In the December 2, 2021 edition of The Legal Intelligencer, Edward T. Kang of Kang Haggerty co-authored “Self-Funded Employer Health Plans: Benefits, Pitfalls and Strategies.”

The majority of Americans receive their health coverage through some type of employer-based insurance, and there are two main types of plans: fully insured and self-funded. Fully insured plans offer health insurance in the more conventional sense, where an employer and its employees pay monthly premiums to an insurer, who then covers the cost of medical treatment provided by its network of professionals.

In contrast, employers can also choose to set up a self-funded plan where traditional insurance companies merely provide access to their network of providers and perform the administrative services relating to claims adjudication. With self-funded plans, the employer acts as the insurer for the medical expenses of its employees, paying for these costs directly out of a specific fund. The principal benefit of self-funded plans is avoiding the mark-up insurance companies build into their premiums to generate a profit. In a typical year, this will allow employers operating a self-funded plan to save money by not paying any excess premiums to insurance companies. Because medical expenses do not accrue with the uniformity or consistency of other business expenses, however, self-funded plans exhibit significantly more variability than premium-based coverage plans.

Because of the risks involved, self-funded plans are primarily used by large organizations that can spread this risk across a wider pool of employees. The larger the risk pool, the smaller the year-to-year fluctuations will be, and the more savings that these employers can generate from not having to pay the mark-up on insurance premiums. While the decision by employers whether to opt for a fully insured or self-funded plan is primarily an actuarial one, this decision can be further informed by an adept legal analysis. This column will focus primarily on self-funded plans, the types of disputes that often arise relating to these plans, and suggestions for avoiding or resolving these disputes.

Health care in the United States is governed by well-known federal statutes such as the Employee Retirement Income Security Act (ERISA), the Health Insurance Portability and Accountability Act (HIPAA) and the Consolidated Omnibus Budget Reconciliation Act (COBRA). And while many of these statutes explicitly preempt state law, that is not to say that regulation in this area is exclusively federal either, as states often attempt to legislate in the gaps left by federal law. ERISA, the headliner of the aforementioned statutes, has a particularly complex and often-litigation preemption provision.

One of the first things employers should consider when deciding whether to choose a self-funded or fully insured plan is the regulatory framework. Because self-funded plans make the most sense for large organizations, these employers are almost always covered by the Affordable Care Act’s mandate that businesses with 50 or more full-time employees offer health care to their workforce. This threshold will then automatically subject them to ERISA requirements as well, which does not by itself require employers to provide health care, but regulates such plans if they are offered. While ERISA preemption is unclear in some contexts, state law is unequivocally preempted when it comes to self-funded plans, a valuable perk for employers looking to avoid state regulation.

Once a plan is covered by ERISA, employers must ensure that they operate the plan in conformity with its statutory and common law requirements. This includes maintaining the plan’s assets in a separate fund, typically conceptualized as a trust, that is legally distinct from the organization’s other assets. ERISA also establishes certain minimum requirements for these plans relating to funding, asset management and fiduciary responsibilities. It also provides for an internal grievance and appeal process if there is a dispute relating to coverage, as well as granting employees the right to sue over these grievances or alleged breaches of fiduciary duty.

And while employers opting for self-funded plans operate as direct insurers for their plan members, most of these entities are not otherwise involved in the health care industry. For this reason, most self-funded plans contract with traditional insurance companies to operate as third-party administrators (TPAs), to review and adjudicate claims. These TPAs, as conventional health insurers, also grant self-funded plans access to their existing network of providers as part of the agreement.

