other states involved with “illegal” activities in connection with TAP and other pharmaceutical companies. The Federal Government alleges that physicians across the country conspired with pharmaceutical sales representatives to illegally bill Medicare and HMOs for inflated drug prices and the sale of promotional “free samples.” To date, five physicians and nine TAP employees have faced criminal charged in connection with the TAP controversy.[xi]

There is no question that genuine health care fraud is a very real problem. Consider for example the egregious case announced this past May by the United States Attorney in the Northern District of Texas regarding a Dallas couple who from 1996 through 2000, billed Medicaid $3,915,925.00 for mental health counseling which never actually took place.[xii] However, an opposite problem also exists; as one legal scholar puts it, “the internal and social costs of such investigations are high, and care should be taken so that the mystique of the health care fraud law enforcement machine does not seduce the regulator into becoming a hunter when there is no prey.”[xiii]

Unfortunately, the recent heightened scrutiny of health care providers has emerged from a relatively lax environment and many providers may have made mistakes without intending to do anything dishonest or illegal. This article provides a brief overview of three relevant federal healthcare fraud statutes. These three statutes are, the Prescription Drug Marketing Act (PDMA), the Medicaid Anti-Kickback Statute, and False Claims Act (FCA) and how the prudent health care provider can seek protection from overly aggressive enforcement. This discussion also provides practical suggestions concerning what to do if Government agents come knocking at your door.

Prescription Drug Marketing Act

The TAP grand jury indictment alleges that TAP conspired with providers to bill drug samples through Medicaid and Medicare in violation of the Prescription Drug Marketing Act (“PDMA”).[xiv] The PDMA states in pertinent part, “No person may sell, purchase, or trade or offer to sell, purchase, or trade any drug sample.”[xv] Drug sample is defined by the act as a unit of drug that is “not intended to be sold and is intended to promote the sale of the drug.” Individuals knowingly selling drug samples in violation of the PDMA provisions can be imprisoned for up to 10 years and be ordered to pay a fine of up to $ 250,000.[xvi] 

The PDMA provision banning the sale of drug samples has not been the subject of extensive litigation so only limited judicial guidance as to how the Act should be applied is available. Congress enacted the PDMA to prevent “an unacceptable risk that counterfeit, adulterated, misbranded, subpotent or expired drugs” could be sold to American Consumers.[xvii] The Act was intended to correct the “decades of abuse” in the use of drug samples by unscrupulous individuals who repackage, distribute, and sell sample drugs.[xviii] The abuse described in the legislative history involves intricate underground black-markets in which free samples are repackaged and sold to unsuspecting consumers.[xix] This process often results in misbranded and adulterated products.

Although, prosecutions of physicians under the PDMA are rare, the FDA recently reported a case involving a Kentucky physician who was fined $40,000 and sentenced to 15 months in prison for violating the PDMA.[xx] This physician was charged not only with the sale of free samples (which he repackaged and sold to patients for cash), but also for over-billing Medicare by charging multiple times for a single medical test. Special agent Rodney Turner of the FDA's Office of Criminal Investigations, commented that not only was the violation an act of illegal profiteering by the doctor, but he was also destroying the safeguards that help ensure the effectiveness of drugs.

In the TAP case the application of the PDMA seems misplaced.  In this case, the drug units in question were packaged, stored, and administered by physicians in exactly the same manner as any other drug units would have been. Some providers accused of wrong-doing in connection with the TAP controversy have indicated that the so-called “drug samples” they received were provided as replacement units for damaged shipments and were not labeled as “Free Sample” or “Not intended for resale.” These circumstances negate the conclusion that the units in question were even “drug samples”, which are defined in the PDMA as units of a drug “not intended to be sold” and “intended to promote the sale of the drug.”

