A Foolish Way to Fight Fraud
New York state has an enormous Medicaid-fraud problem, estimated at billions of dollars a year. To strengthen the state's weak anti-fraud program, the state Assembly is pushing a New York version of the federal False Claims Act; the measuere would reward whistleblowers and their attorneys for turning in Medicaid cheats. But that can't be the whole answer—indeed, by itself, it could easily create as many problems as it solves.
Fighting Medicaid abuse requires a whole arsenal of weapons—new technologies to sniff out fraud, tougher criminal penalties and increased oversight of who's allowed into the program.
Because of the power and efforts of trial lawyers, the federal False Claims Act (FCA) gets lots of press attention in discussions of how to fight Medicaid fraud. And it has indeed helped U.S. prosecutors uncover some cheats—but it has also promoted abuse.
The law allows whistleblowers who report fraud against the government to collect up to 30 percent of any money recovered from information they provide.
Prosecutors aided by whistle-blowers have successfully pursued several huge Medicaid-fraud cases using the FCA, resulting in hundreds of millions of dollars in fines and penalties against drug companies and hospital chains for overbilling the program. But tens of those millions went to whistleblowers and the lawyers working with them on a contingency-fee basis, setting off a flood of further lawsuits.
Since Congress amended the law in 1986, hiking the potential payout to whistleblowers, suits have grown tenfold, with nearly 70 percent of them involving health-care companies. Since 1986, whistleblowers have collected a staggering $1 billion.
But the huge potential payoffs invite abuse. In some cases, insiders have let fraud go on for years after detecting it, slowly gathering evidence and then leaving the company to sue.
Then there's the "protection racket" problem. Whistleblowers, plaintiffs' attorneys and even government prosecutors increasingly seem to be targeting legitimate businesses—using the threat of the FCA's steep penalties (which include permanent exclusion from government programs as well as big fines and damages) to coerce companies into settling cases rather than risking a trial verdict that could bankrupt them.
A 1999 Government Accountability Office study criticized several FCA cases. In one, the GAO concluded that hospitals that had already agreed to pay steep fines to avoid going to trial had in fact been improperly accused. The study also found that prosecutors and whistleblowers targeted some firms for investigation not because they were plausible fraud suspects but merely because they were the biggest contractors in government health-care programs—that is, the deepest pockets for large paydays.
As a result of the investigations, the GAO is now charged with monitoring how federal prosecutors work under FCA.
Plaintiffs' attorneys have helped fuel the fervor for FCA lawsuits. Shortly after Congress amended the FCA in 1986, public-interest lawyer John Phillips, who had lobbied heavily for the new legislation, set up a front group, "Taxpayers Against Fraud," to tout the law—and also set up his own private practice to cash in on the act. His firm has won some $100 million in contingency fees pursuing FCA cases, according to Forbes magazine, and its successes have attracted some 200 more contingency lawyers into the field.
Meanwhile, Taxpayers Against Fraud works the media. Cited dozens of times a year in press stories as an advocate for the FCA, it has successfully encouraged a handful of states to enact their own versions of the legislation—allowing similar suits in state courts, though state prosecutors don't operate under the GAO's watchful eye. And press accounts on the FCA often quote Taxpayers Against Fraud without mentioning that it isn't a real taxpayer group, just a propaganda instrument of lawyers who benefit from the laws the group promotes.
One danger of the false-claims lawsuit frenzy is that it will distract from the broader work of tracking down Medicaid fraud. Local pol Mark Green—who began his public career working for trial-lawyer ally Ralph Nader, and is now running for state attorney general—last year penned a Times op-ed to lobby for a New York version of the FCA as the remedy for the state's Medicaid woes. Green quoted Taxpayers Against Fraud without mentioning that the group's chairman, Neil Getnick, is a supporter of his election bid and that Getnick's law firm could benefit enormously from a New York state law.
A New York FCA can be one weapon in an arsenal against Medicaid fraud. But it needs sensible provisions to discourage abuse, including limiting the size of whistleblower awards and requiring that whistleblowers try to end fraud at their employer before filing suits. The federal law has created open season on legitimate companies and sparked a plaintiffs-bar feeding frenzy. That's not what Congress intended—and no model for New York.
Adapted from city-journal.org, Web site of The Manhattan Institute's City Journal, where Steve Malanga is a contributing editor.