In a closely watched case, the U.S. government is for the first time arguing that an ineffective compliance program could be enough to constitute a violation of the False Claims Act—the federal law that imposes liability for knowingly submitting to the government a false or fraudulent claim for payment.
Shepard
The suit, against Merck-Medco Managed Care, “would be unremarkable except for the fact that it [alleges] that Medco’s lack of an ‘effective’ corporate compliance program demonstrated the requisite knowledge under the FCA,” notes Ray Shepard, a partner with the law firm Ober|Kaler in Baltimore.
The case is a significant development, says Shepard, because the government has never before alleged that a company’s compliance program could be used to determine that it “knowingly” submitted false claims based on recklessness. Although the Medco case involves a health care organization, “any company that submits a claim to the government for payment” can face liability under the FCA. “They ought to take notice of this development,” Shepard says.
Kirk Nahra, a partner with Wiley Rein & Fielding in Washington, says the FCA claim is “consistent with a lot of what the government has been saying about the importance of good compliance programs, and the risks you face if you don’t have a good compliance program, but it goes a step beyond what the government has been talking about.”
Nahra
Nahra calls the suit “a big-deal allegation and further motivation for companies to reevaluate and reexamine their compliance programs.” He notes that the government’s compliant reads like a laundry list of items that the government thinks can go wrong with a compliance program, adding that companies “can use this as a measuring stick when evaluating [their] own program.”
According to Nahra, liability under the FCA can, “as a general matter, be very severe,” noting that damages can be extensive because they are calculated based on the number of claims that are submitted.
‘Ineffective’ Program Made Claims ‘False’
In the Medco case, which was filed in the Eastern District of Pennsylvania in September 2003, the government alleges that the company—one of the largest pharmacy benefit managers in the nation—engaged in a broad range of fraudulent practices, including canceling or altering prescription information, and mailing prescriptions with less than the number of bills ordered and paid for.
SECTION 3729
The excerpt below is from Title 31 of the U.S. Code, Subtitle III, Chapter 37, Subchapter III, Section 3729:
§ 3729. False Claims
(a) Liability for Certain Acts. — Any person who:
knowingly presents, or causes to be presented, to an
officer or employee of the United States Government or a member
of the Armed Forces of the United States a false or fraudulent
claim for payment or approval;
knowingly makes, uses, or causes to be made or used, a
false record or statement to get a false or fraudulent claim paid
or approved by the Government;
conspires to defraud the Government by getting a false or
fraudulent claim allowed or paid;
has possession, custody, or control of property or money
used, or to be used, by the Government and, intending to defraud
the Government or willfully to conceal the property, delivers, or
causes to be delivered, less property than the amount for which
the person receives a certificate or receipt;
authorized to make or deliver a document certifying receipt
of property used, or to be used, by the Government and, intending
to defraud the Government, makes or delivers the receipt without
completely knowing that the information on the receipt is true;
knowingly buys, or receives as a pledge of an obligation or
debt, public property from an officer or employee of the
Government, or a member of the Armed Forces, who lawfully may not
sell or pledge the property; or
knowingly makes, uses, or causes to be made or used, a
false record or statement to conceal, avoid, or decrease an
obligation to pay or transmit money or property to the
Government,
is liable to the United States Government for a civil penalty of
not less than $5,000 and not more than $10,000, plus 3 times the
amount of damages which the Government sustains because of the act
of that person, except that if the court finds that -
the person committing the violation of this subsection
furnished officials of the United States responsible for
investigating false claims violations with all information known
to such person about the violation within 30 days after the date
on which the defendant first obtained the information;
such person fully cooperated with any Government
investigation of such violation; and
at the time such person furnished the United States with
the information about the violation, no criminal prosecution,
civil action, or administrative action had commenced under this
title with respect to such violation, and the person did not have
actual knowledge of the existence of an investigation into such
violation;
the court may assess not less than 2 times the amount of damages
which the Government sustains because of the act of the person. A
person violating this subsection shall also be liable to the United
States Government for the costs of a civil action brought to
recover any such penalty or damages.
