BNUMBER:  B-279893 
DATE:  July 22, 1998
TITLE: Use of False Claims Act to Target Hospitals, B-279893, July
22, 1998
**********************************************************************

Subject:  Use of False Claims Act to Target Hospitals  

File:     B-279893

Date:     July 22, 1998

B-279893

July 22, 1998

The Honorable William M. Thomas
Chairman, Subcommittee on Health
Committee on Ways and Means
House of Representatives

The Honorable Jim McCrery
Subcommittee on Health
Committee on Ways and Means
House of Representatives

In 1995, the Department of Health and Human Services' Office of the 
Inspector General (HHS-OIG) and the Department of Justice (DOJ) 
embarked jointly on a nationwide project targeting improper Medicare 
claims by hospitals for outpatient services (referred to below as the 
Joint Project or the 72 Hour Window Project).  Medicare reimbursement 
of hospitals for inpatient services includes compensation for related 
outpatient services, such as laboratory tests, provided during the 3 
days preceding the day of admission.  The HHS-OIG stated that, despite 
prior warnings, hospitals were continuing to submit claims for these 
preadmission services in addition to their claims for the related 
inpatient procedures, resulting in double payment.

The primary objectives of the ongoing DOJ/HHS-OIG Joint Project 
include requiring hospitals to establish internal controls to prevent 
submission of such improper Medicare claims, recouping amounts 
improperly paid to hospitals plus interest, and, in the more egregious 
cases, collection of penalties from the claimant.  The authority for 
civil penalties and damages for anyone who knowingly submits a false 
or fraudulent claim to the United States is found in the False Claims 
Act, section 3729 of title 31, United States Code.

Hospitals have expressed concern about the use of the False Claims Act 
to support imposition of penalties for claims that they consider to be 
for insignificant amounts; in their view, the government should not 
have used the False Claims Act with respect to these "non-material" 
claims.  The hospitals also say that their claims are not knowingly 
false but are simply mistaken.

You asked us in your letter of August 4, 1997, to address a number of 
questions concerning the use of the False Claims Act in this 
situation, some of which we have combined and restated.  The questions 
are: (1) how the HHS-OIG/DOJ Joint Project is enforcing the False 
Claims Act against hospitals, and whether the law is unclear; (2) 
whether advisory opinions would assist in clarifying the law; (3) 
whether the Joint Project is treating the health care industry 
differently from other industries; and (4) whether the Joint Project 
is pursuing billing errors that are not material, and whether a 
"materiality" standard, limiting use of the False Claims Act to 
disputed amounts that are material, would be appropriate, either 
through legislation or through administrative action by DOJ.  In 
connection with the last question, we looked specifically at the 
operation of the Joint Project in Louisiana, where the state hospital 
association has complained that the failure of the Project to take 
materiality into account led to unfair treatment of hospitals.

In summary, (1) we found no evidence that errors hospitals made with 
respect to the 72 hour rule were the result of unclear or ambiguous 
statutes, regulations, or guidance.  The law is reasonably clear in 
describing the conditions under which nonphysician outpatient services 
are not separately reimbursable.  For this reason, (2) advisory 
opinions do not appear to be necessary or helpful in clarifying the 72 
hour rule.  In addition, since culpability under the False Claims Act 
depends on the state of mind of the person taking the action, advisory 
opinions--to the extent that they rely on assumptions concerning that 
person's knowledge or state or mind--might not be meaningful.  
Further, (3) we found no evidence that health care providers or 
hospitals in particular have been singled out under the False Claims 
Act by the Joint Project or have had a different standard applied to 
them.  Finally, (4) the current practice of DOJ in effect takes 
materiality into account in settlements negotiated by the Joint 
Project under the False Claims Act.  This has been augmented by 
safeguards provided in recent DOJ guidance on False Claims Act 
enforcement in health care matters.  These existing protections seek 
to strike a reasonable balance between protecting the rights of the 
subjects of investigations and those of those of the government.[1]

Background 

Under the Prospective Payment System for Medicare inpatient hospital 
services, Medicare pays predetermined amounts for specific covered 
services.[2]  These amounts are calculated to compensate the hospital 
not only for the inpatient services but also for related outpatient 
services rendered during a window of time before the admission.  
Specifically, the predetermined reimbursement for an inpatient 
procedure includes compensation for nonphysician outpatient services 
related to the admission, like diagnostic tests, that are performed 
during the 3 days immediately preceding the date of admission.  This 
is commonly referred to as the 72 hour rule.[3]

For example, the charge for an electrocardiogram performed by the 
hospital 2 days before, but related to, hospital admission cannot 
properly be billed separately to Medicare.  Reimbursement for this 
test is included (or "bundled") in the predetermined amount paid to 
the hospital by Medicare for the beneficiary's inpatient stay.  A 
separate, unbundled, claim to Medicare for the test would be improper; 
it would constitute billing twice for the same service.  Such a claim 
could also result in an unwarranted expense to the beneficiary in the 
form of a copayment or deductible.

