Another Provider Victory in the False Claims Act War
February 1, 2001
Practice team: Healthcare
The following article was prepared for the Northern California Chapter of HFMA. It was published in the February 2001 issue of the chapter's on-line newsletter, Over The Edge Brief.
The overreaching of the United States in a recent False Claims Act case will excite horror in financial managers, while the holding of the court is a victory for healthcare providers. It emphasizes the importance of careful screening of employees in building defenses to the False Claims Act.
The case is United States v. Southern Maryland Home Health Services, Inc., 95 F. Supp. 2d 465 (D. Maryland, May 9, 2000). Diane Cannon impersonated a physical therapist in order to gain employment with Southern Maryland Home Health Services ("SMH"). She gave the name of an actual licensed physical therapist as her own. She provided false references from purported employers. The "hiring agent" who hired her noted that she was familiar with physical therapy terminology and procedures. During her employment, SMH received no complaints which would put it on notice that Ms. Cannon was not who she said she was or did not have the skills she held herself out as having.
At some point the imposter was found out. Because Medicare requires that a physical therapist be licensed in the state where he or she practices, each bill to Medicare for the imposter's services was false. There were 171 false bills, totaling $59,320 in Medicare payments. Ms. Cannon plead guilty to federal criminal charges of health care fraud and income tax evasion, and to state charges of practicing without a license.
The local United States Attorney sued SMH for violation of the False Claims Act. The United States sought treble damages of $177,960, three times the $59,320 of Medicare payments for the false bills. In addition, the United States sought a penalty of $10,000 for each of the 171 false bills. Financial managers will not need a calculator to understand that amounts to a penalty of $1,710,000. In total, the United States was seeking $1,887,960, almost 32 times the amount of the harm to the Medicare program.
To prove a violation of the False Claims Act the United States needed to prove not only that there was a claim and that it was false, but also that the false claim was made with "knowledge". The False Claims Act defines "knowledge" as either (1) actual knowledge, (2) deliberate indifference to the truth, or (3) reckless disregard for the truth. In this case there was no dispute that the imposter had actual knowledge that her conduct would cause false claims to be made to Medicare. But SMH, not the imposter, was being sued for violating the False Claims Act. The issue before the court was whether SMH could be held vicariously liable for the imposter's knowledge. Would the United States have to prove that SMH had False Claims Act "knowledge", or was SMH automatically liable because its employee had the knowledge?
One must ask why the United States was pursuing so draconian a remedy. The penalty sought did not fit the offense. The seeking of such a harsh penalty would not encourage self-reporting of violations. Most significantly, the rule the United States was urging the court to adopt would damage the government's effort to encourage providers to invest in compliance programs. The United States argued that it did not matter what level of False Claims Act "knowledge" the provider had; the provider automatically violated the False Claims Act because of the knowledge of its dishonest employee. In urging providers to adopt compliance programs, the Office of Inspector General points out, most recently in its Compliance Guidance for Individual and Small Group Physician Practices (65 Federal Register 59434 (October 5, 2000)), that a physician cannot be liable under the False Claims Act for an error, mistake or even negligence. In this case, the United States was arguing that SMH should not even be given the opportunity to prove that the hiring of the imposter was at most the result of a mistake or negligence.
The overreaching of the United States backfired. The court held that the provider was not vicariously liable under the False Claims Act for the wrongful acts of a non-managerial employee unless the employer (1) had actual knowledge of her wrongful acts, (2) ratified her wrongful acts, or (3) was reckless in her hiring or supervision. The imposter was not a managerial employee. SMH was therefore given the opportunity to prove at trial that it did not come within any of these three exceptions.
This opinion is a victory for providers because it allows them to obtain the benefit of an effective compliance program which carefully screens its new employees and monitors the continued eligibility for employment of its current staff. It is one of a growing number of False Claims Act cases which take into account the provider's good faith efforts to comply with the law in evaluating whether the false claims were made with "knowledge".
In California, Southern Maryland Home Health Services will be persuasive, but not controlling. The Southern Maryland court surveyed other cases addressing this issue and found authority in the First Circuit which held the employer to be strictly vicariously liable, and authority in the Fifth and Eleventh Circuits which held the employer vicariously liable if the errant employee had acted within the scope of his or her employment and for the benefit of the corporation. California is in the Ninth Circuit, and no court in the Ninth Circuit has yet addressed this issue. Neither has any California court yet addressed this issue under the California False Claims Act. So we are fortunate to now have this well reasoned case, applying the False Claims Act to a health care provider, to illustrate what the outcome of such an issue should be in California.