Nevertheless, the government has taken the position that some providers who billed patients for drug units delivered to the providers by pharmaceutical representatives had made illegal sales, prohibited by the PDMA. An Indiana Urologist, Rodney Mannion, age 71, who plead guilty to violations of the PDMA in a plea agreement connected with the TAP investigation was recently sentenced to three years' probation and fined $2,000.[xxi]  The U.S. Attorney’s Office reportedly recommended a light sentence due to Dr. Mannion’s cooperation in providing evidence to the government in their case against TAP Pharmaceuticals. Mannion’s plea agreement also involved the government dropping other charges of health care fraud covered by of the Medicaid Anti-Kickback Statute and the Federal False Claims Act.        

Medicaid Anti-Kickback Statute

The thrust of the Government’s allegations in connection with the TAP-Lupron case is that TAP pharmaceutical sales representatives and certain healthcare providers conspired to violate the federal Medicaid Anti-Kickback Statute.[xxii] The Anti-Kickback Statute prohibits knowingly and willfully paying or receiving any remuneration directly or indirectly, overtly or covertly, in cash or kind, in exchange for prescribing, purchasing or recommending any service, treatment or item for which payment will be made by Medicare, Medicaid or any other federally funded healthcare program.[xxiii]  

To convict a healthcare provider under the Anti-Kickback Statute, the government must prove that 1) the provider solicited or received remuneration; 2) the remuneration induced the provider’s referral of program-related business; and 3) the provider entered into the remuneration and inducement agreement knowingly and willfully. This broad statute prohibits not only patently illegal actions, such as overt kickbacks and bribes, but also an array of complex economic relationships which could result in conflicting interests, including discount arrangements, incentives given to providers, payments for services, and the practices of manufacturers giving gifts and business courtesies.[xxiv] Violations of the Anti-Kickback Statute are punishable by fines up to $ 25,000 and/or imprisonment for up to five years for each separate incident.[xxv]

The broad scope of the Medicaid Anti-Kickback Statute can be used to make virtually anything a provider receives from a pharmaceutical company look like a kickback. In response to the growing controversy over pharmaceutical marketing and the problem of perceived “kick-backs,” the Pharmaceutical Researchers and Manufactures of America (PhRMA) recently proposed a voluntary code that pharmaceutical companies are expected to follow on interacting with health care providers.[xxvi] The new code, consistent with the spirit of the current climate, goes as far as prohibiting the age-old practice of sales reps dropping off a pizza or donuts at a provider’s office.

The AMA’s Ethical Opinion on gifts to physicians from industry are straight forward, and if adhered to, should be sufficient to avoid allegations of the Anti-Kickback Statute. Basically, the AMA advises that physicians should only accept gifts of minimum value that primarily benefit patients, such as textbooks and other educational materials. Physicians should not accept cash gifts or free drug samples for personal use. Conferences or meetings should be primarily dedicated to scientific and educational activities and faculty should only accept reasonable honoraria and reimbursement for expenses for participation in industry sponsored educational expenses. Physicians attending conferences should not accept payments or reimbursement for the cost of travel, lodging or other personal expenses. Only students, residents or fellows should accept industry support for attending conferences. And, of course, no gifts should ever be accepted if there are strings attached.

Although, providers should always try to remain on the safe-side when interacting with pharmaceutical sales representatives or making arrangements with clinical laboratory services, hospitals, or other business or joint venture arrangements, actual conviction under the Anti-Kickback Statute requires the government to show that a defendant acted with specific intent, i.e., “knowingly and willfully.” This culpability requirement, which was added to the Anti-Kickback Statute in 1980, was intended by Congress to prevent what was viewed by many as unjustified prosecutions of individuals who acted improperly but inadvertently.[xxvii] 

The federal indictment of TAP pharmaceutical employees alleges that TAP representatives, from 1989 to October of 2001, engaged in the practice of inducing providers to purchase and prescribe Lupron instead of other drugs, by offering and providing “money, free and nominally priced drugs, discounted prices on one drug to induce prescription of the other, free consulting services, and other things of value.”[xxviii] A unique aspect of the TAP case is the notion that free drug samples, which are customary in the industry, can be turned into cash kickbacks. In this respect, the TAP case illustrates a broader application of the Anti-Kickback Statute in that the economic arrangement involved indirect kickbacks, in which free samples or nominally priced drugs are “turned” into cash kickbacks. This indirect nature of the alleged kickbacks increases the likelihood that the defendant did not knowingly and willfully violated the law. 

