The federal False Claims Act has been an effective tool in combating fraud and abuse in government programs, particularly Medicare. Several states have their own state versions of false claims legislation. The federal Deficit Reduction Act (DRA), enacted last February, gives states a powerful new financial incentive to enact state false claims acts modeled after the federal version and directed at fighting Medicaid fraud and abuse.

Specifically, states with state false claims acts that meet certain federal standards are able to keep more of whatever is recovered from fraudulent Medicaid providers or suppliers. The incentive amounts to ten percentage points of any recovery. For example, if a state has a 50% federal Medicaid match, it would normally have to return to the feds 50% of anything recovered. However, if the state has a federally compliant false claims act, the state gets to keep 60% or a 10 percentage point jump in its share. For most states, this could easily result in millions of dollars kept in the state.

OIG Review of State False Claims Acts:

Under the DRA, the HHS Office of the Inspector General (OIG) is responsible for looking at state false claims laws (whether new, existing, or amended) to see if they meet the federal standard and therefore if the state gets the incentive. To read the OIG's review guidelines, click here.

So far, at the request of state officials, the OIG has looked at existing statutes in ten states: California, Florida, Illinois, Indiana, Louisiana, Massachusetts, Michigan, Nevada, Tennessee, and Texas. According to the OIG, the state false claims statutes in Illinois, Massachusetts, and Tennessee meet the DRA requirements and therefore these states' Medicaid programs may keep more of any Medicaid recoveries. The other states will need to amend their statutes if they wish to qualify for financial incentive.

Background on Federal False Claims Act:

Since the nation's founding, federal law has permitted private citizens to sue on behalf of the government to combat fraud in public programs. If the fraud or false claim is proven in court, the citizen bringing the suit gets to keep a portion of the funds recovered as an incentive.

Today, fraud fighters and whistleblowers use the federal False Claims Act, which was enacted in 1863 to stop fraud by military suppliers to the Union Army. Revised several times by Congress, the federal False Claims Act (FCA) has been increasingly used to bring lawsuits against health care providers and suppliers.

Of course, federal prosecutors may also bring criminal charges but in criminal cases they must prove guilt beyond a reasonable doubt. Civil cases are much easier to win in the complex world of health care claims since the standard is a preponderance of the evidence.

How the False Claims Act Works:

Under the False Claims Act, a person with knowledge of fraud against the U.S. government may file a civil suit on behalf of the government against the person or business that allegedly committed the fraud. These are referred to qui tam cases. "Qui tam" (pronounced "key tam" or "kwee tam" and Latin for "who as well") is used in short for longer Latin phrase meaning "he who (sues) for the king as well as for himself." (Okay, for Latin buffs, it's qui tam pro domino rege quam pro seipse. Now you know why everybody just says Qui Tam.)

Qui tam lawsuits are first filed with the federal district court in secret, to give the U.S. Justice Department time to decide whether to intervene and take over prosecuting the case itself. DOJ takes on about a quarter of these cases. If DOJ decides not to take the case, the qui tam plaintiff or "relator" - who is often an internal whistleblower since they need to be the source of information in the case - may pursue the case on behalf of the federal government but at his or her own expense. However, unlike other civil actions where a person can represent themselves (unwise but possible), the relator must hire an attorney to represent them.

The False Claims Act provides for treble damages. Therefore, if fraud is proven through the civil case, the defendant(s) are liable for three times the original cost of the fraud to the taxpayers - plus civil fines of $5,000 to $10,000 for each instance of fraud or false claim.

The amount received by a successful qui tam plaintiff depends on whether the DOJ took the case. If the Justice Department takes the case, the qui tam plaintiff gets between 15% and 25% of the recovery. If the Justice Department declines to take the case and the relator pursues the civil suit on their own, the qui tam plaintiff receives 25% to 30% of the recovery.

Given the size of some of these incentives, the Justice Department often balks and tries to get them reduced, arguing that the plaintiff lacked the direct knowledge required to qualify. Therefore, the payouts to successful whistleblowers often lead to legal battles long after the fraud is proven and defendants pay up.

Earlier this month, the U.S. Supreme Court heard oral arguments in just such a case where the federal government was challenging the right of a successful qui tam plaintiff to collect a portion of recoveries. The ruling, expected by this summer, could have a major impact on future qui tam suits.

Please check out my previous posts on Medicaid program integrity issues.

The Office of the Inspector General (OIG) at HHS has released its 93-page work plan for FY 2007. The OIG plans to examine nearly 100 issues in Medicaid, with particular attention on:

1. Medicaid reimbursement of hospitals, nursing homes, managed care organizations, home and community-based care, and mental health providers.

