By Adam Kerlin
NEW YORK (Reuters) - Ten states are at risk of losing a 10 percent federal bonus from settlements of Medicaid fraud lawsuits if they don't make an August deadline to pass state false claims laws that meet new federal standards.
When Congress passed the Deficit Reduction Act of 2005, it included a strong incentive for states to adopt laws similar to the federal False Claims Act, which punishes those who defraud government programs. The law includes a "qui tam" provision that lets whistle-blowers who tip off officials to fraud share in any recovery.
Under the act, any state that adopted a similar law designed specifically to combat Medicaid fraud would be entitled to an additional 10 percent of resulting Medicaid fraud settlements.
In a typical Medicaid fraud suit, an employee of a medical supply company, say, tips off the Justice Department that the employee's company may be overcharging Medicaid. If the tip leads to a recovery of money by the government, the tipster gets a share of the bounty.
In fiscal 2012, the government reported recovering $4.2 billion from companies found through false claims investigations to have committed Medicaid fraud. Most of those probes were sparked by whistle-blowers.
When the Deficit Reduction Act with its incentive became law in 2005, at least a dozen states became eligible for the bonus. But they lost that status when Congress passed the Fraud Enforcement and Recovery Act of 2009 and, in 2010, the Affordable Care Act and the Dodd-Frank Act - three laws that expanded whistle-blower protections and increased penalties for violators.
The Department of Health and Human Services determined that these adjustments made previously compliant state laws too weak to qualify for the 10 percent bonus.
As a result, 12 states - New York, Georgia, Hawaii, Illinois, Indiana, Massachusetts, Minnesota, Nevada, Rhode Island, Tennessee, Texas and Virginia - became ineligible for the incentive. In 2011 the Health and Human Services' inspector general gave those states a two-year grace period, during which they could continue to qualify for the incentive without the enhancements until August 31 of this year.
So far, only two of the 12 states that had laws that were compliant prior to the amendments, Hawaii and Illinois, have updated their false claims laws to meet the new federal standards. The other 10 states will forfeit the bonus at the end of August unless they pass such legislation.
There are 21 states that have not passed any state-level false claims law, making their road to federal compliance and the Deficit Reduction Act bonus even tougher.
Most of the rest of the states have false claims statutes which came into effect after 2005 and were never approved as qualifying for the 10 percent bonus.
The enactment of the Fraud Enforcement and Recovery Act, the Affordable Care Act and the Dodd-Frank Act coming over just a two-year period derailed many state efforts, as legislatures tried to amend their false claims statutes multiple times to comply with the federal changes, said Patrick Burns, communications director for the Taxpayers Against Fraud Education Fund, a non-profit group.
What's more, not all state lawmakers have embraced the new requirements. Some opponents have questioned the cost-effectiveness of statutes that are proposed, which require significant government resources to investigate the Medicaid claims and oblige the government to share recoveries with whistle-blowers, said Ellyn Sternfield, an attorney with Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, who specializes in healthcare fraud enforcement.
States have also been lobbied by drug and medical companies, which have argued that the whistle-blower provisions encourage meritless lawsuits and create a hostile business environment.
"The incentive is there financially, but it's still a hard pill for some legislatures to swallow," Sternfield said. "The state can recover two million in a case, but half goes to lawyers and whistle-blowers. And the federal government gets a portion of the recovery, too."
Texas, often touted by false claims experts as having an effective state-level statute, is still working to get its law amended to meet the new federal standards.
Burns, of the Taxpayers Against Fraud group, said the delay is due largely to opposition to expanded protection granted to whistle-blowers under the new federal requirements. But he said he expects Texas will update its law.
If the money Texas collected in bonus payments over the last seven years is representative, the state would stand to make tens of millions of dollars less in Medicaid recoveries over the next few years if it doesn't pass a law that qualifies it for the Deficit Reduction Act incentive, according to a study by the Taxpayers Against Fraud Education Fund.
After subtracting for whistle-blower shares and attorneys' fees, Texas recovered more than $821 million over the last seven years, according to the study, which used data from the Texas attorney general's office to track Medicaid fraud recoveries.
Pennsylvania is one of the 21 states that has no version of a false claims act. Legislation to enact one has been introduced multiple times over the last decade, but a coalition of Pennsylvania business groups urged the legislature to kill the legislation each time.
Opponents say the bill would duplicate the federal statute and hurt the state's efforts to recruit and retain physicians.
Earlier this year, Pennsylvania State Representative Brandon Neuman drafted another false claims bill. He said he hopes the Deficit Reduction Act's 10 percent incentive will help propel the new version through the Pennsylvania legislature. But opposition looms.
"All of the state proposals we've seen go far beyond what the federal Deficit Reduction Act requires, which is always a fear for us," said Sam Denisco, vice president of government affairs for the Pennsylvania Chamber of Business and Industry.