Some physicians accused of billing for free samples in the TAP case did not even know that the drug units provided to them by TAP representatives were actually drug samples. As mentioned in the previous section, many of the so-called drug samples involved in the TAP case were identical to regular units, not marked as free samples, and delivered under the pretense of replacement units. Furthermore, even in the Government’s own allegations against TAP, the Government says TAP representative forged physician signatures on sample request forms. Thus, physicians may have received and billed for free samples without have knowingly and willfully done so. This lack of intent is an excellent defense and should be raised as early as possible in the investigation. This defense is precisely the kind protection Congress intended by adding a specific intent requirement to the Anti-Kickback Statute in 1980.[xxix]

More importantly, the Ninth Circuit recently construed the “knowingly and willfully" requirement of the Anti-Kickback Statute as requiring a defendant to “(1) know that § 1128B prohibits offering or paying remuneration to induce referrals, and (2) engage in prohibited conduct with the specific intent to disobey the law.”[xxx] (emphasis added). Moreover, the Fifth Circuit Court of Appeals (of which Texas is a member) recently adopted the Ninth Circuit’s narrow interpretation of the “knowingly and willfully” requirement under of the Anti-Kickback Statute as well.[xxxi] This narrow interpretation of the Anti-Kickback Statute’s  “knowingly and willfully” requirement may even provide a legitimate defense to providers who simply were not aware that they were breaking the law.  Of course, no one wants to be placed in this position, but if this is a providers only defense there is some comfort in knowing that at least to some extent “ignorance of the law” might be a real defense to keep a provider out of prison.        

False Claims Act

The False Claims Act (FCA) provides that where persons submit, cause others to submit, or conspire to submit, false or fraudulent claims to the United States Government, including its federal healthcare programs, the Government is entitled to treble damages (i.e., three times the amount billed) plus fines of $5,500 to $11,000 for each false or fraudulent claim submitted.[xxxii] FCA actions can be brought against any government contractor directly by the Government or by private citizens. Qui Tam[1] provisions of the FCA allow private citizens to file a suit in the name of the U.S. Government charging fraud and rewards the individual who files the suit with a share of any money recovered.[xxxiii]

To successfully maintain an action against a provider under the FCA, a claimant must show that, 1) the provider made, or caused to be made, a statement of material fact in an application for payment or benefits under a federal healthcare program, 2) the statement or representation was false, 3) the provider knowingly and willfully made the statement, and 4) the provider knew the statement to be false. [xxxiv] In analyzing whether the provider "knowingly and willfully" submitted a false claim, the court will consider such factors such as whether the provider was on notice of the governing rule or policy, the clarity of the rule or policy, the pervasiveness and magnitude of the false claims, the existence of a compliance program, the provider's past efforts to remedy the problem, whether the provider previously received guidance on the issue, and the results of previous audits.[xxxv]

The FCA provides rewards for whistleblowers of up to 15% of the Government’s recovery, providing a rich incentive for any current or past employer to commence an action and spark a governmental investigation. The current actions and investigations regarding TAP and Parke-Davis are examples. Former TAP sales executive, Douglas Durand, received a $77 million whistleblower payment for reporting TAP’s activities.[xxxvi]  

Administrative Actions

While the Department of Justice generally enforces the forgoing health care statutes criminally, the Department of Health and Humans Services Office of Inspector General (“OIG”) also pursues administrative and civil penalties against alleged violation of the Medicaid Anti-Kickback Statute, the False Claims Act, or any other violations that endanger Medicaid beneficiaries. Administrative and civil remedies through the OIG offer the Federal Government the advantage of more favorable discovery rules and a lower standard of proof. In some instances, the Department of Justice may refer cases over to the OIG to proceed administratively. While it may be some relief to a provider when this happens, administrative proceedings by the OIG are by no means to be taken lightly, since fines can be exorbitant and exclusion, can be a professional death sentence. 