As TPAs handle the claims adjudication process, they are tasked with deciding what is and is not covered under a certain plan. Such coverage often turns on the phrase “medically necessary,” as determined by the TPA or someone in their network of providers. Because of this, self-funded plans can sometimes find themselves liable for exorbitant sums if a TPA or one of its providers claim the treatment was medically necessary. Employer could be billed millions of dollars charged by a medical provider for procedures that raise the question whether such procedures were “medically necessary.” This is one of most the critical clauses in any TPA agreement, and employers operating self-funded plans should ensure that they have some means of challenging or auditing such decisions. Otherwise, employers can find themselves in the unenviable position of disputing medical necessity determinations retroactively after the costs have already been incurred and adjudicated. Many TPAs do not share their “secret sauce” for determining what is considered “medically necessary.”

In any dispute between a plan and its TPA, courts will first examine the contract between the two parties. Just as preventative care can help minimize future expenses, employers operating self-funded plans should take the requisite precautions before entering into a TPA agreement. At a minimum, this should include the retention of experienced counsel to review and negotiate these agreements. While most of the organizations that opt for self-funded plans will be large enough that they have their own in-house general counsel, this is an area where it is worthwhile to retain a specialist. An experienced outside counsel will not only protect the interests of the plan, but will also be able to recognize any potential areas of uncertainty in the proposed agreement. Contractual ambiguity is the progenitor of litigation, and the best time to resolve these disputes is before they can even occur.

Self-funded plans can also fall victim to the classic insurance coverage dilemma of who is liable when an insured is covered under multiple policies, as was the case in Northeast Department ILGWU v. Teamsters Local Union No. 229, 764 F.2d 147 (3d. 1985). There, a participant in the appellee fund and beneficiary of the appellant fund submitted claims to both funds which then denied coverage based on so-called “other-insurance” clauses. These clauses come in a range of strengths that attempt to predetermine the allocation of each insurer’s share in the event of overlapping coverage. The strongest form of an other-insurance clauses is an “escape clause,” which outright denies coverage if the insured is covered by another policy.

This was the type of clause at issue in Northeast, and the court noted that such a “clause is enforceable only if it is consonant with the provisions and policies of ERISA” Importantly, ERISA prohibits arbitrary and capricious conduct by fund trustees. And while such plans are governed by the federal common law interpreting ERISA, the U.S. Court of Appeals for the Third Circuit in Northeast engaged in a nationwide review of state court decisions to find that escape clauses were almost uniformly disfavored by courts. Underlying this hostility is the indiscriminate nature by which escape clauses operate, forcing insureds to rely on other policies that may have significantly less favorable terms, when they reasonably expected that they would have the full value of their coverage under their desired plan. As such, the Third Circuit held that it was arbitrary and capricious for appellee trustee to have included such a provision in its plan, and that “escape clauses in ERISA covered employee benefit plans are unenforceable as a matter of law.”

The Third Circuit’s opinion in Northeast has been widely influential, and its per se prohibition against escape clauses in ERISA plans is often cited. A decade later, the court in McGurl v. Teamsters Local 560, 925 F.Supp. 280 (D.N.J. 1996) faced a similar situation, but with a less-forceful “excess clause” in play. While excess or “always-secondary” clauses also attempt to shift coverage to an alternative insurer, the excess insurer still provides coverage after the limits of the primary policy are exhausted. Unlike escape clauses, which can “render unsuspecting beneficiaries victims of the paradox by which more insurance could often mean less coverage,” excess clauses do not leave insureds with less total coverage. For this reason, the McGurl court found that excess clauses, while administratively unwieldy, did not violate the policies underlying ERISA as a matter of law.

While many employers will understandably focus on the fiscal consequences of choosing a self-funded over a fully insured plan, the legal consequences of such a decision should not be neglected. And while the types of employers opting for self-funded plans will typically be large entities with considerable internal resources, navigating the complicated framework of statutes and case law is significantly easier with an experienced guide. Like in health care generally, an ounce of prevention is worth a pound of cure, and an attorney well-versed in these matters can help resolve disputes before they even occur. This can be done primarily through well-drafted plan documents, defining the coverage and benefits of the plan, along with a fair and transparent TPA agreement. Self-funded plans already entail a considerable amount of financial risk, and it is imperative that employers not compound these with unnecessary legal risks as well.

