American Journal of Law & Medicine

First Nursing Homes, Next Managed Care?: Limiting Liability in Quality of Care Cases under the False Claims Act.


Suppose that a managed care enrollee visited his plan doctor for treatment of an injury. Next, suppose that either: (1) the doctor, through her own negligence, failed to render the appropriate standard of care, or (2) although the doctor desired to treat the injury consistent with what she believed to be professionally recognized standards of health care, the managed care organization (MCO) administrators denied coverage. Consequently, the doctor failed to render adequate treatment. In both cases, under traditional jurisprudence, the enrollee might have a medical malpractice action against his doctor.(1) He also might try to hold the health plan liable under a variety of agency and direct liability theories.(2) However, under the same facts, if a federal program such as Medicare paid for the enrollee's care,(3) he might act as a whistleblower (or "relator") against the doctor and the organization,(4) conceivably recruiting the federal government to foot the litigation and investigation bills(5) and increasing his recovery.(6) In the second case, even the doctor might act as a relator against the MCO.(7) Unhindered by state tort reform recovery caps,(8) the False Claims Act (FCA)(9) creates potentially enormous liabilities and recoveries,(10) thus creating equally enormous incentives for abusing its power. Quality of care suits under the FCA are likely to affect all areas of the health care industry in the near future, and the industry needs to prepare itself.

"Who Pays? You Pay."(11) These words ring as true for health care organizations as they do for the Medicare beneficiaries they are intended to affect. What are you paying, and why are you paying it? According to a federal multi-agency initiative, you are paying for health care fraud that your diligent reporting may help prevent.(12) On February 24, 1999, the United States Department of Health and Human Services (HHS), in conjunction with the U.S. Department of Justice (DOJ) and the American Association of Retired Persons, launched a public outreach campaign titled: "Who Pays? You Pay."(13) The campaign is designed to enlist the public in the mounting war the U.S. government is waging against health care fraud.(14)

The federal government has a number of statutory weapons in its anti-fraud arsenal including the FCA, the Medicare and Medicaid anti-fraud and abuse provisions,(15) the Health Insurance Portability and Accountability Act of 1996,(16) the Stark legislation,(17) and the Civil Rights of Institutionalized Persons Act (CRIPA).(18) Despite this array of enforcement mechanisms, HHS estimates that in fiscal year 1998 alone, more than $12 billion of Medicare spending represented overpayments or wasteful spending.(19) If HHS is correct that public involvement is the key to combating health care fraud effectively, then the FCA, with its whistleblower provisions and large monetary penalties, may become the statutory weapon of choice. The FCA was enacted in 1863, primarily to address the problem of civil war defense contractor fraud.(20) Since then, it has evolved into the government's most powerful civil tool in combating health care fraud and abuse.(21) False health care claims cases traditionally have fallen into four general categories: (1) clinical laboratory cases, (2) consultant cases, (3) physicians at teaching hospitals cases and (4) kickback cases.(22) This Note focuses on the recent addition of a fifth category of FCA cases based on poor quality of medical care.

Part II of this Note will discuss the theory behind quality of care claims and the significance of such claims to the health care industry. Part II analyzes the tremendous power the FCA wields in quality of care cases and hypothesizes that its power will increase exponentially as it envelops cases traditionally brought under tort theories such as malpractice. Part III surveys the existing case law in an effort to elucidate what constitutes an actionable quality of care issue under the FCA, drawing much of its information from settled claims. Part IV analyzes the potential for managed care liability under quality of care FCA claims, particularly with respect to Medicare+Choice organizations. Part V discusses ways in which the health care industry might limit its liability for quality of care claims, emphasizing the importance of implementing and enforcing compliance programs and hypothesizing that not every violation of a federal Medicare quality regulation is necessarily a federal false claim.

The simplicity of the basic FCA case is startling when contrasted with the complexities of quality of care claims brought under it. This simplicity makes the FCA dangerous, as its limits are not yet well defined.

Generally, a prima facie FCA case need only allege the following:

(1) the [defendants] presented or caused to be presented to an agent of the United States a claim for payment;

(2) the claim was false or fraudulent;

(3) the [defendants] knew the claim was false or fraudulent; and

(4) the United States suffered damages as a result of the false or fraudulent claim.(23)



Theoretically, a health care organization billing a federal reimbursement program for unnecessary services, whether rendered or not, would be liable under a traditional false claim theory of overbilling.(24) For the purposes of this Note, a distinction must be drawn between billing for medically unnecessary services, or upcoding, and billing for unrendered, yet necessary services. Although both circumstances potentially raise quality of care issues, focusing on the latter enables the present cases to be more closely analogized with potential cases against MCOs. Hereinafter, all references to poor quality of care will be to cases in which necessary care was either inadequately rendered or not rendered at all.

