BACKGROUND — STATE GOVERNMENTS AND THE OIG APPROVAL PROCESS
It has been awhile since we visited the topic of DHHS-OIG approval of state false claims legislation, so a short refresher is in order.
As regular readers know, the federal government has experienced unqualified success with the federal False Claims Act. Because a large chunk of every state government’s healthcare budget comes from the feds, Congress determined that it would be a good idea to have each and every state pass a state false claims act. They did this in the Deficit Reduction Act of 2005 (Pub. L. 109-171), which was not actually passed until 2006.
Of course the federal government cannot require any state to pass a specific law. (That is, with the exception of the reconstruction era following the Civil War, when the southern states were required to ratify the Fourteenth Amendment and pass civil rights legislation to gain re-admittance to the United States). For this reason Section 1909 of the Deficit Reduction Act of 2005 creates a financial incentive for States to enact false claims legislation. This incentive takes the form of a decrease in the Federal medical assistance percentage with respect to any amounts recovered under a State action brought under a qualifying law (and a corresponding increase in the percentage of the money kept by the state).
Not just any old false claims act will suffice however — and Congress understood, perhaps based on its own experience, that the legislative process ranges from messy and disorderly at best to dysfunctional at worst. So, for a State to qualify for this monetary incentive, the State law must meet certain requirements listed in section 1909 of the Act. DHHS-OIG has also published a memo to provide guidance to the states.
The OIG, in consultation with the United States Attorney General, determines whether States have false claims acts that qualify for an incentive under section 1909 of the Social Security Act. When a state passes false claims legislation, it is up to the state’s government to notify DHHS-OIG and request a review of the new law; OIG will also review prospective legislation to determine if it is good enough to qualify under the DRA.
In the final analysis there are four main points for states to keep in mind as they consider state false claims legislation. To qualify for the financial incentive, a State’s false claims act must:
1. establish liability to the State for false or fraudulent claims, as described in the Federal False Claims Act (FCA), with respect to Medicaid spending,
2. contain provisions that are at least as effective in rewarding and facilitating qui tam actions for false or fraudulent claims as those described in the FCA,
3. contain a requirement for filing an action under seal for 60 days with review by the State Attorney General, and
4. contain a civil penalty that is not less than the amount of the civil penalty authorized under the FCA.
So the states have all of this guidance and help as they contemplate false claims legislation — and on top of this the states have more than 150 years of federal case law and statutory experience from which they can learn. One would think it would be a straightforward process to pass a law that qualifies.
THE REALITY OF THE LEGISLATIVE PROCESS
I mentioned earlier that the legislative process is disorderly and messy — and regular readers of this blog know full and well how ugly it can get. but that doesn’t quite begin to describe it. As a result, numerous states failed to observe these basic principles and, as a result, they failed to pass qualifying legislation. As each state passed a law that failed to qualify, a rejection letter was issued by DHHS-OIG.
Because of all of the guidance and educational materials provided, prior to April of 2013, it was easy to predict which state FCA would be rejected and which would be approved — state laws that complied with the above conditions would be approved and state laws that didn’t conform would be rejected.
So what happened in April of 2013? That month the California False Claims Act was approved by the OIG, despite the law’s failure to comply with requirement number 2 above. The California FCA fails to comply with requirement number 2 because the law lacks one of the most important elements of a false claims act from a relator’s point of view — namely, the California False Claims Act as amended in 2012 still lacks an alternate remedies provision.
ALTERNATE REMEDIES AND THIER IMPORTANCE TO QUI TAM LITIGATION
The federal FCA and the Virginia Fraud Against Taxpayers Act both contain alternate remedies provisions. In a nutshell, these provisions provide that if the government chooses to obtain a recovery from the defendant in certain types of proceedings other than the relator’s FCA suit, this is known as an alternate remedy and the relator is entitled to the same share of the recovery as if the recovery was obtained through the relator’s FCA suit. §3730(c)(5). The corresponding provision of the Virginia Fraud Against Taxpayers Act is Virginia Code § 8.01-216.6.
These provisions are vital to protecting relators and their counsel — in fact, I know of no protection for the relator anywhere in the law that is more vital. Relators are required to file a detailed disclosure statement with the state Attorney General prior to filing thier case under seal, and of course the relator then files the case under seal and serves it again on the Attorney General but not on the defendant. So the government will have at its disposal a complete and total guide to the fraud alleged by the relator prior to any information being made public.
And, without an alternate remedy provision there is absolutely nothing to stop the government from persuing a case against the defendant other than through the relator’s case. In other words, the government can just completely cut out the relator and his or her counsel and settle the case with the defendant without giving the relator a single dime.
Anyone who thinks that this sort of thing could not happen is dreaming. It might seem logical to assume that the government will want to maximize its recovery and pursue the qui tam case, but that is not always the case. Sometimes the government will be embarrassed and will want keep its real or perceived failure to do its job a secret. Certainly the defendant will be more than happy to go along with such an approach, and in fact I think defense counsel will often be the ones to suggest the government and defendant settle the case outside of of the FCA context.
So the alternate remedy provision provided by the federal FCA and other state FCAs is important to the overall false claims statute. California, as mentioned earlier, amended their state FCA, but without an alternate remedies provision, so disapproval should have been a given. But it wasn’t — in April of 2013 the newly-amended California FCA was approved by the DHHS-OIG.
SO HOW DID CALIFORNIA OBTAIN DRA APPROVAL OF THIER FALSE CLAIMS ACT WITHOUT AN ALTERNATE REMEDY PROVISION?
The answer to that one is simple — and it ties in with something I said earlier. You see, California asked the DHHS-OIG for a review of thier state statute and asked for a list of changes that would be required if California wanted to comply with the section 6031 of the DRA. DHHS-OIG complied with the request and gave these recommendations, which have now been removed from the website.
But in providing those recommendations, the DHHS-OIG failed to point out that California didn’t have an alternate remedy provision in the California FCA. So a few months later, when California passed a new statute meeting each and every recommendation of DHHS-OIG, the law still didn’t have an alternate remedy provision. At that point, DHHS-OIG had two choices — they could either (1) admit to their mistake and admit to their oversight (and fail the Ca FCA) or (2) they could simply pretend that the alternate remedy protections of the FCA do not exist and pass the California False Claims Act.
Guess what? They took option number (2)….what was that I was saying about government agencies wanting to pretend that their screws up never happened…..?
Also, it appears that the regulatory process just as messy, disorderly and haphazard as the legislative process…jeez….