Providers who are convicted of, or plead guilty to, “criminal offense related to such physician's or practitioner's involvement in the Medicare and Medicaid programs" face mandatory exclusion for at least five years.[xxxvii] However, the OIG may also permissively exclude providers who have not been criminally convicted, provided the excluded provider or entity is given reasonable notice and opportunity for a hearing by the Secretary of the Department of Health and Human Services (“Secretary”) and to judicial review of the Secretary's final decision.[xxxviii]

Additionally, the Secretary can temporarily withhold payments from of Medicaid and Medicare funds to an individual or entity prior to reaching a final decision.[xxxix] This economic advantage can create a significant burden for a provider to overcome if the provider is dependant on Government funds to stay in business. By withholding payment and delaying any final decision a provider is simply without recourse, and the courts have upheld this authority by denying preliminary injunctions to “temporarily excluded” providers.[xl]

The effects of exclusion to an individual or entity are harsh. First, the individual or entity is obviously excluded from receiving program payments for items or services furnished, ordered, or prescribed under the Medicare (Title XVIII), Medicaid (Title XIX), Maternal and Child Health Services Block Grant (Title V), Block Grants to States for Social Services (Title XX) and State Children's Health Insurance (Title XXI) and all other Federal health care programs. [xli]  Moreover, any entity in which an excluded individual is serving as an employee, administrator, operator, or in any other capacity, for any services, including administrative and management services furnished, ordered, or prescribed during the period of exclusion is also subject to exclusion.[xlii] Furthermore, no payment will be made to any entity that submits bills for payment of items or services provided by an excluded party.[xliii] Because the effect of exclusion is so harsh, it is often thought of as an administrative death sentence. Nevertheless, nearly three thousand individuals and entities were excluded by the OIG in the fiscal year 1999.[xliv]

State Actions - The Texas Medicaid Fraud Prevention Act

State and Federal law enforcement authorities generally work together with respect to overseeing Medicaid compliance. For the most part, the Texas Medicaid Fraud Prevention Act (TMFPA) mirrors Federal health care fraud laws. Texas law grants the Texas Attorney General broad authority to impose monetary and administrative sanctions.[xlv] Like the Federal False Claims Act, the TMFPA also has a Qui Tam provision to reward whistleblowers.[xlvi] The Texas Attorney General’s has established the Medicaid Fraud Control Unit (MFCU), the Texas Health & Human Services Commission's Medicaid Program Integrity (MPI), and the Elder Law and Public Health Division (ELPH) to investigate and prevent health care fraud and abuse.

The MFCU conducts criminal investigations into potential violations of state and federal Medicaid laws and related misconduct of providers. The MPI, like the OIG at the federal level, has the authority to impose civil and administrative sanctions on providers, including 1) Exclusion from Medicare and Medicaid programs for a specified period of time; 2) Suspension of payments; 3) Recoupment of overpayments; 4) Recoupment of projected overpayments (determined through a sampling process); 5) Restricted reimbursement; and 6) Civil monetary penalties. Finally, the ELPH investigates abuse to the elderly and inspects nursing homes. But the ELPH also has authority to investigate and prosecute civil Medicaid fraud claims and may also refer cases to MFCU for criminal prosecution.[xlvii]

What should you do if you are under investigation?

Most health care providers never think it will happen to them until that moment of panic when Federal or State agents arrive at their office unannounced and began making demands. Although most health care providers have done nothing intentionally wrong, when agents barge into a provider’s office the innocent are made to feel like criminals. Providers who are convinced of their own innocence may have a tendency to “spill their guts.” On the other extreme, providers equally convinced they have done nothing wrong may act overly defensive or be uncooperative which could led to additional charges and raise suspicion. For instance, providers who do not let agents in or who tell their employees not to speak to agents face potential fines or imprisoned for obstruction of justice.  However employees should be reminded of their right to have their own attorney present. 

