Anti-Fraud is Not Anti-Business: How Corporations Can Use the Whistle-Blower Law to Level the Playing Field

by Lesley Ann Skillen

A modified version of this article was published in Report on Medicare Compliance,
Vol. 8, No. 9, March 18, 1999

Imagine this:

It is 1988. You are the CEO of Acme Consolidated Clinical Laboratories, Inc., a prosperous nationally-based chain of clinical testing laboratories. A memo from the CFO lands of your desk, headed: “Reimbursement Maximization.” The memo describes a fast-growing practice amongst your competitors that, if adopted by Acme, would enhance revenues by millions of dollars with a correspondingly small increase in expenditure.

The practice is the following: standard chemistry panels, or SMACs – the packages of blood tests routinely ordered by physicians as general health screenings and diagnostic tools – are being “enhanced” by the automatic performance of additional tests. Physicians like it, writes the CFO, because they get additional diagnostic information (which is good for the patient), and because the more tests they do, the less vulnerable they feel to malpractice lawsuits. Acme’s competitors are able to offer physicians very low prices on the enhanced panels – less than a dollar increase on the old price – because when the panels are billed directly to Medicare, private insurers and private payors, the additional tests are billed not at the low package price but individually, at the price listed in the fee schedule. This way, some labs are getting over $100 from Medicare for the most sophisticated of their enhanced panels, more than twice the amount that Acme is currently getting for their top price panel. Of course, the logistics of performing a high volume of additional tests would have to be considered, but the cost of additional equipment and personnel would be more than offset by the increase in revenues. Your CFO urges you to consider a change in Acme’s policies to accommodate this exciting new development in clinical testing.

You have been in the lab business for 41 years. As you ponder your CFO’s proposal, you feel increasingly uneasy. If the tests are automatically added to the SMACs without giving the physician an option whether to order the tests or not, wouldn’t Acme be open to the charge that it was performing and billing for medically unnecessary tests? And as to the physician discounting, what about the rule that Medicare can’t be charged more than other payors? Could the discount be characterized as a kickback offered to physicians in exchange for their Medicare business? In short, is this legal?

You call your CFO. You articulate your concerns. Yes, he admits, there have been murmurings in the marketplace that Medicare may be evaluating the legality of these developments. But he quickly urges you to consider another problem. The profits Acme’s competitors have been able to achieve by billing the add-on tests to Medicare and others has sparked off a bidding war in the already fiercely competitive marketplace for physicians’ business. Sales reps have been getting accounts by undercutting the prices that reps from other labs are offering doctors for SMACs and other panels of blood tests that doctors use. The other labs can afford to do this because the panels that the doctors themselves pay for are loss leaders for the infinitely more lucrative business that the labs get when doctors order test panels for their Medicare and privately insured patients. Acme reps in the field are complaining bitterly that through no fault of their own they are shedding accounts like autumn leaves.

You soon appreciate that the reality is harsh and inexorable: Acme can’t compete in this marketplace, unless it gets on board with its competitors. The very existence of the corporation is at stake. But what about the legal and ethical issues? You know that the practice of adding on tests, without offering doctors the choice whether to get the test or not, is at the very least the kind of “gray” area practice that would make your Board of Directors very nervous indeed.

Cautious steps are taken at first. Feasibility studies are done with respect to a number of potential “add-on” tests to determine the extent to which their inclusion in a standard health profile could be clinically justified. HDL? This is a real winner, given the anti-cholesterol frenzy of recent years. Ferritin? Very little clinical justification, and would require new lab equipment. Fructosamine? Well, possibly, but the medical literature doesn’t really support it. Thyroid? High revenue potential, but didn’t the American Thyroid Association recommend against thyroid screening in asymptomatic patients? Syphilis? It’s been popular with doctors in the past, but how would it look if syphilis tests were being routinely performed on five year olds? Offering doctors the option of ordering the panels with the add-on tests for a nominal price is considered – but soon rejected. Marketplace intelligence tells you that Ace Labs tried this for a while, and found that doctors simply didn’t order the enhanced panels because they didn’t want the add-on tests.

