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Legal Intelligencer: Qui Tam Suits and Veil Piercing: A Powerful Combo for Combating Health Care Fraud

Scale with medication on one side and money on the other

This article will discuss briefly the history of qui tam litigation, its interplay with piercing theories and the particular utility of these types of suits in the health care context.

In the November 4, 2021 edition of of The Legal Intelligencer, Edward T. Kang and Ryan T. Kirk of Kang Haggerty co-authored “Qui Tam Suits and Veil Piercing: A Powerful Combo for Combating Health Care Fraud.

In 2019, the United States federal government spent $1.1 trillion, or approximately 25% of the overall federal budget, on just four government health care programs; Medicare, Medicaid, the Children’s Health Insurance Program (CHIP) and the Affordable Care Act (ACA). In addition to these well-known programs, the Department of Defense spends tens of billions of dollars every year providing health care to service members, veterans and their families through programs like TRICARE. Likewise, all states administer their own Medicaid programs and typically match the funding provided by the federal government, pumping even more public money into this sector.

Unfortunately, not all of these expenditures go toward the intended recipients, and some individuals prey on this largesse. While academics and commentators debate the exact proportion of improperly diverted government expenditures, the fact that such diversion exists is noncontroversial. For its part, the Centers for Medicare and Medicaid Services (CMS) estimated that around 7% of Medicare spending in 2019 was improperly reimbursed. See “2020 Estimated Improper Payment Rates for Centers for Medicare & Medicaid Services (CMS) Programs” (Nov. 16, 2020). The problem is even worse for Medicaid and CHIP, with CMS estimating that around 15% of this spending was improperly reimbursed in 2019.

Of course, fraud is not limited to the health care context, nor is this a novel dilemma. To combat this longstanding problem, the federal government has long relied on the False Claims Act (FCA) and the qui tam suits it authorizes to detect and deter fraud. In the modern era, FCA suits often operate in conjunction with veil piercing theories, as fraudulent behavior typically underlies both. This article will discuss briefly the history of qui tam litigation, its interplay with piercing theories and the particular utility of these types of suits in the health care context.

Like many doctrines that developed at common law in England, qui tam is a truncation of a longer Latin phrase. The original “qui tam pro domino rege quam pro se ipso in hac parte sequitur,” translates to “he who brings an action for the king as well as for himself.” While the United States soon soured on having a king, qui tam suits survived, and proto-versions of the FCA can be found in Colonial America. The idea behind qui tam actions has remained fairly consistent over time; to incentivize whistleblowers to come forward, they are given a portion of any amount that the government recovers based on their claim.

Up until the Civil War, qui tam suits in America were typically brought under state or common law. But with the outbreak of this conflict, and the massive wartime spending that ensued, federal contracts were increasingly viewed as easy targets for racketeering and fraud. In an effort to crack down on this abuse, Congress enacted the original False Claims Act of 1863, which was then signed into law by President Abraham Lincoln.

In the century-and-a-half since, Congress has tweaked the FCA on several occasions. The most recent amendments to the statute were specifically promulgated to combat health care fraud, as such cases have become the lion’s share of qui tam actions. For instance, the Fraud Enforcement and Recovery Act of 2009 amended the FCA to impose liability on those who knowingly receive or conceal evidence of overpayments, not just on those who directly submit the false claims. In the health care context, where funds flow freely between pharmacies, hospitals, patients and physicians, these amendments help impose liability on members of that chain that turn a blind eye to obvious wrongdoing to keep the stream of payments unbroken.

The following year, the FCA was further amended as part of the ACA. Suspecting that the increased public funds flowing into the health care industry would also present a greater risk of diversion, Congress amended the FCA to make it easier for whistleblowers to bring suit. Specifically these whistleblowers, or “relators” as they are called in qui tam actions, no longer had to have direct and independent knowledge of the transactions at issue. Instead, relators only need to have knowledge that is independent and “materially adds” to the government’s past understanding of the allegations. See 31 U.S.C. Section 3730(e)(4)(B).

When a relator does bring an action under the FCA, the complaint is first filed under seal and served upon the government. The government then investigates the allegations and decides whether or not to intervene. If it chooses to intervene, the government then prosecutes the suit under the FCA, as well as any other applicable statutes. The factual scenarios underlying FCA suits will often also involve violations of the Anti-Kickback Statute and Stark Law, which prohibit corrupt referral practices in the health care industry.

