False Claims Act in Representations & Warranties Insurance

Companies with government customers in the United States must be well-informed about the False Claims Act (FCA). In the fiscal year ended 2023, the Department of Justice (DOJ) obtained more than $2.68 billion in settlements and judgments from civil cases involving fraud and false claims against the government.

The FCA dates to the American Civil War. FCA whistleblowers have assisted the federal government in recouping billions of dollars, including substantial amounts from a few pharmaceutical companies. But large pharma is not the only industry subject to FCA claims. Every company, big or small, that has a federal government customer can find itself under the purview of the DOJ. In fact, the government customer does not need to be federal at all, as almost 30 U.S. states have passed their own model of the FCA, allowing states to claw back money defrauded from their own funded programs.

Healthcare seems to be the biggest industry sector where government agencies have availed themselves of the FCA’s recoupment mechanism (i.e. through Medicare and Medicaid), including treble damages. In an increasingly expensive healthcare market with advanced regulation, required specialty education, and overall fiscal pressure in the general economy, we can infer that government payors will continue to take measures to control the utilization, cost, and provision of healthcare services.

Medicare will presently not pay for many clinical test services, including commonly ordered clinical tests, without significant and appropriate diagnostic information provided by the physician supporting the medical necessity of such a test. The most important information is appropriate diagnostic codes. And when there are almost 70,000 medical codes to choose from, it is no wonder certain errors arise, sometimes with disastrous consequences. For an appropriate medical test to be recommended, accepted, billed, provided, reimbursed, and then not challenged upon audit, the patient must be truthful, the doctor attentive and well-informed, the diagnosis accurate, the revenue cycle management (RCM) provider precise, and the code correct. Even the legibility of handwriting comes into play. When we consider the process required for proving “medical necessity” as defined by Medicare, it is hardly surprising that inherent errors exist in the process itself, and less surprising government payors can successfully claw back money through the FCA.

RWI underwriters have seen firsthand how the False Claims Act can expose RWI policies to healthcare-related claims. However, a target company does need to have high government reimbursement rates, nor does it need to provide healthcare services, for the Department of Justice to commence an investigation and an RWI claim to follow.

National defense is another industry where the FCA has been invoked to claw back damages. Engineering contractors for the Department of Transportation, surveillance and security services, and product manufacturers of any kind with federal (or in some cases, state) government customers are not exempt from the reach of the False Claims Act.

Private equity and strategic buyers in the market for a target company with government contracts must pay particular attention to all government contracts as well as the company’s underlying policies and procedures for maintaining compliance with those contracts. One sign a target might be at higher risk (typically seen for non-healthcare government contractors or subcontractors) is the existence of cost-reimbursable contracts (often discernable by seeing cost-plus accounting in the financial statements). These contracts pay for allowable costs plus some additional amount for profit and are regularly subject to ordinary course government audits. If there is an issue discovered in that contract (e.g., a representation, warranty, or cost improperly enumerated), repayment obligations may result from audits by government agencies through the FCA.

Again, companies who have government customers in the United States must be well-informed about the False Claims Act (FCA) and analogous state laws. It may save you millions, if not billions.

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