The meetings and memos are endless and agonizing. Your CFO urges you to follow the marketplace trend and begin charging for mathematical calculations derived from the results of other tests performed in the panel, like VLDL and T7. You are reminded that someone wrote about looking down into his open grave and jumping in. You pretend that it’s a matter of whether, but you know that it’s really a matter of when and how.

At one meeting, the practices of competitors are scrutinized. Your Medical Director notes that Ajax Labs’ decision about which tests to add to the SMAC was clearly based on their reimbursement potential rather than their clinical utility. Your Director of Sales reports that Ajax Labs has been offering chemistry and hematology panels to doctors for $10 – less than half the price that Acme charges. He complains that all his best reps are trying to get jobs with Ajax because their commissions are the highest in the industry. You wonder how Ajax executives sleep at night. Between satin sheets, no doubt.

“This company values its ethical standards and reputation,” you feel compelled to point out. “You know we are conservative when it comes to ‘gray area’ practices. Dubious billing practices by our competitors, no matter how widespread, are not a green light to us to do the same thing; simply because everyone else is doing it doesn’t make it acceptable.”

“Why don’t we blow the whistle on them?”

Heads turn. A new assistant general counsel, fresh out of Cornell, is speaking:

“There’s this very old statute …”

“You mean older than you?”

Laughter. The Medical Director has scored a hit with this one.

“A Civil War era statute, actually, so I guess that makes it older even than you.”

Silence. Composing herself , the assistant general counsel continues:

“It’s called the False Claims Act, and it was passed by President Lincoln in 1863 to deal with all the crooked military contractors during the Civil War. It’s recently been amended by Congress to strengthen it and make it more effective in fighting fraud against the Government. The primary concern seems to be defense procurement fraud – you know, the six hundred dollar toilet seat syndrome – but it’s just as applicable to health care fraud. It’s a civil statute that provides for treble damages and penalties of up to $10,000 per violation, and attorneys fees. It has this section called the qui tam law, which effectively turns citizens into private fraud enforcers. Anyone who knows about a fraud on the Government can bring an action in the name of the Government and get between 15% and 30% of the proceeds. With the profits our competitors are making off of Medicare, that could mean who knows how many millions for us, as well as allowing us to enhance our already stellar reputation as model corporate citizens.

“By the way, qui tam is Latin, short for qui tam pro domino rege quam pro seipso: ‘he who as much for the king as for himself.’ The qui tam action was borrowed from the English common law, which . . .”

“You mean we should rat out our competitors?”

“Why not? Companies do it in anti-trust cases all the time.”

There is a general feeling in the room that the assistant general counsel is on a fast track to the mail room.
Flash forward a decade. Acme is no more, having been absorbed into a larger lab when the indictment of Ajax labs and its civil settlement with the Government, arising from a qui tam case brought by a former Ajax employee, spelled the beginning of the end for the cash cow that had kept the lab industry so profitable for so many years. Acme itself has been called to account by the Federal Government. It has pled guilty to a criminal offense and agreed to pay many millions of dollars to the Government in damages and penalties, following a number of False Claims Act qui tam lawsuits brought by one of Acme’s former sales reps, a former billing consultant, and a couple of Acme’s physician clients. In its new corporate guise, it is now facing a shareholder action, a lawsuit by private insurance companies, and a class action suit brought on behalf of self-pay patients.

You wonder whether you might still be the CEO of a major national laboratory, and whether the lab industry as a whole might have avoided having to pay the Federal Government almost a billion dollars in False Claims Act damages and then being sued by every man and his dog for the same practices, and whether your employees might have been able to stay in their jobs and your fellow executives stay out of prison, and whether the stock prices might have remained stable, and whether Medicare might not have closed the barn door after the horse had bolted and become impossible about getting paid for lab tests . . . you recall the advice of the young, brash, Cornell graduate, and wonder whether she wasn’t on to something.