If the government opts not to intervene, relators can still proceed with the suit on behalf of the United States, but the government retains the ability to intervene later on. If successful, the defendants will be liable for treble the amount of false claims submitted, as well as statutory penalties and attorney fees. The relator’s portion of this recovery will be between 15% to 30%, depending on whether the government intervened and the relator’s level of participation in the fraud. As evidenced by its long history, the FCA has proved fairly effective at deterring and detecting fraud.

With the increasing corporatization of the health care industry, however, the scale and complexity of fraudulent schemes has also grown tremendously. This trend is particularly evident in the pharmaceutical sector, where violations of the FCA have forced corporate behemoths like GlaxoSmithKline and Pfizer into billion-dollar settlements. In addition to the sheer size of the entities that operate in the health care industry, their ownership structures have also become significantly more elaborate. The health care industry is no longer limited to doctors and hospitals, but a veritable thicket of holding companies, LLCs, and private equity firms. Despite this, the typical relator has not changed all that much; they are still often just individuals operating within these organization that grow suspicious of improprieties and decide to take action.

Because of this increasing corporate complexity, piercing the corporate veil in qui tam actions serves an important public function. FCA suits involve some type of malfeasance by definition, and the corporate form is often used to further this fraud. Culpable actors engaged in wrongdoing know the consequences of their actions if discovered, and will seek to minimize any liability they will face. To this end, they will often attempt to take advantage of the corporate form and the limited liability it offers. Courts should be especially skeptical of this use of the corporate form in the qui tam context, as the ultimate victims of these unscrupulous practices will be the public at large.

While the specific criteria for piercing the corporate veil varies by jurisdiction, there are many commonly agreed-upon elements. For instance, in Pennsylvania, the Supreme Court has endorsed the use of the eponymous Lumax factors to determine when to pierce the corporate veil. Lumax Industries v. Aultman, 669 A.2d 893 (Pa. 1995). These factors have been cited by federal courts throughout the U.S. Court of Appeals for the Third Circuit, along with many other iterations of such a list. Despite some variation across jurisdictions, there is broad agreement among courts on one key factor: veil piercing is appropriate when the corporate form is used to perpetrate a fraud. Given the inherent nature of FCA suits, these circumstances arise quite frequently.

The veil piercing analysis in FCA suits is similar to other contexts, although courts often also consider the specific equitable consequences of the misappropriation of public funds. For instance, in United States v. Dynamic Visions, 971 F.3d 330 (D.C. Cir. 2020), the government brought suit against a home health care provider after a routine audit revealed it was unable to substantiate any of the Medicaid reimbursement claims it submitted. After finding against the defendant, the trial court also pierced the corporate veil to impose liability on the corporation’s sole owner, reasoning that he failed to follow corporate formalities and that it would be grossly inequitable to let him keep these illicitly obtained funds. On appeal, the D.C. Circuit agreed and held “that it would be unjust to allow [the owner] to retain funds wrongfully taken from, and now owed to, the government.”

In another FCA suit, this time brought by a relator, the court in Stepe v. RS Compounding, 325 F.R.D. 699 (M.D. Fla. 2017) confronted a scheme to defraud TRICARE’s reimbursement of compound drugs. The government sought to pierce the corporate veil, but the company’s owner argued that there was insufficient evidence to support this remedy. Rejecting his motion to dismiss, the court held that the government had pled fraud with sufficient particularity, and that the owner had “at least deliberately ignored or recklessly disregarded the fraudulent practices.” Like in Dynamic Visions, the court also credited the government’s argument that it would be inequitable for the company’s owner to retain these ill-gotten gains and escape liability.

Steeped in history, the FCA and qui tam suits are still as relevant as ever. The public-private cooperation cultivated by statutes like this is one of the most effective tools at our disposal to prevent fraud, waste and abuse. This is especially true in the health care context, given the sheer volume of public funds involved and the complexity of the transactions at issue. These countermeasures would be impotent, however, if nefarious actors can evade liability through corporate trickery. Courts should not be afraid to pierce the corporate veil when it comes to qui tam litigation, as the ultimate victim of this chicanery is society as a whole.

Edward T. Kang is the managing member of Kang Haggerty. He devotes the majority of his practice to business litigation and other litigation involving business entities. Contact him at ekang@kanghaggerty.com.

Ryan T. Kirk is an associate at the firm. He represents clients in a wide range of matters that includes complex commercial litigation, contract disputes, commercial transactions, and class action lawsuits. Contact him at rkirk@kanghaggerty.com.

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