Case law has established that providers claiming reimbursement under the federal Medicare and/or Medicaid programs implicitly certify compliance with all applicable federal regulations pertaining to program eligibility.(25) The viability of an implicit certification theory will be discussed in greater depth in Part V of this Note. Numerous Medicare and Medicaid regulations pertain to quality of care to be delivered. When providers, either knowingly or recklessly,(26) do not adequately render the appropriate regulated levels of care, they may be susceptible to liability under the FCA, having falsely certified compliance.(27)


1. The Power of the FCA

The FCA is becoming an increasingly important check on the quality of care rendered by all types of health care providers.(28) In 1986, the FCA was amended to make it stronger, increasing penalties against defendants, increasing the percentage of recovery allowed to relators, and lowering the intent requirement from "actual knowledge" to "deliberate ignorance" or "reckless disregard."(29) The effects of the amended FCA on the health care industry have been enormous.(30) FCA cases are brought by the Attorney General, through the DOJ, and are based on information garnered from a variety of sources, including the HHS Office of Inspector General (HHS-OIG).(31) The FCA also contains a qui tam provision(32) by which an individual whistleblower may bring a civil suit on behalf of the United States to recover damages resulting from false claims submitted to the U.S. government.(33)

In the managed care context, potential relators include plan administrators, members who have been denied coverage and health care providers unhappy with administrative decisions. Potentially, the FCA may even serve as an end-run around the Employee Retirement Income Security Act of 1974 preemption and damage limits.(34) Because Medicare+Choice Organizations, like nursing homes, generally rely on capitated payments from federal programs and do not submit fee-for-service claims for reimbursement for medical services, similar financial incentives exist in both to undertreat patients, suggesting that similar theories of poor quality of care false claims might apply to both.(35)

The FCA mandates that violations be redressed by monetary damages equal to treble the value of the fraudulent claims, in addition to civil penalties ranging from $5,000 to $10,000 per claim.(36) However, FCA violators who voluntarily disclose their violations to the government within thirty days of discovery may be liable for not less than double, rather than triple damages.(37) The FCA further provides for qui tam relators to collect from ten to thirty percent of the government's recovery, depending upon the relators' contributions to the case, in addition to reasonable expenses, fees and costs of litigation.(38) Thus, individuals, particularly disgruntled individuals, have strong financial incentives to bring suit under the FCA rather than tort alternatives that are often less lucrative.

Between 1987 and 1997, whistleblower lawsuits increased in volume by more than 1,500 percent.(39) Between 1996 and 1997 alone, the DOJ reported an increase in FCA qui tam civil judgments and settlements in health care fraud matters from $135.5 million to $618.1 million.(40) Health care fraud has surpassed defense contracting as the primary source of FCA cases,(41) and the industry is beginning to feel the heat.

2. The FCA as an Alternative to Medical Malpractice

Under traditional jurisprudence, if a health care provider rendered substandard care to a patient, a medical malpractice suit was the legal remedy of choice.(42) One criticism of extending the FCA to reach quality of care issues is that medical standard of care violations might be better redressed through the tort system.(43) The vast scope of conduct that may be encompassed by extending the FCA to quality of care claims creates "potentially unlimited liability" for health care providers.(44) Like a malpractice suit, an FCA suit may significantly affect public opinion and the public's choice of providers.(45) As the following cases indicate, the line between what constitutes a malpractice case and what constitutes a false claim for Medicare payment case has become quite blurry over the past few years.



On March 6, 1996, two consent orders were entered in the U.S. District Court for the Eastern District of Pennsylvania, settling a quality of care FCA suit for $600,000(46) and signifying the beginning of a new frontier in FCA litigation. United States v. GMS Management-Tucker, Inc.(47) addressed the horrendously inadequate nutritional and wound care provided to residents in Tucker House Nursing Home ("Tucker House"), a long-term care facility managed by GMS Management-Tucker, Inc.(48) The government based this case on information that three Tucker House residents developed several severe medical conditions including malnutrition, dehydration, gangrene and multiple decubitus ulcers while at Tucker House. …

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