Between 1986 and 1996, the HHS-OIG performed five successive reviews 
of claims by hospitals covered by the prospective payment system, in 
order to assess compliance with the prohibition on billing Medicare 
for nonphysician outpatient services rendered during a specified 
window of time prior to admission.  In each review, the HHS-OIG 
determined that millions of dollars of claims had been inappropriately 
filed and paid.  In addition, Medicare beneficiaries have paid 
millions of dollars in deductibles and coinsurance for which they 
should not have been responsible, in connection with these improper 
claims.

In the first review, covering the period October 1983 through January 
1986, the HHS-OIG identified significant improper payments made 
nationwide and not previously detected.  In that first report, issued 
in 1988, the HHS-OIG recommended that fiscal intermediaries, the 
contractors that manage Medicare billing and reimbursement, implement 
computer controls to prevent further improper payments, and that they 
recover overpayments from hospitals.  The HHS-OIG further recommended 
that the Health Care Financing Administration (HCFA), the agency that 
administers the Medicare program, notify hospitals that they must 
correct billing procedures or face sanctions.  The findings and 
recommendations were much the same for the second report issued in 
1990, covering the period February 1986 through November 1987.  The 
two reports identified $68 million in overpayments.[4] 

Claims submitted during the period covered by the fourth report, 
November 1990 through December 1991, showed a significant decrease in 
overpayments.[5]  However, that report, issued in 1994, showed that 
overpayments continued, totalling $8.6 million for the 14-month 
period.  Concluding that more needed to be done, in 1995 the HHS-OIG 
and DOJ jointly initiated a national project to include the 4,660 
hospitals identified in the fourth HHS-OIG report as having submitted 
potentially improper claims.  The national project had its genesis in 
a pilot project begun in Pennsylvania.[6]

The Joint Project decided to adopt a new tactic to deal with hospitals 
found in the more recent reviews to have been submitting claims for 
outpatient procedures that were not allowable under the 72 hour rule.  
DOJ would bring civil actions under the False Claims Act against the 
hospitals unless they agreed to negotiated settlements.  As described 
below, the settlement offers to hospitals took into account the 
penalties to which those hospitals might be subject under the Act.

The False Claims Act provides that any person who "knowingly presents, 
or causes to be presented" a false claim to the Government is liable 
to pay a civil penalty of no less than $5,000 and no more than $10,000 
per claim, plus an amount normally three times the damages which the 
Government sustains as a result of the false claim.[7]  The current 
penalty levels were established in 1986; until then, the penalties had 
remained at the level at which they were set in the original Civil War 
statute--a $2000 penalty for each claim and double damages.

Under the current version of the False Claims Act, the claimant's 
knowledge or state of mind is an important factor in determining 
liability.  A claimant does not have to intend specifically to defraud 
the government when presenting a false claim in order to have violated 
the Act, but something more than innocent mistake or simple negligence 
is necessary.[8]  A claim is "knowingly" false not only when the 
claimant has actual knowledge that the information is false, but also 
when he acts in deliberate ignorance or reckless disregard of the 
truth or falsity of the information.

Before approaching the hospitals, the Joint Project consulted with 
representatives of the American Hospital Association (AHA).  AHA 
participated in drafting a model "demand letter" to be sent to 
hospitals and a model settlement agreement.  The demand letters notify 
hospitals of their potential exposure to civil liability under the 
False Claims Act and offer to settle the matter before litigation.  
Enclosed with each letter is a listing of the claims by the hospital 
that the Project believes to have been improper and a proposed 
settlement agreement, including a proposed amount.

AHA and the Hospital Council of Western Pennsylvania also worked with 
the U.S. Attorney's Office to develop the strategy of scaling the 
settlements to the relative culpability of each hospital.  This was 
initially done by assigning hospitals in each state to one of three 
"tiers" (numbered as 1, 2, and 3) based on, among other things, the 
ratio of potentially false claims identified in the HHS-OIG's fourth 
report to the number of hospital beds.  Subsequently, a tier zero was 
established, comprising hospitals with less than $1000 of overpayments 
regardless of the number of beds.[9]

In the settlements, all tiers are required to repay, with interest, 
the potential overpayments identified in the fourth and fifth HHS-OIG 
audits, and estimated overpayments up to the date of settlement.[10]  
This is the only payment sought from tier zero hospitals, those 
hospitals that were overpaid less than $1000, and tier 1 hospitals, 
those whose overpayments exceed $1000 but that have relatively few 
improper claims per bed.[11]  The majority of hospitals fall into tier 
1 or tier zero and are not asked to pay any penalties.

Tier 2 includes institutions with a higher proportion of false claims 
per bed.  Settlements calling for sanctions begin at this tier.  In 
addition to reimbursing Medicare for overpayments plus interest, tier 
2 hospitals are asked to pay a penalty equal to 75 percent of the 
overpayments identified and recovered as a result of the third HHS-OIG 
audit.

Hospitals with the greatest proportion of potential false claims per 
bed are placed in tier 3.  DOJ's offers of settlement to tier 3 
institutions include reimbursing Medicare for overpayments plus 
interest and, in addition, penalties measured as (1) 100 percent of 
the overpayments identified and recovered as a result of the third 
audit and (2) 200 percent of the potential overpayments identified in 
the fourth audit.

