Stating a strong case for insurers using state whistleblower laws against fraudsters

By Peter Budetti and Colette G. Matzzie
January 15, 2016

California, Illinois let insurers sue fraudsters on behalf of the state

imageAbstract: Insurance companies may find it in their interest to use state qui tam laws in California and Illinois to file whistleblower lawsuits and recover funds stolen through fraud. Whistleblower lawsuits in those states allow private insurers to a) recover amounts well beyond actual losses, plus reasonable attorney fees, expenses and costs; b) mobilize the resources of the state and private bar to prosecute the suits; and c) obtain equitable relief of longterm value to the insurer. The statutes reach a wide range of insurance schemes, including automobile, workers compensation, property and healthcare. Several insurers, notably Allstate, have used the statutes to remedy fraud schemes. Many states have enacted qui tam laws. But only California and Illinois have separate statutes allowing private insurers recovery of fraud losses on behalf of the state. It would be in private insurers’ interests to encourage other states to adopt similar laws.

For many in the insurance industry, it may seem farfetched to suggest insurance companies embrace whistleblower lawsuits. After all, whistleblower lawsuits alleging fraud long have targeted health insurers with Medicare and Medicaid contracts.

But the experience in two states suggests it can be in insurance companies’ best interests to use state qui tam laws to file whistleblower lawsuits that recover funds stolen by schemes. This includes upcoded health-insurance claims, phantom services, staged vehicle crashes, medical mills and false workers-compensation injury claims.

Federal1 and state False Claims Acts2 authorize persons with knowledge of fraud against Medicare, Medicaid and other public programs to file qui tam lawsuits for the government to recover stolen funds. California and Illinois statutes go a big step farther. They let whistleblowers sue on behalf of the state to recover funds wrongfully obtained from private insurers.3 These statutes can, in effect, put private insurers on the plaintiff’s side of such lawsuits. Thus they provide an effective mechanism to uncover and recover damages using state law enforcement.

image Anyone can be a “whistleblower” and file a qui tam lawsuit under the California Insurance Fraud Prevention Act (CIFPA)4and the Illinois Insurance Claims Fraud Prevention Act (IFPA).5 This includes an insurer that knows of a fraud scheme.

These “private-insurance” qui tam statutes aim to protect the public from premium increases and coverage limits stemming from large insurance-fraud losses, including healthcare schemes.

Notably, the California and Illinois qui tam laws provide different, and complementary, remedies compared to the private rights of action in many state insurance codes. Under the latter, insurers can recoup funds when they have suffered a direct financial loss from an insurance scheme but may not go the extra step of recouping on behalf of the state all funds wrongfully paid by private insurers to the fraudster.6

Moreover, the private insurer qui tam statutes bring added resources for pursuing the suits, allow equitable relief that may offer value to the insurer, raise the prospect of criminal prosecutions, and reach a wide range of frauds. They also provide opportunities and incentives for whistleblowers to work cooperatively with private insurers.

The statutes allow larger awards than are available to an insurer suing only for its own damages under state insurance codes. Qui tam awards may assess up to three times the fraudulent claims, penalties of $5,000-$10,000 for each claim, plus attorney fees and costs.

The proceeds are allocated among the whistleblower (the “relator”), state agencies and state general treasury. If the relator is an insurer and has paid the fraudster money in California and Illinois, the insurer is compensated for losses before allocation of a “relator’s share.”

In California, the statutory relator’s share is 30-40 percent of the proceeds if the insurance commissioner or state attorney general intervenes. It is 40-50 percent if they decline to intervene. The Illinois statute is similar. A person bringing the action in both states and who has paid the defendant money may be entitled to up to double the amount paid if it is greater than 50 percent of the proceeds.7 Both statutes also allow relators to recover reasonable attorney fees, expenses and costs from the defendant.

Over the past two decades, several insurers have used the California and Illinois statutes successfully in cases alleging fraud against automobile, workers compensation, and healthcare insurers.8 Allstate, especially, has a long track record of using the CIFPA to remedy fraud schemes.9 In an early case, Allstate brought suit on behalf of the state of California against three physicians and their medical clinics for submitting false claims. In that case,

Allstate prevailed in a jury trial in 2003, earning an award of more than $7 million. The insurer also was awarded attorney fees and costs for a total judgment in excess of $8 million.10

“One goal of the CIFPA is to deter methods such as kickbacks and steering because they can increase insurance claims and payments...”In another case in 2012 involving fraudulent claims for radiology services, Allstate was awarded $10,000 for each of 487 false personal-injury claims totaling $4.87 million in civil penalties, plus triple the value of those claims (more than $918,000), and attorney fees, costs and expenses totaling more than $1.2 million.11 The Illinois Attorney General also has used the IFPA to recover for claims against private insurers for MRI services.12

Beyond the financial advantages of the CIFPA and the IFPA, such suits invoke the authority and resources of state law enforcement. The primary responsibility for prosecuting the case rests with public officials. That means the insurance commissioner in California, and a division of the Attorney General’s office in Illinois. They also can harness the insurance company’s attorneys if the insurer is the relator.