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.

Kang Haggerty associate Ryan Kirk served as co-author of this article.

Reprinted with permission from the December 2, 2021 edition of “The Legal Intelligencer” © 2021 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.

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 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.

Kang Haggerty associate Ryan Kirk served as co-author of this article.

Reprinted with permission from the November 4, 2021 edition of “The Legal Intelligencer” © 2021 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.

The Patient Protection and Affordable Care Act and How It Affects the Whistleblower

Edward Kang

Introduction

Long existing solely as debate between opposing sides of the political aisle, the battle for examining the United States’ healthcare system witnessed actual movement in 2010 with the passing of the Patient Protection and Affordable Care Act (ACA or commonly referred to as its politically coined nickname, Obamacare).  The bill completely revised national healthcare with the intent of not only vastly increasing the number of citizens covered but also decreasing their out of pocket costs to obtain coverage.  Since its enactment, however, it has experienced countless attacks, mostly from the right, with regard to whether it is constitutional.  In 2012, the United States Supreme Court famously ruled in National Federation of Independent Business v. Sebelius that the bill is, indeed, constitutional by a 5-4 vote.
Past new healthcare operations, new whistleblower protection was also built in to Obamacare to go hand in hand with the shifting landscape.  Whether Obamacare as a whole positively or negatively impacts the healthcare system may depend on one’s own personal views, but the bill does, without a doubt, establish new whistleblowing measures to accompany the new healthcare provisions.
The inner workings of the various whistleblower protections enacted by the Patient Protection and Affordable Care Act are rather complex, as they exist in different capacities depending on the situation – i.e., While the protections affect some cases more so than ever, these protections may not apply at all in some cases.  Also, due to the manner in which the bill was intended to be put into effect over the next few years, some specificities may not apply in practice for some time.  Overall, however, Obamacare made many positive implementations to whistleblower laws.
Claims Filed With Regards to Title I and Tax Credits
Obamacare is broken up into numerous parts that serve different purposes.  Although it has many pieces, whistleblower claims filed throughout the bill follow a process similar to most areas of the general work force as The Occupational Safety and Health Administration (OSHA) is tasked with responding to filed claims.  Title I of the bill deals with the most conventional occurrences of health care, such as hospital, clinical, and physician care.  It also stands as the section of the bill which finds the strongest protection from any form of retaliation resulting from whistleblowing on fraud, waste, or other violations.  The activities that are protected by these prohibitions are as follows:

·         providing information relating to any violation of Title I of the ACA, or any act that he or she reasonably believed to be a violation of Title I of the ACA to:  the employer, the Federal Government, or the attorney general of a state;

·         testified, assisted, or participated in a proceeding concerning a violation of Title I of the ACA, or is about to do so; or

·         objected to or refused to participate in any activity that he or she reasonably believed to be in violation of Title I of the ACA.

A second provision that the Occupational Safety and Health Administration lists under the same provisions is a part of Section 1558 which amends the Fair Labor Standards Act of 1938 by adding section 18C.  The Fair Labor Standards Act was established as a means to completely reinvent the American workplace by instilling broad revisions to the expectations set forth by American businesses.  Under the bill, the country witnessed new labor hours, overtime compensation, a minimum wage, and the addressing of the issue of child labor. In the context of Obamacare and what amendment 18C to the Fair Labor Standards Act actually accomplishes, it is important to have a basic understanding of the state and federal “exchanges” set forth by the health care bill.  These exchanges serve as marketplaces for customers to compare various private health care providers’ prices in order to seek one out that makes the most financial sense.  Section 1402 of Obamacare allows for consumers purchasing health care through an exchange to receive a cost-sharing reduction.  Section 18C applies to these citizens as well as those who may receive a tax credit under Section 36B of the Internal Revenue Code of 1986.  18C prevents any retaliation in these two instances (i.e., when an employee either receives a tax credit or a cost-sharing reduction).