According to DOJ, the goal of its approach to these settlements has 
been to alter hospital conduct, not to generate revenues.  Even in the 
highest tier, the hospitals have not been asked to pay the $5,000 to 
$10,000 per false claim penalty which is mandatory under the statute 
if the claim is determined in court to have been knowingly false or 
fraudulent and therefore to have violated the Act.  Only tier 3 
hospitals have been asked to pay what the Act refers to as treble 
damages, and then only on overpayments identified in the fourth audit.  
By the same token, the proposed settlement agreements for hospitals in 
tiers 1, 2, and 3 require that the hospitals develop internal 
management systems and controls to address the recurring Medicare 
overpayments.  If a hospital establishes and implements controls to 
prevent such billing errors in the future, the government, under the 
express terms of the settlement, will view any subsequent incorrect 
claim as inadvertent.

To reinforce the collaborative nature of the settlement process, any 
hospital which asks for reconsideration of its tier designation has 
been allowed to present new data and, based on these requests, DOJ has 
assigned some hospitals to lower tiers.  Further, to ensure that 
hospitals investigated in the later stages of the Project were treated 
no differently from those investigated earlier, no penalties were 
assessed against any hospital for activities after 1991, the end of 
the period covered by the fourth audit.  Hospitals, however, are 
required to reimburse Medicare for overpayments up to the date of 
settlement.

Clarity of Law and Guidance

You expressed concern that providers could be penalized for errors 
occurring as the result of unclear or ambiguous laws.  We do not 
believe that this is an issue with respect to the 72 hour rule.

The statute and the Medicare guidance are straightforward.[12]  The 
law defines "operating costs of hospital inpatient services" to 
include:

     "the costs of all services for which payment may be made under 
     [Medicare] that are provided by the hospital (or by an entity 
     wholly owned or operated by the hospital) to the patient during 
     the 3 days . . . immediately preceding the date of the patient's 
     admission if such services are diagnostic services (including 
     clinical diagnostic laboratory tests) or are other services 
     related to the admission (as defined by the Secretary [of Health 
     and Human Services])."[13]

There could be questions in a given case whether a service is "related 
to the admission"[14] but, as required by the law, the Secretary has 
provided definitions to help with that determination.[15]  The U.S. 
Attorney for the Middle District of Pennsylvania, whose office is 
coordinating the Joint Project, told us that hospitals have not 
complained that either the statute or guidance on the 72 hour rule is 
unclear or ambiguous.[16]

Advisory Opinions

We agree with the Department of Justice that the use of advisory 
opinions in connection with statutes like the False Claims Act in 
which knowledge or state of mind is a factor presents serious 
difficulties.  We find no compelling need to require advisory opinions 
in connection with the False Claims Act generally or the 72 hour rule 
in particular.

Advisory opinions are analyses by the agency charged with enforcement 
of a law, indicating how the agency would interpret and apply the law 
or regulations in specific circumstances.  The purpose of these 
opinions is generally to permit people engaging in a complex or 
unprecedented transaction to act with some confidence that their 
actions will not later be found to have been illegal.

These opinions are "advisory" both in the sense of providing advice 
and also because they are based on hypothetical situations: the agency 
indicates how it would apply the law if it were presented with 
circumstances described by the person requesting the opinion.  
Advisory opinions are strictly limited to the facts presented, and may 
be relied upon only by the requestor; others are not bound by, nor may 
they legally rely on advisory opinions.  (Of course, to the extent a 
third party can establish that his situation is the same as that 
covered in an advisory opinion, it would be difficult for the 
government to justify treating the third party differently from the 
recipient of the advisory opinion.)

Advisory opinions play a role in the regulatory activities of some 
federal agencies, such as the Internal Revenue Service (private letter 
rulings on tax matters) and the Federal Trade Commission (application 
of antitrust laws).  In addition, advisory opinions are provided by a 
number of state governments in response to questions on various 
issues, such as election finance, tax, or ethics.  However, with the 
exception of a provision in the recently-enacted Health Insurance 
Portability and Accountability Act of 1996 (HIPAA),[17] we are not 
aware of any provisions for advisory opinions on statutes, like the 
False Claims Act, where the existence of a violation depends on a 
determination of someone's knowledge or state of mind.

HIPAA directs the Secretary of Health and Human Services (HHS), in 
consultation with the Attorney General, to issue advisory opinions 
binding on HHS and the parties seeking those opinions, concerning the 
legality of practices under specific sections of Medicare law.  
However, in the preamble to its regulations governing availability of 
these advisory opinions, HHS points out that "it is not practical for 
the agency to make an independent determination of the subjective 
intent of the parties [to a business transaction] based only upon 
written materials submitted by the requestor."  It therefore designed 
the regulations "to avoid the potential pitfalls of advisory opinions 
on intent-based statutes."[18]