Insurers can use state qui tam laws to seek equitable relief, including injunctions, to keep the defendant from continuing the wrongful behavior or address potential health problems arising from the fraud.

In the 2012 Allstate case, equitable relief included notifying patients and healthcare providers about the scheme and alerting them to ignore the phony X-ray reports or medical documentation submitted with the false claims.

Insurers may benefit from a qui tam action even when the insurer is not the relator. For instance, the settlement of a CIFPA qui tam case against the large hospital chain Sutter Health in 2013 required “historic changes” in Sutter’s billing and disclosure of anesthesia charges to insurers and patients, says the California insurance department. Sutter Health paid $46 million to California to settle the whistleblower lawsuit, which was filed by a billing auditor. Significantly, for the first time, Sutter Health also had to provide health insurance companies with information about their audit policies and dispute resolution processes.13

The CIFPA and the IFPA can reach a wide range of health-insurance schemes. For example, the CIFPA prohibits conduct similar to that prohibited by the federal Anti-Kickback Statute,14 which is a predicate for federal False Claims Act violations. Currently, the California insurance commissioner is litigating a case initiated by a whistleblower against Bristol Meyers Squibb.

The action alleges that the pharmaceutical company paid kickbacks — including sports tickets, fancy meals, expense-paid trips and honoraria — to doctors in California to increase the company’s sales.15 Insurers in California have spent more than $3.5 billion for the costs of the drugs allegedly promoted by the kickback scheme, the insurance department says.

The kickback section of the California law also makes it unlawful to employ so-called “runners, cappers and steerers.” The California appellate court has held that the statute does not require proof that a claim was induced through this conduct. It prohibits the mere “employment” of such persons “with the intention to induce the presentation of claims to insurers.”

This would include payments to doctors to induce prescriptions and insurance claims.16

Significantly, the California appellate court in the Bristol Meyers case recognized that running and capping is unlawful because it often results in excessive and unneeded services and insurance claims. These activities also unfairly (and perhaps deceptively) obtain the patients or other business opportunities that might have gone to honest competitors who played by the rules.17

One goal of the CIFPA is to deter methods such as kickbacks and steering because they can increase insurance claims and payments, with large social costs even if no specific claim is identified as wrongly induced. The IFPA also prohibits kickbacks expressly — in cash or in kind — to procure patients when insurance claims for services will be made.18

Added remedies under the statutes are intended to deter and remediate fraud schemes. Civil remedies are tied to violations of the state criminal codes. Civil penalties and multiple damages are intended to be remedial, not punitive. They leave open the prospect of parallel criminal prosecution plus damages and equitable relief.19

imageEven if not serving themselves as qui tam relators, insurers also could benefit from working cooperatively with private citizens who have filed whistleblower lawsuits to recover funds that insurers have paid for fraudulent claims. Those whistleblowers are likely to be insiders with information about schemes that the insurers might not otherwise have detected. Whistleblowers bringing CIFPA and IFPA claims will be represented by private counsel who can provide resources, expertise and litigation support in addition to government-provided resources.

In recent years, successful qui tam actions have drawn attention to fraud against Medicare and Medicaid. News coverage of large settlements has drawn the most attention. Yet healthcare fraud affects private and public insurers alike.

The Coalition Against Insurance Fraud and National Health Care Anti-Fraud Association (NHCAA) recognize fraud’s broad reach. They call for applying anti-fraud activities across the public and private sectors. “It is clear that many of the same individuals and entities that perpetrate fraud against government health care programs also perpetrate fraud against the private sector. Accordingly, any effective steps in the fight against health care fraud must address and incorporate both the public and private sectors,” NHCAA says.20

imageThe Coalition puts it this way: “[T]hose who commit medical fraud are equal-opportunity criminals. They exploit weak systems and go wherever the money is, hitting up both the public and private sectors.”21

The goal of aligning anti-fraud activities across the public and private sectors would be greatly assisted by statutes such as those in Illinois and California. Those statutes provide a mechanism for coordinating qui tam suits whenever there are grounds for bringing companion actions against defrauders of both private and public insurance plans.

The U.S. Department of Justice and state Medicaid Fraud Control Units already work together often to pursue actions alleging fraud against federal and state health programs. Similar alliances among private insurers, government agencies and whistleblowers also would recover public and private funds.

Effective enforcement models can develop where federal and state resources are joined with those of private insurers to identify, assess and remediate schemes against those programs. For example, while whistleblowers typically bring broad insider knowledge of the scope and methods of suspected scams, their qui tam lawsuits often would benefit from access to data maintained by private insurers. This would help in assessing the scope and size of damages, and precisely target specific false claims in developing proof of the fraud.

