Legislative & Administrative
Update for 2003

Congressional activity in 2003 relating to the False Claims Act (FCA) revolved around the massive Medicare prescription drug legislation, which became law in December after six months of difficult negotiations (P.L. 108-173). At one point in the legislative process, the Senate version of the bill included a provision that would have increased the minimum FCA penalty per false claim from $5,500 to $7,500 and the maximum from $11,000 to $15,000 (section 612 of S. 1). The House-passed bill had no comparable provision, and it was not incorporated into the final conference agreement. Nonetheless, the new Medicare law contains an important provision clarifying the applicability of the FCA and its qui tam provisions to Medicare administrative contractors, which are responsible for the processing and payment of hundreds of millions of Medicare fee-for-service claims annually. In addition, Congress expressed its intent to rely on the FCA to ensure the accuracy of pricing data submitted by drug manufacturers to the Secretary of HHS.

The year 2003 also saw a proposal by the Centers for Medicare & Medicaid Services (CMS), which administers the Medicaid program at the federal level, to limit to three years the period that drug manufacturers participating in the Medicaid drug rebate program are required to retain their pricing data. TAF joined Senator Charles Grassley (R-IA), the Department of Justice (DOJ), and the Office of Inspector General (OIG) of the Department of Health and Human Services in urging CMS to reconsider its position and, provisionally, to extend the record retention requirement to 10 years, consistent with the FCA. In addition, the TAF Education Fund worked to educate policymakers and the general public about the contributions of the FCA and its qui tam provisions in protecting the Medicare and Medicaid programs against fraud by commissioning and disseminating several policy reports.

I. Medicare Administrative Contractor Reform

The Medicare program uses private insurers as fiscal intermediaries and carriers to process over 900 million claims for payment it receives each year from hospitals, physicians, and other fee-for-service providers. There has for several years been an interest on the part of the Centers for Medicare & Medicaid Services (CMS), which administers Medicare, as well as the General Accounting Office (GAO) and the Office of Inspector General (OIG) at HHS, in reforming the way in which Medicare selects and contracts with intermediaries and carriers. Legislation to accomplish this was debated but not enacted during the 107th Congress (2001 – 2002). TAF, in collaboration with Osman & Associates, worked to ensure that the statutory and report language did not undermine pending or future FCA cases against fraudulent Medicare administrative contractors. To date, there have been 11 FCA settlements involving fiscal intermediaries or carriers, mostly Blue Cross/Blue Shield plans, for a total of over $425 million.

Early in 2003, at the beginning of the 108th Congress, bipartisan contracting reform legislation was introduced in the House by Representative Nancy Johnson (R-CT). This bill, H.R. 810, was reported by both the Committee on Ways and Means (H. Rept. 108-74, Part 1, filed April 11) and the Committee on Energy and Commerce (H. Rept. 108-74, Part 2, filed April 29). The statutory language in the two versions relating to liability for fraud was identical and reflected the position supported by TAF. A Medicare administrative contractor would be liable if, in connection with a payment to a Medicare provider or plan, it acted "with reckless disregard of its obligations under its Medicare administrative contract or with intent to defraud the United States." The provision also clarified that this statutory standard was not to be construed to limit liability for conduct that would constitute a violation of the FCA.

The House did not take up H.R. 810, and there was no companion bill in the Senate. Instead, the contractor reform provisions of H.R. 810 were folded into the House and Senate versions of the massive Medicare prescription drug bills, H.R. 1 and S.1, introduced in June 2003 and passed by the House and the Senate, respectively, that same month. The language in both bills relating to contractor liability was identical to the language in H.R. 810 (see section 911(a) of H.R. 1, section 521(a) of S. 1). On July 24, the conferees announced an agreement on the portions of the bills relating to regulatory and contracting reform. This agreement adopts the House language on contractor liability. See Summary of Regulatory and Contracting Reform Conference Agreement, http://waysandmeans.house.gov/media/pdf/hr1/hr1summaryregreform.pdf. This agreement was incorporated into the final conference report, which was adopted by the House and the Senate in November and signed into law by the President on December 8 as the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, P.L. 108-173. The contractor liability language is found in section 911(a) of the new law, which adds a new section 1874A(d)(3) to the Social Security Act.

II. Medicare Part B Drug Reform

It is widely known that the Medicare drug legislation establishes an outpatient drug benefit under a new Part D that is to take effect January 1, 2006. Less well known is that this same legislation also makes a fundamental policy change in the current Medicare Part B drug benefit, which covers chemotherapy and other physician-administered drugs. Prior to this change, Medicare paid for the drugs it covered at 95 percent of the Average Wholesale Price (AWP), as reported by the manufacturers. This payment methodology led to abuses that were uncovered by qui tam relators in the mid- to late-1990’s and were the basis for several landmark settlement agreements with drug manufacturers totaling over $1.6 billion. These settlements included Corporate Integrity Agreements (CIAs) that contain a more accurate and reliable basis for payment than the AWP: the Average Sales Price (ASP). In revising the Medicare Part B payment rules for physician-administered drugs, Congress replaced AWP with Average Sales Price as the basis for payment, effective January 1, 2005.