In comments on an earlier bill with a similar provision for advisory 
opinions, the HHS-OIG pointed out that authorizing advisory opinions 
for an intent-based statute would be without precedent in U.S. law; 
none of the then-existing advisory opinion processes in the federal 
government addressed the issue of the requestor's intent.  The HHS-OIG 
said that advisory opinions on intent-based statutes are impractical, 
if not impossible, due to the inherently subjective and factual nature 
of this inquiry, and that DOJ and the National Association of 
Attorneys General also strongly opposed advisory opinions for all 
intent-based statutes.[19]

In commenting on the provision in HIPAA, this Office expressed similar 
concern.  We said, as did the HHS-OIG and DOJ, that the government 
cannot advise meaningfully on the legality of a proposed action when 
that determination depends on the state of mind of the person taking 
the action.[20]

Advisory opinions may not be necessary to provide some protection 
against the threat of False Claims Act liability.  Hospitals or other 
providers in doubt about the propriety of a particular claim are free 
to ask the fiscal intermediary or HCFA whether, for example, 
particular procedures are covered by Medicare or, in the case of the 
72 hour rule, whether a specific pre-admission outpatient procedure 
will be regarded as "related to the admission."[21]  While the answers 
would not have the binding legal authority of advisory opinions, the 
government would find it difficult to argue that a provider who had 
been advised by HCFA or a fiscal intermediary that a claim was covered 
had knowingly submitted a false claim.

The False Claims Act Applies Government-Wide

Application of the False Claims Act is not limited to health care 
providers.  It covers any claims against the United States, ranging 
from defense contracting to agricultural price supports.[22]  Medicare 
and Medicaid figure prominently, since they account for a substantial 
number of the claims filed with the federal government, but the Act 
reaches many other activities.  Claims of any kind that cannot be 
explained as mere inadvertence or innocent mistake can subject the 
individual or firm filing the claims with any agency of the government 
to penalties under the False Claims Act, even if the claims are for 
small amounts.

The same standard of proof--that a person "knowingly" filed a false 
claim with the federal government--applies to all false claims civil 
enforcement efforts, including health care and defense.  The principal 
differences between the Medicare and defense procurement programs lie 
in the size of the individual claims and the law enforcement 
strategies employed.  Efforts to control defense procurement fraud  
generally have focused on the small number of contractors that receive 
the vast majority of defense procurement dollars; individual defense 
contractors may receive overpayments exceeding $1 million for one 
claim.  In contrast, Medicare pays millions of claims every year to 
thousands of hospitals and other providers; while, in the aggregate, 
Medicare is a large program, each claim typically is relatively small.  
The loss to the government from false claims in both programs, 
however, is large and can seriously undermine the public's trust.

Consideration of the Materiality of a Claim Under the False Claims Act

In enforcing the False Claims Act, it is appropriate for DOJ to 
consider whether "errors that are considered to be non-material to the 
case at hand" should be treated differently from other errors.[23]  
This is in effect what DOJ now does.  As discussed below, there are 
several possible disadvantages to a legislative materiality 
requirement.  We believe that existing protections, when properly 
implemented, should serve the purpose of preventing injustices to 
providers, either in the form of overly harsh punishment or of 
treating innocent mistakes as violations.  We found no evidence in the 
72 Hour Window Project to suggest that either of these has occurred.

The sanctions established by the Act--treble damages and civil 
penalties of $5000 to $10,000 per claim--could be considered to be 
harsh, for example, if the dollar amount of false claims is small.  A 
materiality requirement, some might argue, is needed to protect those 
who are less culpable from the penalties that would otherwise be 
required by the Act.[24]

There are competing policy considerations in this area.  Certainly 
sanctions should not be imposed that are out of proportion to the 
offense, or that punish innocent mistakes.  At the same time, vigorous 
pursuit of improper billing in Medicare is a reasonable strategy for 
the government because of the scope of the problem.  According to the 
HHS-OIG, overpayments due to billing errors, fraud, medically 
unnecessary services, lack of supporting documentation, and other 
problems in the Medicare fee-for-service program resulted in 
unwarranted payments in fiscal year 1997 of $20.3 billion.  In the 
Medicare environment of hundreds of thousands of claimants, amounts 
that might not be considered material with respect to one provider 
could in the aggregate add up to millions of dollars.

With regard to existing protections, DOJ, as is generally the case 
with law enforcement agencies, can take materiality into account on a 
case-by-case basis.  In practice, law enforcement officials exercise 
discretion in deciding whether to bring an enforcement action and, if 
so, whether to seek penalties and what penalties to seek; they have 
broad discretionary authority not to pursue false claims which, in 
their judgment, do not warrant the investment of time and effort 
needed[25] or where, because of mitigating circumstances, the 
penalties may be out of proportion to the offense.

This is done through the exercise of so-called prosecutorial 
discretion or declination policy.  Prosecutorial discretion means that 
law enforcement officials decide whether to prosecute or pursue a 
civil enforcement action in a given case based on a variety of factors 
including, in addition to the amount at issue, the strength of the 
evidence, the availability of resources, the likely deterrent effect 
of prosecution, and the prior behavior of the claimant and its 
willingness to adopt effective corrective action.  Similarly, 
declination policy is a determination in advance not to take certain 
actions in cases presenting particular fact patterns or where the 
amount involved does not meet a dollar threshold.[26]  These exercises 
of discretion can amount to an effective, although, informal, 
materiality standard.