2. Medicaid prescription drug benefit issues, including pharmaceutical industry practices affecting pricing and rebates.

3. Financing practices used by states, most notably provider taxes, certified public expenditures, and upper payment limit issues.

4. Budget neutrality of Medicaid waivers, specifically Section 1115 Medicaid reform waivers and Section 1915 waivers for managed care or home- and community-based care programs.

Role and Influence of OIG in Medicaid:

The federal government has significantly increased staffing at both CMS and the OIG to review or audit state Medicaid agencies, Medicaid providers, drug manufacturers, and Medicaid managed care organizations. This, in turn, has increased the number, diversity, and complexity of Medicaid issues under review by the two federal agencies.

OIG studies and evaluations often help states learn about ways to improve Medicaid program efficiency. They also help CMS target its limited resources. OIG reports also provide valuable insights on best practices and program innovations. And, of course, OIG reports can lead to recommendations that CMS recover federal funds from states or recoup payments from providers.

Part of the OIG's work plan focuses on checking to ensure that CMS, states, or providers are compliant with newly enacted or even long standing federal requirements. Other projects will look to see whether inappropriate or questionable practices recently found in a few locations are isolated cases or indications of a broader, national problem in Medicaid.

However, several of the OIG's Medicaid related projects for 2007 will look at controversial Medicaid policy issues such as whether waivers approved by the Secretary of HHS are budget neutral and if some states are using Medicaid to pay for non-emergency care for illegal immigrants.

Medicaid Hospital Payments:

In the hospital arena, the OIG will look at the reasonableness of cost outlier payments for inpatient admissions, state compliance with OBRA '93 limits on disproportionate share hospital payments, and whether states are correctly determining hospital eligibility for disproportionate share payments.

Medicaid Long-Term Care Services:

The OIG intends to look more closely at home and community-based services. For example, the OIG will examine whether states are inadvertently paying for home and community-based services after a beneficiary's death or during a hospitalization. They are also looking at whether certain states are improperly claiming federal match on state costs of administering home and community-based waiver programs. As I mentioned earlier, they are also evaluating whether home and community-based waiver programs are budget neutral. That is, whether they are no more costly than nursing home care.

Elsewhere in Medicaid long-term care, the OIG plans to study state determinations of nursing home eligibility and the adequacy of state safeguards against improper asset transfers. They also want to know if states are recovering funds from estates as required by federal law. In addition, they plan to study possible duplicate payments to nursing homes and hospitals. Specifically, they want to get a handle on whether some hospitals are being paid for patients already discharged to a nursing home and if nursing homes are being paid while a beneficiary is a hospital inpatient. Further, the OIG plans to see if some home care providers were improperly paid for care provided to residents of assisted living facilities. The OIG also has projects to examine the appropriateness of Medicaid payments to personal care providers and physical and occupational therapists.

Mental Health and Substance Abuse Services:

Mental health and substance abuse services and providers are also coming under greater scrutiny. For example, the OIG is looking at the appropriateness of Medicaid payments for community mental health centers, outpatient clinics, day treatment programs, inpatient and outpatient alcohol and drug treatment, and community residencies for persons with mental disabilities.

Medicaid Drug Costs:

The OIG work plan for FY 2007 naturally includes a long list of projects looking at Medicaid prescription drug costs. This includes reviews of how drug companies determine average manufacturer price (AMP) and the adequacy of CMS' oversight of Medicaid drug rebates. Other OIG studies will assess drug price fluctuations and whether states overpay for drugs to treat HIV.

Medicaid Managed Care:

The OIG work plan also calls for several evaluations of issues affecting Medicaid managed care organizations (MMCOs). For example, the OIG wants to know if some states are inappropriately paying Medicaid MCOs for dual eligibles and if states are paying fee-for-service claims for beneficiaries covered under Medicaid health plans. The OIG also intends to examine the completeness and accuracy of encounter data submitted by Medicaid MCOs.

State Administration of Medicaid:

The Office of the Inspector General is also eager to evaluate a wide range of issues regarding day-to-day administration of Medicaid by states. Again, the list of target issues is long. For example, the OIG work plan includes projects to examine state administrative costs, program integrity efforts, information systems, administrative claiming by counties, state overrides of claims system edits and audits, revenue maximization practices, and third party collections.

To Learn More:

Those are just some of the Medicaid related topics the OIG plans to study in FY 2007. Most of the OIG projects will likely result in a public report in 2007. To read the full work plan, click here (PDF).

As part of a larger, federal government-wide congressionally mandated initiative to reduce inappropriate payments, CMS has published its final rule on Medicaid / SCHIP payment error rate measurement. As expected, it represents a significant expansion of federal oversight of day-to-day state Medicaid operations and of the lives of Medicaid providers and Medicaid managed care organizations.