In turn, insurers will benefit from cooperative sharing agreements for access to data, even with personal identifiers removed or de-identified. This is insider information only whistleblower relators can bring to enforcement efforts.

To date, concerns over data-sharing and use by government enforcers have created hurdles to effective cooperation. Such obstacles can be overcome by negotiating agreements to meet the shared goals of maximizing recoveries and deterring schemes through civil penalties and other remedies.

Also, joint prosecution agreements could allow shared use of investigative materials, witness interviews and exchange of documents. These cooperative arrangements would allow state officials charged with enforcing public and private healthcare fraud statutes to consider optimizing recoveries for the state based on fraud directed at both public and private programs, and affecting citizens as taxpayers and consumers.

Recognizing that private insurers may hesitate to share data with a government agency — especially insurance regulators — the Obama Administration created the Health Care Fraud Prevention Partnership in 2012.22

Participants share data and information through a Trusted Third Party to ensure confidentiality of sources and protect proprietary interests. The Trusted Third Party is a private-sector entity that supports the Partnership’s technical capabilities such as defining study requirements, managing secure data exchanges and reporting results. The federal law calling on the Department of Health and Human Services and the U.S. Attorney General to consult with and arrange for data-sharing with private health plans has been on the books since enactment of the Health Care Fraud and Abuse Control Program in 199623 in the Health Insurance Portability and Accountability Act (HIPAA).

The Partnership created the first formal, nationwide mechanism to implement the data-sharing authority. Some 28 health plans and their national organizations have joined with the federal government, state officials, law enforcement, and healthcare anti-fraud associations in the Partnership. The Partnership has yet to be fully implemented by the Centers for Medicare and Medicaid Services, though its early efforts have yielded successful results for participating partners.

State laws

Private insurers, many of which face healthcare fraud schemes identical to those against federal and state programs, have yet to benefit fully from the invaluable information provided by whistleblower insiders to federal and state program officials. They generally have not had access to the line-level healthcare worker who can identify concerns about known overbilling and efforts to conceal schemes from public and private payers. The California and Illinois statutes present an opportunity for private plans to work with healthcare workers and other insiders willing to reveal fraud schemes.

Another potential value of the qui tam private insurance statutes is that the rewards would encourage whistleblowers to step forward and help insurers deal with emerging fraud schemes under innovative models of healthcare organization and financing.

Healthcare providers participating in Accountable Care Organizations (ACOs), for example, could systematically game their reporting of quality performance measures to collect bonuses intended as an incentive for the ACO to achieve certain quality benchmarks while reducing spending. But private health plans that developed the ACOs likely would know about the fraud only with insider information.Qui tam lawsuits could create incentives for whistleblowers in healthcare organizations to alert private insurers and cooperate with the health plans to reveal schemes and recover funds.

Successes to date under the CIFPA and the IFPA suggest private health plans would benefit greatly from fully exploiting those statutes to identify and recover funds they have lost under fraud schemes. An aggressive qui tam strategy could prompt insurers to file cases on their own, or team with whistleblowers to pursue recoveries for both private and public insurance. This would encourage whistleblowers to bring their inside knowledge of schemes against the private insurer to the company, just as many now identify and act regarding fraud against Medicare and Medicaid. Doing so also would provide new sources of information that complement efforts of insurer Special Investigative Units.

Some 30 states and the District of Columbia have enacted state False Claims Acts. Only California and Illinois have broadened qui tam laws to cover fraud against private plans.24 Other states should consider following their lead. It would be in private insurers’ best interests to encourage enactment.

About the authors: Peter Budetti, Of Counsel to Phillips & Cohen LLP, is a former Deputy Administrator with the Centers for Medicare and Medicaid Services. He was director of the Center for Program Integrity... Colette G. Matzzie is a partner at Phillips & Cohen, which focuses on representing whistleblowers in qui tam cases.