Existing law also offers protections against misuse of the False 
Claims Act.  The law places the burden on the government to prove that 
the claimant acted "knowingly" and defines that term to exclude the 
possibility that a mere isolated mistake can be treated as a 
violation.  Under the definition, a person will not be held liable for 
a false claim made in error, unless the government can prove, through 
a preponderance of the evidence, that the error was the result of 
deliberate ignorance or reckless disregard of the truth.  The 
government may suspect deliberate ignorance when a claimant makes the 
same mistake repeatedly after having been warned, but it still must 
prove that suspicion in court to prevail.

The recent DOJ guidance concerning False Claims Act enforcement in the 
health care arena adds safeguards to those described above.[27]  Under 
the guidance, DOJ attorneys must independently evaluate whether the 
provider submitted false claims with knowledge of their falsity.  In 
doing so, they must examine the statutory and regulatory provisions 
and interpretive guidance, verify the accuracy of the data and other 
evidence, determine whether the provider had notice of the rules or 
policy and whether they were sufficiently clear, and take into account 
how pervasive and how large the false claims were.

The new guidance also addresses the providers' concern that, to avail 
themselves of defenses to the charge of submitting false claims, they 
must be willing to litigate the issue, a potentially expensive process 
regardless of the outcome.  It does this by making explicit that 
Department attorneys must offer providers an adequate opportunity to 
discuss the matter before a demand for settlement is made, and an 
adequate time to respond.  This represents an opportunity for 
providers to contest specific charges of false claims.

In settlement negotiations over alleged violations of the False Claims 
Act, DOJ can take materiality into account by opting to forgo or 
moderate the penalties that would apply in a False Claims Act 
suit.[28]  In fact, the 72 Hour Window Project in effect does this.  
DOJ has offered settlements with sanctions that appear reasonably in 
proportion to the extent of false claims, given the fact that in the 
past no sanctions were imposed on these hospitals and the same errors 
have continued.  Under the tier system used by DOJ in the 72 Hour 
Window Project, hospitals in the lower two tiers, which comprise most 
hospitals, were not subject to penalties under the False Claims Act; 
they only had to return the overpayments with interest.  Hospitals in 
tier 1 were also asked to sign a settlement agreement under which they 
committed to establishment of internal management controls to prevent 
future improper claims from being submitted to Medicare.

Only those hospitals in tiers 2 and 3 were subject to penalties.  
These were institutions that not only had uncorrected erroneous claims 
at a higher level than other hospitals in the service area of the 
fiscal intermediary, but also were continuing to make the same errors 
that had been detected and called to their attention in the first two 
audits.  In some cases, the amount of their current erroneous claims 
may have been small.  This was taken into account in DOJ's calculation 
of a settlement offer, but so was the fact that errors were recurring.  
(For more specific examples of the reasonableness of DOJ's 
settlements, see the discussion below of the treatment of Louisiana 
hospitals.)

One argument against a more formal and less flexible materiality 
requirement is that it could weaken the salutary effect of the False 
Claims Act.  The sanctions in the Act were intended to deter 
misconduct by those submitting claims to the government.  A policy 
that erroneous claims below a certain pre-established level will not 
be subject to sanctions could lend itself to the kind of behavior 
referred to as "gaming the system," and could reduce the deterrent 
effect of the Act.  For example, if unscrupulous providers are aware 
that, below a certain threshold, the government will tolerate claims 
that are knowingly false or fraudulent, they could attempt to exploit 
this policy, possibly resulting in an increase in the number of false 
claims which the government is unable to recover.

Establishing a materiality requirement would necessitate deciding 
difficult questions, such as whether the standard should apply per 
provider or per specific type of claim.  In the case of the 72 Hour 
Window Project, for instance, the outcome of a materiality threshold 
for false claims could be very different depending whether it was 
measured relative to all the hospital's Medicare claims or to only 
those claims governed by the 72 hour rule.  Related questions that 
would have to be resolved are: whether the standard should be a fixed 
amount or a percentage of claims; what period of time should apply; 
and whether a materiality threshold should remain the same for all 
providers or whether the continued submission by a provider of 
incorrect claims at or just below the threshold would justify a lower 
threshold for that provider.

Louisiana Hospitals and the 72 Hour Window Project
 
The State of Louisiana has enacted a materiality requirement, 
applicable to claims under the state's Medicaid program.[29]  The 
Louisiana Hospital Association has suggested that the law may be a 
good model for a federal materiality requirement, and has urged that 
the treatment of Louisiana Hospitals in the Joint Project demonstrates 
the need for such a law.[30]  We therefore examined DOJ's use of False 
Claims Act sanctions in negotiating settlements in the Joint Project 
in Louisiana.

We selected three Louisiana hospitals from the HHS-OIG data base, one 
from each of tiers 1, 2, and 3, for analysis.  (Tier Zero hospitals, 
those with overpayments of less than $1000, were not asked to sign 
settlement agreements.)  We picked hospitals that were toward the 
middle of each tier in terms of numbers of claims and total dollar 
amounts.  Although this is not a statistical sample, it is 
representative in the sense that the U.S. Attorney used the same 
formula to calculate exposure and settlement offers for all hospitals 
in a tier.