(b) Knowing and Knowingly Defined. — For purposes of this
section, the terms "knowing" and "knowingly" mean that a
person, with respect to information:
has actual knowledge of the information;
acts in deliberate ignorance of the truth or falsity of the
information; or
acts in reckless disregard of the truth or falsity of the
information,
and no proof of specific intent to defraud is required.
(c) Claim Defined. — For purposes of this section, ''claim''
includes any request or demand, whether under a contract or
otherwise, for money or property which is made to a contractor,
grantee, or other recipient if the United States Government
provides any portion of the money or property which is requested or
demanded, or if the Government will reimburse such contractor,
grantee, or other recipient for any portion of the money or
property which is requested or demanded.
(d) Exemption From Disclosure. — Any information furnished
pursuant to subparagraphs (A) through (C) of subsection (a) shall
be exempt from disclosure under section 552 of title 5.
(e) Exclusion. — This section does not apply to claims, records,
or statements made under the Internal Revenue Code of 1986.
Source:
Cornell University's Legal Information Institute, U.S. Code Collection
The most noteworthy allegation for the compliance community is the government’s assertion that Medco’s weak compliance program rendered “false” all claims that were submitted by the company to the U.S. for payment of pharmacy benefit management services. The government asserts that Medco acted recklessly because its “compliance program … was not reasonably capable of reducing the prospect of misconduct.”
Among the alleged conduct cited as a basis for False Claims Act liability:
Medco’s board and senior management failed to develop an appropriate compliance reporting system;
The company did not make employees aware of the compliance program;
No senior official had direct responsibility for overseeing compliance;
There was inconsistent enforcement through corrective actions; and
No systems were in place setting forth reasonable steps to detect violations, investigate alleged violations and otherwise respond to reported offenses.
Shepard, of Ober|Kaler, notes that health care providers are not required even to have compliance programs, though prudent ones have adopted them. The Medco complaint suggests that “if you have one, and it’s not an effective one, then you can be liable for violating the FCA,” Shepard says. “According to the government, a [company] will be considered to have acted recklessly unless it has implemented an effective compliance program.”
“Dangerous Precedent” For Businesses
Earlier this year, Medco settled the federal government’s claim for injunctive relief and agreed to pay $26.6 million to 20 states that had also sued the company, in addition to $2.5 in restitution to patients. But that settlement did not cover the federal government’s claim that Medco’s compliance program resulted in violations of the False Claims Act.
That aspect of the case is still “plodding its way through” the courts, notes Nahra, of Wiley Rein & Fielding.
Although the suit appears to have been bogged down by discovery battles, Shepard notes that the case crossed a significant hurdle late last year when a federal judge denied Medco’s motion to dismiss the FCA claim. “At the very least, the government has claimed that Medco’s compliance programs were either non-existent or insufficient, in satisfaction of the ‘reckless’ requirements of §3729(b) [of the False Claims Act],” Judge Clarence C. Newcomer wrote (see FCA excerpt at right).
Shepard says the Medco case has potentially ominous implications.
“A company [may] make the effort to create a compliance program—trying in good faith to comply [with the law]—and yet they make a mistake,” he puts forward. “To then have the government come in and say you acted recklessly because your compliance program didn’t catch this particular billing error, and have that interpreted as fraud, I think that is certainly a dangerous precedent for businesses that deal with the government.”
This case emphasizes the point “that you not only should have [a compliance program] on paper but need to have one that functions well and you should document that it functions well,” says Shepard, noting that companies should keep records of instances where their compliance program has prevented fraud against the government to guard against future allegations that the program was ineffective.
Additional details, including a copy of the government’s complaint and the decision in which the federal judge denied Medco's motion to dismiss the suit, are in the box above, right.
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