So here we are in the first full week of January. It’s natural to reflect a bit on what the past year brought and what the New Year will bring. The Department of Justice recently released its 2013 False Claims Act recoveries. That gives us a chance to take stock on fraud. Will enforcement keep up its run of ever-bigger settlements? Will the IRS and SEC whistleblower programs gain traction or maintain their not-quite-a-contender posture as the year goes on?
DOJ Releases 2013 False Claims Act and Fraud Recoveries
The Department of Justice (DOJ) released its annual tally sheet in late December touting the federal recoveries including of some $3.8 billion from False Claims Act (FCA) cases in fiscal year 2013. Of this amount, $2.6 billion related to heath care fraud. An additional $443 million was collected by state attorneys general. Together that brings the tally for health care alone to over $3 billion. $860 million was recovered in the procurement fraud arena, primarily defense contracts, also trending upward. Health care and defense have always been the biggest sources of contract fraud in the federal system; one can safely predict that this will not change in 2014.
Of course, there are so many different ways to slice and dice these multi-variable statistics. The DOJ’s calculations count only civil recoveries, not criminal fines, forfeitures and restitution awards. Since many health care fraud prosecutions also include criminal pleas, the government’s numbers are under-stated to a fairly large degree, excluding, for example, almost half of the Abbott Labs $1.5 billion settlement for off-label promotion of the drug Depakote to elderly nursing home patients. ($700 million of that total was a criminal fine, excluded from the government’s calculations.)
Similarly, because of the government shut-down in 2013, the much anticipated $2.2 billion Johnson & Johnson Risperdal settlement was booked after the close of the fiscal year (but still in calendar year 2013).
And as we noted above, none of these DOJ figures factor in state Medicaid recoveries. These often accompany large global settlements. So in reality, one has to look at longer-term trends rather than annual numbers. And on that basis, the trends are quite clear: the number of FCA cases filed is going up; the recoveries are getting bigger; and whistleblower awards are going up as well (although the DOJ has been tougher lately in negotiating percentages with relators).
Looking Ahead to Future Fraud Recovery
Because so many sectors of our health care and defense industries are profit-driven, there is a never-ending push for higher and higher revenue numbers to meet the expectations of investors (as the companies set those expectations). Growth is the mantra, not cost-cutting or savings to consumers. There is money to be made in selling products that treat or cure disease; but not so much in the prevention of disease. The same is true in the military sector.
In so many different ways, companies try to meet these expectations of growth with business plans (some would say schemes) that either seek to take a larger slice of a given pie (increase market share) or by expanding the pie (making the market bigger). The problem, of course, is that the temptations to violate the law are too numerous and too easy to get away with to entirely hold back illegal behaviors, no matter how seriously many companies tout their compliance systems.
Scofflaws will still pay kickbacks to increase market share. And will still promote drugs off label to expand their markets. No, off-label is not dead; far from it. The problems are systemic to our health care industrial complex and our military industrial complex. The schemes will change in subtle ways from case to case and from decade to decade, but the patterns are clear. This time next year, the DOJ will be issuing another press release touting similarly large prosecutorial results to those achieved in FY 2013. It’s about as big a prediction as saying that football teams with elite quarterbacks will do well in the playoffs.
SEC and IRS Whistleblower Programs
More difficult to predict will be the fate of the SEC and IRS whistleblower programs. Both are newer than the False Claims Act, and both have a critical difference. IRS and SEC whistleblowers do not have a private right of action if the government does not prosecute the case. So SEC and IRS whistleblowers are very much at the mercy of the investigating agencies. There is simply no avenue for grabbing the ball from them and running with it oneself (as there is under the False Claims Act). So far, there are early signs of life at the SEC, as a few small settlements have been announced under the whistleblower program and one large one. Most important, the agency seems to want to encourage whistleblowers to come forward.
The same has not been true of the IRS. The agency has awarded one significant award to a whistleblower that it then turned around and prosecuted criminally, hardly the kind of opening bell one would hope to use to recruit more whistleblowers. Moreover, reports of internal hostility to the program from some quarters of the agency are too numerous to ignore. We continue to hold our breath to see if the IRS’s whistleblower program is anything more than a black hole into which good leads go to die.
Taking the Long View on Fraud
The important thing, though, is the long view. The moral arc of the universe is long, but it bends towards justice. It may take awhile for the SEC and the IRS to realize that the tools Congress have given them are powerful indeed. Or for them to notice the DOJ’s twenty-six-year successful track record of working with whistleblowers to see what is possible.
We’re not predicting any breath-taking new developments from either agency. But fraud isn’t taking a holiday and never will. The leads will keep coming. And eventually, if for no other reason than political self-preservation, the SEC and IRS will get the message. Then they will do the right thing with the information courageous whistleblowers are putting right before their noses. How soon that will happen is the more difficult prediction.