The settlement offers to the hospitals were not disproportionate to 
the amount of allegedly false claims and were fair under the 
circumstances.  The hospitals' potential liability exposure under the 
False Claims Act was greatly in excess of the amounts of their 
overpayments, but that is a consequence of the penalties established 
by the Act, not of misconduct by DOJ.  The potential exposure assumes 
that in a lawsuit the maximum penalties would be imposed with respect 
to every charge.  However, a settlement offer would consider potential 
defenses, and the outcome might be less than the maximum liability.  
In addition, hospitals may legitimately wish to avoid being sued under 
the False Claims Act for reasons such as the expense of litigation or 
the possible damage to their reputations. 

Tier 1 hospitals only had to repay, with interest, potential 
overpayments identified in the fourth and fifth HHS-OIG audits, and 
estimated overpayments up to the date of settlement.  For tiers 1, 2, 
and 3 in Louisiana, DOJ arrived at the amount of potential 
overpayments for the period 1994 through the date of settlement by 
doubling the amount of potentially improper claims identified in the 
HHS-OIG's fifth report.

For example, DOJ found improper claims by a tier 1 hospital in the 
HHS-OIG's fourth and fifth reports totalling $2,911.  This amount did 
not include interest or an estimate of improper payments made after 
1994.  DOJ calculated the hospital's potential exposure, assuming full 
liability in an action under the False Claims Act, as $467,909.[31]  
DOJ offered to settle with this hospital for $5,870.[32]

For the tier 2 hospital we looked at, DOJ offered to settle for 
$70,173.  (The settlement offer included penalties on overpayments 
found in the third HHS-OIG report.[33])  The amount of potentially 
improper claims identified in the fourth and fifth HHS-OIG reports was 
$24,245, and the amount of improper payments recovered under the third 
HHS-OIG report had been $24,758.  Potential exposure under the False 
Claims Act for overpayments identified in the third and fourth HHS-OIG 
reports would have been $1,664,418.

For the tier 3 hospital, which was in that category because of a 
relatively high proportion of errors per bed compared to other 
hospitals in the state, the potential exposure in False Claims Act 
litigation would have been $4,915,871.  DOJ offered to settle for 
$124,512.  The fourth and fifth audits had identified improper claims 
totaling $24,799, and $60,551 had been recovered for improper claims 
identified by the third HHS-OIG report.  Again, the settlement offer 
included penalties related to overpayments identified in the third and 
fourth audits.[34]

Conclusion

We have found no evidence that errors hospitals made with respect to 
the 72 hour rule were the result of unclear or ambiguous laws, 
regulations, or guidance.  The law is reasonably clear that outpatient 
diagnostic procedures and other services related to admission that are 
provided by a hospital during the three days prior to an admission are 
not separately reimbursable.  Payments in violation of this rule have 
been highlighted in successive HHS-OIG reports since 1988.  Prior to 
initiation of the Joint Project, hospitals were required to reimburse 
Medicare for improper payments identified in the first three HHS-OIG 
reports.

Advisory opinions do not appear to be necessary or helpful in 
clarifying the 72 hour rule.  The statute and Medicare guidance are 
straightforward.  Moreover, because culpability under the False Claims 
Act depends on the state of mind of the person taking the action, 
advisory opinions--to the extent they are dependent on assumptions 
about the knowledge or state of mind of a claimant--might not be 
meaningful.

We found no evidence that health care providers or hospitals in 
particular have been singled out for enforcement action under the 
False Claims Act, or have had a different standard applied to them, 
compared to claimants in other sectors of the economy.

Finally, the current practice of DOJ in effect takes materiality into 
account, as do the new guidelines.  The settlements sought from 
hospitals had a rational basis, taking into account a prior history of 
uncorrected errors.  Also, the tier system used by the Project was in 
effect a materiality standard; the tiers protected most hospitals from 
paying any penalties, based on the small amount or frequency of their 
erroneous claims; where penalties were made part of the settlements, 
they were not disproportionate under the circumstances.  It is not 
clear that incorporating a materiality requirement in federal law 
would significantly improve the situation.  On the other hand, there 
is some risk that unscrupulous providers would try to exploit such a 
requirement and there could be difficulties in drafting it in such a 
way as to provide a clear standard, while leaving sufficiently 
flexibility for law enforcement officials.

Officials from HHS-OIG and DOJ reviewed a draft of this letter and 
concurred in its findings.  They suggested technical or clarifying 
comments which we incorporated as appropriate.

As agreed with your office, unless you publicly announce its contents 
earlier, we plan no further distribution of this letter until 30 days 
after its issue date.  At that time, we will make copies available to 
interested parties on request.

If you or your staff have any questions, please call me at (202) 
512-5400.

Robert P. Murphy
General Counsel

1. Two other GAO products, soon to be available, address closely 
related issues.  The first of these addresses the data sources, 
analysis and procedures used to bring False Claims Act cases against 
hospitals for outpatient and clinical laboratory services.  That 
report also discusses recent changes by DOJ in its management of 
national initiatives involving the use of the False Claims Act and the 
release of model compliance guidance by HHS-OIG.  Also, our report on 
DOJ use of the False Claims Act in cases involving hospital billings 
to Medicare for physicians at teaching hospitals will be issued soon.

