Healthcare Fraud

The purpose of the qui tam provisions of the False Claims Act is to encourage private individuals who are aware of health care fraud being perpetrated against the government to bring such information forward. Healthcare consumes approximately 40% of federal spending, with Medicare spending approximately $350 billion, and Medicaid totaling approximately $320 billion.  Common types of fraud include the following:

Pharmaceutical Companies

Pharmaceutical companies may be liable under the False Claims Act for Medicare and Medicaid fraud in any case where the government loses money directly or indirectly. This would include practices such as:

  • paying kickbacks and inducements to physicians, hospitals and pharmacists to prescribe or otherwise favor their drugs;
  • engaging in off-label marketing;
  • misreporting the “best price,” the “federal ceiling price” or other benchmark prices that pharmaceutical companies report to the Medicare and Medicaid programs;
  • overcharging for “340B” program drugs;
  • manufacturing or diverting substandard or tainted drugs.
  • providing false data to the Food and Drug Administration or withholding negative data from the FDA about the efficacy of a pharmaceutical drug or medical device in clinical research trials to get FDA approval to sell and market the pharmaceutical drug or medical device.
  • manufacturing, selling or distributing adulterated drugs — meaning those processes didn’t meet required standards to ensure safety, quality, purity and correct strength of the drug.

Medical Devices and Implants

Sales and marketing tactics used by medical device companies, such as lucrative consulting agreements with doctors and off-label marketing, could violate the False Claims Act and could be the basis for a qui tam (whistleblower) lawsuit.

Both the pharmaceutical and medical device industries follow some of the same sales and marketing practices that have been found in the case of pharmaceutical companies to be violations of the False Claims Act and other federal and state statutes. As a result of qui tam lawsuits and federal and state investigations, drug companies have paid more than $2 billion to settle allegations of Medicare and Medicaid fraud.

A medical device company could be liable under the False Claims Act for Medicare and Medicaid fraud if it:

  • Has financial arrangements with doctors that essentially are kickbacks for using a company’s implant or other medical device. Some financial arrangements that are coming under federal scrutiny include royalty payments on new devices, paying the cost of educational conferences, sponsoring fellowships and providing unrestricted grants.
  • Markets the implant or other medical device for uses that haven’t been approved by the U.S. Food and Drug Administration. A division of Serono pleaded guilty in 2005 to charges it conspired to market Serostim by supplying doctors diagnostic software that was not fully approved by the Food and Drug Administration. Serono paid $704 million to settle qui tam lawsuits and related federal charges. Prosecutors said the software led to an increase in demand for Serono’s drug, Serostim, used to treat wasting in AIDS patients.
  • Sells implants or other medical devices that are defective or the company has reason to believe are defective.

Sales representatives and their companies in segments of the medical device industry that are highly lucrative and competitive probably face the greatest pressure to win market share. There may be more pressure to offer kickbacks to doctors to win their business. This includes markets for implantable cardioverter defibrillators and pacemakers, stents, prosthetic heart valves and other cardiac implant devices; orthopedic implants (including artificial hips and artificial knees); spinal disks; cochlear implants; and robotic surgery machines.

Hospitals and other healthcare providers could be liable under the False Claims Act if they bill Medicare and Medicaid for medical devices that haven’t been approved by the FDA.

Kickbacks to doctors

Sales representatives, medical device companies and doctors should evaluate their financial relationships to determine whether doctors are being paid legitimate compensation for valuable services rendered in the development of the devices or whether the companies are making the payments to secure competitive advantage in the highly lucrative and competitive medical device field and are kickbacks. Payments to physicians could be considered improper financial inducements if they could influence the doctors’ choice of implants and other medical devices. Free vacations, unrestricted grants and consulting agreements could be considered kickbacks as they might influence doctors’ choices of implants and other medical devices.

Services not rendered/add-on services

Probably the clearest example of fraud by health care providers involves billing for services that were never delivered to patients. The basic scheme can involve as many variations as there are treatments.

For example, some physicians bill Medicare or Medicaid for diagnostic procedures they never performed, physical therapists bill for sessions that never took place, and nursing homes might bill for supplies that were never actually purchased or used. There is often some falsification of records to support improper billings.

Billing for unnecessary procedures or services that have been added to a bill for legitimate charges is another type of false claim. The government also has held clinical laboratories liable when they induced physicians to order unnecessary add-on tests by including the extra test in a standard blood chemistry panel at minimal or no extra charge to the physician. The lab then bills Medicare for the additional test without the doctor’s knowledge. When the physician doesn’t have the option of ordering the standard panel without the extra test, the lab may be liable for claims submitted for the extra test.

Upcoding and Unbundling/Fragmentation

Billing Medicare and Medicaid for medical services is done using a complex system of numerical codes that designate various diagnoses and procedures. Reimbursements are based on those codes. The coded, computerized bills submitted by providers are processed by large insurance companies (known as “intermediaries” or “carriers.”) that contract with the government to pay claims using government funds.

Because different codes or code combinations may produce dramatically different reimbursements from government programs, there is a financial incentive to “upcode” or bill for a more serious (and more expensive) diagnosis or procedure.

Another common example of improper coding is called “unbundling,” also known as “fragmentation.” Medicare and Medicaid often have special reimbursement rates for a group of procedures commonly done together, such as typical blood test panels by clinical laboratories. Some health care providers seeking to increase profits will “unbundle” the tests and bill separately for each component of the group, which totals more than the special reimbursement rates.


One of the most complicated and troubling aspects of the health care system involves hidden financial arrangements between various health care providers. There are a variety of improper arrangements where providers will provide some material benefit in return for other providers prescribing or using their products or services.

In most instances, such arrangements are illegal. Doctors are supposed to decide on the most appropriate treatment for their patients without consideration of their own financia interests. Kickbacks often result in medically unnecessary treatment.

Lack of Medical Necessity

Some health care providers bill Medicare and Medicaid for services or procedures that are not medically necessary. They would be liable under the False Claims Act for those false billing practices.

Fraudulent Cost Reports

Medicare reimburses health care institutions for certain costs in addition to paying for individual procedures and treatment. Virtually every hospital and many other providers submit cost reports to Medicare, which are used to calculate how much the government will reimburse the provider for expenses related to patient care. This includes the costs of capital improvements like new medical equipment and bigger wards. Over the years, cost reports can represent billions of dollars in payments for some providers.

Providers who knowingly inflate the costs they incurred, mischaracterize the nature of those costs or give the wrong percentage of their services dedicated to Medicare patients are liable under the False Claims Act.

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