They key to getting through a government investigation is to remain calm, professional and polite, but at the same time to stay on guard and act prudently. The first thing a provider should do when dealing with government agents is to identify the agent in charge and ask to read the documents authorizing the search. These documents will usually be a request for medical records, a subpoena (usually from the OIG), or a search warrant. Your rights, and consequently the rules the government agents must follow, are different depending what type of document (a request for medical records, a subpoena, or a search warrant) authorizes the search.  If the agents’ authorization is only a request for records or an agency subpoena, the agents are generally not entitled to immediate access or entry. On the other hand, if they present you with a search warrant issued by a judge or magistrate they are entitled to immediate entry and access to your records.

If the agents do not present a search warrant, or if for some reason you believe the warrant is invalid, you should assure the agents of your willingness to cooperate, but point out that since you do not believe the documents authorize an immediate search, you would like to wait for your attorney to arrive to assist them with gathering the appropriate documents. Most agents will generally agree to wait for your attorney. If they indeed do not have a valid search warrant and they still insist on immediate access, it generally unwise to try to stop them. In this case, you should maintain, preferably in front of witnesses, that you are allowing them to search under protest and call your attorney immediately. If the agents do present a search warrant, it still does not hurt to ask if they would mind waiting for your counsel to arrive, but they generally will not grant such a request without a good reason to do so. Under no circumstances should you try to interfere with or intimidate agents. As mentioned in the beginning of this section, such conduct may led to fines or imprisonment for obstruction of justice.

While you do not want to interfere with agents conducting a search, you do want to monitor the search. If the agents commence the search before your attorney can arrive you should nonetheless try to have your attorney arrive as soon as possible to help monitor the search or at the very least interview everyone who witnessed the search as soon as possible while memories are still fresh. If your attorney is not available to monitor the search, you must play an active role in monitoring how the agents conducted the search. By monitoring the search, we mean to getting the names of each agent and documenting the search as best as possible.

Ideally you should assign an employee to each agent conducting the search. If a camera is handy document the search on film. It is very important that the individuals monitoring the search do not interfere with the agents. However, if certain documents go beyond the scope of the agents’ warrant or you believe they are privileged documents, you should make a record of your objection and request the said documents be boxed separately and marked “privilege claim asserted.” The company representative monitoring the search should also arrange to have copies made of all documents or computer files taken by agents and make a detailed inventory of all items taken. Although the agent in charge is required to provide you with an inventory, you should not rely on this, since agents typically provide only a general list, which is not very helpful.

Proper monitoring of the search provides several advantages. First, a detailed record of the search provides your counsel with valuable information necessary to provide the best defense or recommend a settlement of plea offer, whichever the case may be. A monitoring of the search also helps to prevent agents from taking critical documents without leaving you copies. Furthermore, documents obtained in areas or by means which exceed the scope of the agents’ authorization may be deemed inadmissible evidence if your case goes to trial.

Conclusion

As healthcare expenditures continue to rise, the entire healthcare industry will inevitably face greater political pressures and legal scrutiny over rising costs. Increased scrutiny of prescription drug costs have attracted particular interest recently, as this sector is the fastest growing healthcare costs in terms of overall expenditures.[xlviii] Healthcare organizations and providers should focus on strict compliance with applicable laws, particularly with respect to billing transactions and business relationships that might be construed as unethical arrangements to generate Medicaid business. If a deal seems too good, it might be illegal. However, the goal should always be to err on the safe side to avoid exhausting investigations and serious charges, which can be devastating. You do not want to spend a small fortune in legal fees and five or six years of your life trying to prove your innocence. The Medicaid Anti-Kickback Statute, the Prescription Drug Marketing Act (PDMA), and False Claims Act (FCA) are but a few of the serious fraud and abuse provisions which can destroy a healthcare organization or the career of an uninformed healthcare provider. Unfortunately, there are literally 100,000 pages of Medicare regulations, rulings and bulletins providers must adhere to. Criminal charges can be brought at either the state or federal level and civil and administrative proceedings can also have serious consequences.