Section 1558 sets clear standards in barring retaliation by employers who engage in retaliation such as intimidation, termination, discipline, and blacklisting in settings specified under Title I.  The remedies provided for the whistleblower if retaliation is found include reinstatement, back pay with interest, the payment of compensatory damages, the payment of attorneys’ fees, and the payment of expert witness fees.

The False Claims Act

Preexisting whistleblowing statutes also find themselves involved in the subsections of Obamacare as the new healthcare bill subjects some actions related to its exchanges to potential treatment under the False Claims Act.  These actions are stated as “payments made by, through or in connection with an exchange” by Section 1313 and fall under the False Claims Act.  In the context of healthcare, the False Claims Act’s existing governance applies in instances where an invoice for health care service through an exchange containing overcharges is knowingly presented.  In these cases, there is the potential for a civil penalty which may include a fine up to $10,000, a penalty between three and six times the overcharge, as well as repayment to the federal government for any costs it incurred in bringing about the civil action.  Interestingly enough, much like how Dodd-Frank greatly expanded existing durations and amounts, Obamacare doubles the maximum penalty of the False Claims Act from three to six times the amount.

A False Sense of Security

A large number of employees and consumers seeking to report fraudulent conduct may be thankful for the many protections that Obamacare provides, but as mentioned above, the bill must be read very cautiously to ensure that one may actually receive any protection at all.  Specifically, only Title I instances of retaliatory activity by an employer grant whistleblower protection by Section 1558 to the wronged employee.  Those falling under Title II through Title X are not protected by Section 1558.  The following are some of the common settings in which a claim would NOT be protected:

·                     administration of Medicare and Children’s Health Insurance Program Expansion

·                     Medicaid, Medicare and CHIP program integrity

·                     Nursing home care for the elderly

·                     Innovative treatment and therapies

·                     Payments and reimbursements (not through exchanges)

·                     Prescription drugs and preventative care

·                     House-call visits

·                     Expansions of and increasing in training for the health care workforce

·                     Grants for the expansion of health care to under-served populations

Given the large number of unprotected areas, many false claims may go, unfortunately, unnoticed or unreported as many employees who know of them would be in fear of the potential consequences of blowing the whistle without protection.

The Procedure of Investigating a Retaliation Complaint

While the whistleblowing process may take many different forms, the process of filing a complaint of retaliatory behavior under Obamacare is rather straightforward.  Possessing a statute of limitations from the time of the violation of 180 days, the method of reporting maintains one direct route.  All complaints against an employer are filed with the OSHA through either an oral complaint by telephone or in person, or through a written complaint in fax, electronic, or mail form.  The administration then determines the validity of said complaint and, upon conducting an investigation, issues its order against the employer.  Barring an appeal within thirty days of the ruling, OSHA’s order is final and the process is complete.  If either the employer or the employee seeks an appeal, there may be a hearing before an administrative law judge of the Department of Labor.  All in all, the procedure is rather simple in that there is one path to be taken in all cases.

Conclusion

The Patient Protection and Affordable Care Act stands as one of the most controversial pieces of legislation to find its way into law in the history of the United States.  With 37 repeals of at least some parts of the bill in the house since its passage just three years ago, it remains clear that health care is a pisive issue on the political spectrum.  Be that as it may, the law of the land is Obamacare, at least for now, and with it, comes many accompanying measures to boost whistleblower action in health related fields.  Among those protected fields are hospital care, clinical care, physician care, and activity related to the new health exchanges created under the bill.  These advances are empowering steps in continuing the strong stand in recent law of furthering the protection of whistleblowers.  But one must wonder if the ultimate legacy of the bill with regard to the whistleblower will be the positives it brings to the table.  Only time will tell if the lasting memory of Obamacare will instead be the negative implications of continuing to leave so many areas of healthcare completely open for retaliation against reported misconduct.