2. The amount paid to hospitals for a service depends on the nature of 
the illness and its classification under a so-called diagnosis-related 
group or DRG. 

3. A one-day window applied from October 1, 1983 through December 31, 
1990.  Effective January 1, 1991, the window was expanded to 3 days.  
(A one-day rule still applies under limited conditions.)  Omnibus 
Budget Reconciliation Act of 1990, Pub. L. No. 101-508,  sec.  4003(a), 42 
U.S.C.  sec.  1395ww(a)(4).  In this letter we refer only to the 72 hour 
rule, but some of the earlier reviews by the HHS-OIG of hospital 
compliance, discussed below, properly applied the one-day standard 
then in effect.

4. A third HHS-OIG report, issued December 1992, identified 
overpayments totalling $38.5 million for claims submitted between 
December 1987 through October 1990.  The report cautioned that 
significant improper claims and payments continued, and recommended 
that HCFA emphasize to hospitals that they would be subject to 
penalties unless they adopted adequate procedures to avoid improper 
billing.

5. The fourth HHS-OIG report identified potential improper payments at 
an annual rate of about $7 million.  For the period covered by the 
fifth report, January 1992 through December 1994, the corresponding 
annual rate was about $9 million.  The fifth HHS-OIG report was issued 
in 1996.

6. In 1993, the HHS-OIG and the Office of the United States Attorney 
for the Middle District of Pennsylvania began a pilot project, 
initially involving two hospitals in Pennsylvania but later expanded 
to most Pennsylvania hospitals.  The United States Attorney for the 
Middle District of Pennsylvania took the lead when the joint decision 
was made in 1995 by the HHS-OIG and DOJ to expand the effort 
nationally.

7. In this report, we use the term "overpayments" to refer to the 
amount the government pays, in excess of what it should have paid, as 
a result of a false claim..  We use the term "penalties" to refer to 
recoveries by the government under the Act, apart from interest, in 
excess of the amount of overpayment.  Thus, when the Act calls for 
treble damages, this comprises recovery of the overpayment plus a 
penalty equal to 200 percent of the overpayment.

8. E.g., Wang ex rel. United States v. FMC Corp., 975 F.2d 1412, 1421 
(9th Cir. 1992):  "The Act is concerned with ferreting out 
'wrongdoing,' not scientific errors."

9. Hospitals are grouped and divided among the tiers within the 
service areas of each fiscal intermediary, which usually but not 
always correspond to individual states. 

10. In addition, all hospitals must agree to make reasonable efforts 
to refund copayments and deductibles paid by Medicare beneficiaries.

11. Tier zero hospitals are not asked to sign a settlement agreement.  
Settlement agreements are entered into with tier 1, tier 2, and tier 3 
hospitals.  Settlements with tier 1 hospitals include no damage or 
penalty provisions but commit hospitals to implement internal controls 
to prevent future false claims. 

12. 42 U.S.C.  sec.  1395ww(a)(4); Medicare Hospital Manual  sec.  415, 415.6.

13. 42 U.S.C.  sec.  1395ww(a)(4).

14. The Joint Project decided to limit its enforcement effort to 
improper billings within a single hospital, and eliminated multiple 
hospital issues from the settlement.  In a small number of cases, the 
72 hour rule applies to situations involving more than one hospital.  
For example, if a patient, while admitted to hospital A for a 
procedure, goes to hospital B for a test related to the procedure, 
hospital B should bill hospital A, not Medicare.

15. Medicare Hospital Manual  sec.  415.6.

16. The letters that you forwarded to us from the Louisiana Hospital 
Association that complain of certain aspects of the Joint Project also 
do not raise lack of clarity as an issue.

17. Section 205, Public Law 104-191, 42 U.S.C.  sec.  1320a-7d.

18. 62 Fed. Reg. 7350 (February 19, 1997).  The regulations provide 
that advisory opinions will not be available when "[a]n informed 
opinion cannot be made, or could be made only after extensive 
investigation . . . or collateral inquiry."  42 C.F.R.  sec.  
1008.15(c)(3).  Since February 21, 1997, the effective date of the 
regulations, HHS has issued fourteen advisory opinions under HIPAA. 

19. H.R. Rep. No. 104-276, Pt. 1, at 500-01 (1995).

20. Letter to Rep. Stark, B-270093, March 18, 1996.

21. With respect to the 72 hour rule, section 415.6 of the Medicare 
Hospital Manual defines "related to the admission" as "furnished in 
connection with the principal diagnosis that necessitates the 
patient's admission as an inpatient (i.e., if the outpatient principal 
diagnosis is the same as the inpatient principal diagnosis)," thus 
considerably narrowing the scope of any questions a hospital might 
have.