To implement this new payment methodology, the Medicare drug bill requires manufacturers to report to the Secretary of HHS, on a quarterly basis, their Average Sales Prices for all physician-administered drugs covered under Part B. This reporting requirement is effective January 1, 2004. The ASP data reported is subject to audit by the OIG. In addition, Congress is relying on the qui tam provisions of the FCA to ensure the accuracy of the reported data:

"The Conferees intend that if a manufacturer knowingly (as defined in section 3729(b) of the False Claims Act) submits false information, that such submission be considered a ‘false record or statement’ made or used ‘to get a false or fraudulent claim paid or approved by the government’ for purposes of section 3729(a)(2) of title 31, United States Code, known as the False Claims Act. Thus, if a manufacturer knowingly submits any false information, the manufacturer would be fully subject to liability under the False Claims Act." (H. Rep. 108-391, p. 592).

III. Retention of Medicaid Rebate Records by Drug Manufacturers

Under current law, pharmaceutical manufacturers that want Medicaid to cover their products must agree to pay rebates on a quarterly basis to the federal government and the states for the drugs that Medicaid purchases. The amounts of these rebates are calculated on the basis of pricing data submitted to the Secretary of HHS by the manufacturers. Since 2001 the Department of Justice has entered into agreements with five different drug manufacturers settling allegations of fraud against the Medicare and Medicaid programs; among the allegations in each agreement was the concealment by the manufacturer of accurate pricing data, resulting in the underpayment of rebates owed the federal and state governments. The conduct at issue took place over periods as long as 11 years.

On August 29, 2003, CMS issued a final regulation limiting to three years the time a manufacturer participating in Medicaid must retain pricing data relevant to the rebate program unless the manufacturer is aware of a government audit or investigation that has not been resolved.This regulation was scheduled to take effect January 1, 2004. TAF joined Senator Grassley, DOJ, and the OIG in urging CMS to revise this requirement so as to conform to the 10-year statute of limitations in the FCA (TAF’s comments are posted elsewhere on this web site).

On January 6, 2004, CMS published in the Federal Register a proposed rule that would replace the three-year recordkeeping requirement with a 10-year requirement. On the same day, CMS published an interim final rule, effective January 1, 2004, that imposes a 10-year recordkeeping requirement through December 31, 2004. In explaining its actions, the agency expressed "concern" that, in the absence of a 10-year requirement, manufacturers "will destroy records concerning drug price calculations, as well as data supporting those calculations after three years" and that, as a result, "the effective use of the FCA to investigate fraud regarding the Medicaid drug rebate program could be severely limited at a considerable cost to the Federal and State treasuries." If CMS does not publish a final rule implementing the 10-year requirement before the December 31, 2004, a sunset provision in the interim final rule will go into effect, and manufacturers will be able to destroy pricing records more than three years old. TAF will continue to advocate for the 10-year recordkeeping requirement.

IV. Informing the Medicare and Medicaid Policy Debate

The core mission of the TAF Education Fund is to educate the general public, the legal community, policymakers, and other interested parties about the FCA and its qui tam provisions. Toward this end, the TAF Education Fund commissioned and disseminated three studies in 2003 relating to the contributions of the FCA to federal health care policy. One had to do with Medicare; one with Medicaid; and one with both Medicare and Medicaid. Each of these reports is posted on this web site.

In June 2003 the TAF Education Fund released a report by health care economist Jack Meyer finding that, over the 5-year period 1997 – 2001, the federal government recovered nearly $9 for every $1 spent in investigating and prosecuting civil fraud cases under the FCA. The report, Fighting Medicare Fraud: More Bang for the Federal Buck, was an update of Meyer’s ground-breaking 2001 study for TAF that found an $8-to-$1 return on investment over a 4-year period. Both studies emphasize that these direct returns to the federal government significantly understate the value of the FCA because they do not include the indirect benefit of large FCA recoveries in deterring fraud against Medicare by providers and plans not involved in the settlements. These indirect benefits, while not quantifiable, "undoubtedly add substantially to the public’s benefit" from the FCA and its qui tam provisions.

June 2003 also saw the release of a TAF Education Fund report on the role of the FCA in combating fraud against the federal-state Medicaid program. The report, Reducing Medicaid Fraud: The Potential of the False Claims Act, found that over the five-year period 1997 – 2001, federal FCA recoveries from fraud against Medicare were 25 times as great as federal FCA recoveries from fraud against Medicaid, even though federal Medicare outlays were only twice as great as federal Medicaid outlays. The author, Andy Schneider, J.D., identified the reasons for this startling discrepancy and made a number of recommendations for improving the effectiveness of the FCA in fighting fraud against the Medicaid program. Among the recommendations is that Congress encourage states to enact their own FCAs with qui tam provisions by increasing the federal share of Medicaid administrative costs in states with such laws in place.

Finally, in November 2003, TAFEF, in collaboration with Getnick & Getnick, released a report detailing six FCA settlements and one state FCA settlement with pharmaceutical manufacturers, including three of the nation’s five largest drug companies, which recovered over $1.6 billion. The report, Reducing Medicare and Medicaid Fraud by Drug Manufacturers: The Role of the False Claims Act, documents the vital role of whistleblowers in surfacing information about complex, sophisticated corporate fraud against federal health care programs, information that would not otherwise become available to government officials. The author of the report, Andy Schneider, J.D., concludes that, in light of these settlements, the cases not yet settled but out from under seal, and the additional cases likely to be under seal, "[w]histleblowers, federal prosecutors, and state attorneys general appear to be on the verge of forcing fundamental changes in the marketing and pricing practices of the pharmaceutical industry."