Medicaid Payment Error Rate Measurement:

The Medicaid Payment Error Rate Measurement (PERM) initiative is a complicated process but means that every state will undergo a detailed examination of paid claims, capitation payments, reimbursement and premium policies, coding, and more. States must turn over vast amounts of data every quarter, plus virtually everything else on rates, policies, and claims processing edits and audits.

CMS will hire a series of new contractors to examine all this, run samples, and identify errors. CMS will then set maximum acceptable error rates (based on what it or its contractors determine is an "error") and then state must take corrective action. These corrective actions could include recovering payments, changing reimbursement policies, and revising claims processing requirements.

States Targeted for Federal Review:

States will rotate, with each state going through the entire process every three years. The states selected for the first round (FY 2006) are Pennsylvania, Ohio, Illinois, Michigan, Missouri, Minnesota, Arkansas, Connecticut, New Mexico, Virginia, Wisconsin, Oklahoma, North Dakota, Wyoming, Kansas, Idaho, Delaware.

Second round states (FY 2007) are North Carolina, Georgia, California, Massachusetts, Tennessee, New Jersey, Kentucky, West Virginia, Maryland, Alabama, South Carolina, Colorado, Utah, Vermont, Nebraska, New Hampshire, Rhode Island. Third round states (FY 2008) are New York, Florida, Texas, Louisiana, Indiana, Mississippi, Iowa, Maine, Oregon, Arizona, Washington, District of Columbia, Alaska, Hawaii, Montana, South Dakota, Nevada.

Opportunities and Challenges:

If CMS manages the process well and works cooperatively with states, the PERM may help (1) save taxpayer dollars, (2) improve the operations of the less sophisticated state Medicaid programs, (3) showcase the best run Medicaid shops and best fiscal agents, (4) help CMS develop greater respect for the hard work of states, (5) identify inappropriate provider practices across state lines, (6) facilitate comparative research and analysis of Medicaid, and (6) allow CMS and states identify, build, and share best practices.

However, PERM raises many practical concerns, especially given the enormous complexity of Medicaid and wide technical and programmatic variation among state Medicaid programs. Even if a state has a low error rate, the administrative burden could be intense, with a steep learning curve for CMS and the new federal contractors and endless arguments among the parties on what is or is not a genuine error. For states with high error rates, the implications include need to update systems, modernize procedures, redirect or replace fiscal agents, change payment and claims procedures, and much more. And add to this, controversial recoveries of federal dollars from states and providers.

In the Deficit Reduction Act (DRA), Congress authorized the new $150 million Medicaid Transformation Grant Program to help states design and implement reforms to increase quality and efficiency of Medicaid. This is a unique opportunity to help states restructure and modernize Medicaid, save taxpayer dollars, and improve services. But states must act fast to take advantage.

State Medicaid agencies may submit grant proposals to CMS by September 15, 2006. For grants, CMS has a total budget of $75 million in FFY 2007 and another $75 million in FFY 2008. The amount of each grant will vary and will depend on the number of applications received. State matching funds are not required.

While states have wide discretion in proposing projects and may propose multiple projects in a single grant application, CMS is encouraging states to look at ways to improve Medicaid program operations and efficiency.

In the area of improving Medicaid program efficiency, CMS is particularly interested in grant projects to:

CMS is also interested in projects to improve the effectiveness of Medicaid. Examples include projects on:

In the arena of improved care delivery, CMS is particularly interested in grant proposals to:

This is a unique, one-time opportunity for states but, with grant applications due in six weeks, the timeline is tight. States needing help or advice in writing an application may contact me or my friends at Sellers Feinberg for assistance.

The HHS Office of the Inspector (OIG) is studying a long list of issues related to Medicare Part B physician-administered drugs, the new Medicare Part D outpatient prescription drug benefit, and state Medicaid pharmacy benefits. In addition to its investigative and audit function, the talented staff at the HHS OIG also conduct analyses and evaluations, typically resulting in public reports. Below are the drug benefit-related topics that the OIG selected for close examination this year. Some were mandated by Congress, others requested by CMS or OMB. Think of it as a useful sentinel of upcoming hot issues and controversies.

Medicare Part B Physician-Administered Drugs:

Medicare Part D Prescription Drug Benefit:

State Medicaid Prescription Drug Benefits:

Naturally, the list is subject to change and should not be considered as the only topics under review. The OIG changes its work plan to accommodate new problems and changing conditions. Therefore, the topics will fluctuate. For more information, including past studies and reports, visit the OIG site.