22. DOJ has been active in several national initiatives regarding the 
False Claims Act since the 1970's.  In the late 1970's and early 
1980's, at the request of the General Services Administration, several 
U.S. Attorneys' offices undertook large-scale procurement fraud 
investigations.  Periodically, the Department of Housing and Urban 
Development asked that DOJ act on large-scale housing fraud issues.

One of the most noteworthy initiatives under the False Claims Act 
arose out of large-scale Department of Defense (DOD) procurement fraud 
investigations by the DOD Inspector General.  This resulted in the 
creation within DOJ of the Defense Procurement Fraud Unit which 
focused on the 100 DOD contractors who received 70 percent of DOD 
procurement dollars.  Between 1987 and 1994, DOJ reported $1.7 billion 
in settlements against DOD contractors.  Between 1981 and 1992, there 
were 92 civil defense procurement fraud cases involving 38 of the top 
100 DOD contractors or their subsidiaries.  Nearly half of the cases 
were settled without litigation; another quarter were settled after 
they were brought to trial.

23. It may not be easy to define materiality.  For present purposes, 
we use it to refer to the basis for a determination (whether set out 
in statute, regulation, policy, or decided on a case-by-case basis) 
that an action under the Act should not be pursued because the scale 
of the false claims does not warrant enforcement action.  This may be, 
for example, because of small dollar value or small number of claims, 
taking into account the cost of enforcement among other factors.  What 
constitutes materiality is clearly relative: an amount that may be 
material in one set of circumstances may not be material in another.

24. Proposed legislation provides an example of how such protection 
might be implemented.  H.R. 3523 would limit civil actions under the 
False Claims Act.  An action could not be brought based on improper 
claims submitted to a federally funded health care program (like 
Medicare) unless the amount in question were "material."  An amount is 
not material under the bill unless it exceeds a certain percentage of 
the total amount of claims submitted.  Further, the amount to be 
compared against a percentage for determining whether it is material 
is the amount of a single claim, unless the claim is part of a 
pattern.

25. Kusserow, Richard P., "Civil Money Penalties Law of 1981: A New 
Effort to Confront Fraud and Abuse in Federal Health Care Programs," 
58 Notre Dame Law Review 985, 987-989 (1983).

26. Of course, a decision not to proceed under the False Claims Act to 
seek civil penalties does not preclude collection of the disputed 
amounts by the agency.

27. Memorandum, "Guidance on the Use of the False Claims Act in Civil 
Health Care Matters," June 3, 1998, from the Deputy Attorney General 
to all Department attorneys handling civil health care fraud matters.

28. Under the False Claims Act, there is no requirement that the 
claimant actually have received payment or that the government have 
sustained actual monetary harm.  In fact, penalties can be recovered 
under the FCA even if the government cannot show that it incurred any 
damage.  See Rex Trailer Co. v. United States, 350 U.S. 148, 153, n. 5 
(1956); Hagood v. Sonoma County Water Agency, 929 F.2d 1416 (9th Cir. 
1991).

29. Louisiana's law provides that a Medicaid claim will not be 
considered false or fraudulent unless it is "in regard to material 
information" and will not be prosecuted unless it resulted in actual 
damages to the state of at least $1,000.  1997 La. Acts; Act No. 1373, 
July 15, 1997.  The law uses the accounting definition of materiality, 
whether an omission or misstatement of a specific piece of financial 
information is of sufficient magnitude in relation to the entire 
financial health of an entity that it would reasonably influence the 
judgment of a person relying on it to come to a different conclusion.

30. The Association has said that DOJ's use of sanctions under the 
False Claims Act for what the Association calls mere billing errors 
"borders on extortion."

31. This was based on application of the maximum possible sanctions, 
including treble damages (repayment of overpayments plus a penalty 
equal to 200 percent of the overpayments) and $10,000 penalties for 
each false claim, applied to overpayments identified in the third and 
fourth HHS-OIG reports.  Calculations of a hospital's potential 
exposure did not include potential overpayments (or penalties that 
could be applied to overpayments) identified in the fifth HHS-OIG 
report. 

32. In calculating its settlement offer, DOJ included the amount 
identified as improper payments in the HHS-OIG's fourth report ($606) 
plus interest ($170).  DOJ added the amount of potentially improper 
claims identified in the HHS-OIG's fifth report ($2305) plus interest 
($484) plus estimated overpayments up to settlement ($2305).

33. DOJ required repayment of the potential overbillings identified in 
the fourth HHS-OIG report ($1,634) plus penalties calculated at 75 
percent of the amounts recovered pursuant to the third HHS-OIG report 
($18,569).  Potential overpayments identified in the fifth HHS-OIG 
report ($22,611), interest on that amount ($4,748), and estimated 
overpayments up to settlement ($22,611) were added. 

34. In calculating its settlement offer, DOJ sought recovery of the 
potential overpayments identified in the HHS-OIG's fourth report 
($11,590) plus, as penalty, 100 percent of the amount recovered under 
the HHS-OIG's third report ($60,551) and 200 percent of the potential 
overpayments identified in the HHS-OIG's fourth report ($23,180).  To 
this amount was added the amount of potential overpayments identified 
in the fifth HHS-OIG report ($13,209) plus interest ($2774) plus 
estimated overpayments up to settlement ($23,180).