The lesson to be learned from this parable is the following:

Corporations don’t have to feel persecuted by the qui tam law. Corporations and their principals qualify fully as qui tam relators.1 The qui tam law gives the honest health care company a powerful anti-fraud weapon to cut down dishonest competitors who are fraudulently claiming a disproportionate share of federal health care dollars. Corporations can use the qui tam law to expose the corrupt business practices of rivals, make money for themselves and be heroes for cleaning up their industry and recouping defrauded taxpayer dollars.

For too long, corporate America has seen itself as being at the wrong end of the qui tam law. The law has been popularly viewed as a tool for disgruntled employees to get rich and get even by taking advantage of a weakness in a corporate compliance program or bypassing it all together. The term “whistleblower” is itself so loaded with meaning that it has become hard to see the qui tam law for what it is.

In fact, it is a law that is “firmly rooted in the American legal tradition”2 with a pedigree going back to the thirteenth century, when the concept began to develop as part of the English common law. By the fourteenth century, it had begun to appear in legislative form, allowing private parties to bring a lawsuit to redress a public wrong and to share in the penalties recovered. Qui tam statutes were adopted in America as part of the general adoption of British law at the time of independence, so that by the time of the “Lincoln Law” in 1863, the concept of private citizen enforcement was an accepted part of the U.S. statutory framework. Ten of the fourteen statutes passed by the first Congress contained qui tam provisions designed to assist Government enforcement, including statutes relating to bank regulation, import duties and copyright infringement.3

Back then, the qui tam law was seen as a means of supplementing the efforts of the overtaxed Attorney General and U.S. District Attorneys. It has the same function today. As the Senate Committee on the Judiciary noted in considering the 1986 amendments:

“In the face of sophisticated and widespread fraud, the Committee believes only a coordinated effort of both the Government and the citizenry will decrease the wave of defrauding public funds.”4

In 1996, a Department of Justice press release celebrating the tenth anniversary of the 1986 amendments and the recovery since that time of over $1 billion under the qui tam law expressed the same sentiment:

“The recovery of over $1 billion demonstrates that the public-private partnership encouraged by the statute works and is an effective tool in our continuing fight against the fraudulent use of public funds.”5

The broader message to take away from all this is that “anti-fraud” is not “anti-business.” In the same way that corporations learned that the responsible use of the RICO statute could help right the wrongs they suffered as a result of fraud, so can the responsible use of the qui tam law be a powerful weapon in the service of the business community.

The Federal corporate Sentencing Guidelines provide strong incentives for corporations to take positive steps to prevent, detect and accept responsibility for the illegal acts of their officers and employees. Under the Guidelines, corporations must promptly report those acts to and cooperate with Government authorities. In such a climate — in which compliance and self-policing are effectively mandated – law abiding corporations need to take action to protect their ability to compete honestly in an honest marketplace. Companies routinely do so now under the anti-trust laws when confronted with anti-competitive practices by rivals.

The qui tam law provides an opportunity for honest companies to level the playing field by exposing the illegal practices of competitors for federal dollars, and at the same time offsetting the business losses incurred as a result of them. It does so not only with an eye to bottom-line profitability, but also to the greater public good.

1. See U.S. ex rel. John Doe v. X Corp, 862 F. Supp. 1502, 1506-7; William E. Kovacic, Whistleblower Bounty Lawsuits As Monitoring Devices in Government Contracting, 29 Loy. L.A. L. Rev. 1799, 1812 (1996)

5. U.S. Department of Justice Office of Public Affairs press release, “Justice Department Recovers Over $1 Billion In Qui Tam Awards And Settlements,” October 18, 1995. The figure of $1 billion represents one-third of all recoveries achieved by the Department of Justice in civil fraud cases in the same time period.