endNOTES
[1] False Claims Act, 31 U.S.C. §§ 3729, et seq.
[2] See Phillips & Cohen LLP, List of States with False Claims Acts,at http://www.phillipsandcohen.com/ State-False-Claims-Statutes/
[3] New Jersey has a similar statute, the New Jersey Insurance Fraud Prevention Act, allowing insurers to sue for compensatory damages and to recover treble damages if the defendant is found to have been engaged in a pattern of fraudulent acts. Under the New Jersey statute, the insurance commissioner may join in the action brought by the insurer to seek civil penalties. N.J.S.A.17:33A-1 – 17.33807.
[4] California’s Insurance Frauds Prevention Act, Cal. Insur. Code. § 1871 et seq.
[5] Illinois Insurance Claims Fraud Prevention Act, 740 ILCS 92/1 et seq.
[6] Conn. Gen. Stat § 53-444; D.C. Code § 22-3225.04; Fla. Stat. § 817.234 (1)(a)(5); Fla. Stat. § 627.736 (12); Haw. Rev. Stat. § 431:2-408; Ky. Rev. Stat. § 304.47-020; Mass. Gen. Laws ch. 715h § 6; N.J.S.A. § 17:33A-7; N.C. Gen. Ann. § 58-2-161; Pa. Cons. Stat. Ann. § 4117(g); Tenn. Code. Ann. § 56-53- 107; Tenn. Code. Ann. § 56–53–102; Tenn. Code. Ann. § 56–53–103
[7] 740 ILCS 92/25(c)
[8] See, e.g., People ex rel. Fire Insurance Exchange v. Anapol, 211 Cal. App. 4th 809 (2013) (property insurance scheme); People ex rel. Monterey Mushrooms, Inc. v. Thompson, 136 Cal. App. 4th 24 (2006) (workers-compensation fraud scheme).
[9] See People ex rel. Allstate Ins. Co. v. Weitzman, 107 Cal. App.4th 534 (2003); People of the State of California ex rel. Allstate Insurance Company v. Paul E. Harnitchek, D.C., et al., No. SCV 48876 (San Bernardino Superior Court 2000); People of the State of California ex rel. Allstate Insurance Company v. Arthur G. Collins, M.D., et al., No. PC 021925 (Los Angeles Superior Court 2003); People of the State of California ex rel. Farmers Insurance Exchange, et al., v. Kosal Naing dba Queen Auto Center, et al., No. KC032572 (Los Angeles Superior Court 2003) (kickbacks from auto repair shops) and People ex rel. Allstate Ins. Co. v. Muhyeldin, 112 Cal. App. 4th 605 (2004).
[10] Muhyeldin, 112 Cal. App. 4th at 607-08. )
[11] People of the State of California ex. rel. Allstate et al. v. Daniel H. Dahan and Progressive Diagnosic Imaging, Inc., No. BC-3976954 (Los Angeles Superior Court filed Nov 16, 2012); see also Allstate Insurance O. v. Northfield Medical Center, et al., No. MRS-L-3228-99 (Sup. Ct. NJ)
[12] See Illinois Attorney General news release, “Madigan Joins Suit Against Radiology Center Over Illegal Payment of Kickbacks to Doctors” (January 17, 2007) http://www.illinois- attorneygeneral.gov/pressroom/2007_01/20070117.html?
[13] See California Department of Justice, Press Release, “Sutter Health hospitals agree to pay record payment in Department of Insurance lawsuit involving anesthesia billing” (November 4, 2013) http://www.insurance.ca.gov/0400-news/0100- press-releases/2013/release094-13.cfm.
[14] Cal. Insur. Code. § 1871.7(a)Mar. 25, 2015.
[15] A See California Department of Justice news release, “Insurance Commissioner Dave Jones Intervenes in Lawsuit Against Pharmaceutical Giant Bristol Myers-Squibb Alleging Illegal Kickbacks Provided to Doctors to Increase Sales of Its Drugs” (March 18, 2011) http://www.insurance. ca.gov/0400-news/0100-press-releases/2011/release041-11. cfm. See also, California ex rel. Wilson v. Bristol-Meyers Squibb Co., 227 Cal. App. 4th 579 (2014).
[16] See Wilson, 227 Cal. App. 4th at 593 (section 1871.7(a) prohibits employing certain persons “with the intention to induce the presentation of claims to insurers”).
[17] Id. at 601.
[18] 740 ILCS 92/5(b).
[19] Cal. Insur. Code. § 1871.7(b) referencing conduct made unlawful by California Penal Code sections 549 and 550; 740 ILCS 92/5, referencing the Illinois Criminal Code.
[20] “M Fighting Health Care Fraud:An Integral Part of Health Care Reform. National Health Care Anti-Fraud Association. (Washington, D.C. June, 2009) http://www.nhcaa.org/ docs/nhcaa/PDFs/Member%20Services/Fighting%20 Health%20Care%20Fraud_NHCAAJune2009.pdf
[21] JPrivate-Public Partnership to Fight Fraud Should Be More Integral to Reform, Dennis Jay, Bureau of National Affairs Health Care Fraud Report 2009;13:695-7.
[22] Centers for Medicare and Medicaid Services, available at https://hfpp.cms.gov/index.html
[23] “Social Security Administration, Compilation of the Social Security Laws, available at http://www.ssa.gov/OP_Home/ ssact/title11/1128C.htm
[24] See also New Jersey Insurance Fraud Prevention Act, N.J.S.A.17:33A-1 – 17.33807 (permitting state to intervene in insurer-initiated action for damages).


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