The already enormous per-claim penalties under the federal False Claims Act (“FCA”) may nearly double by August 1, 2016, ratcheting up the stakes of FCA cases for health care providers, pharmaceutical and medical device manufacturers, and life sciences companies subject to the FCA. This week, the Railroad Retirement Board (“RRB”) published an interim final rule raising the minimum per-claim penalties under the FCA and the Program Fraud Civil Remedies Act (“PFCRA”) to $10,781 from $5,500, and increasing the maximum per-claim penalties to $21,563 from $11,000 (aspects of the penalties under the FCA and the PFCRA are within RRB’s jurisdiction). Although the RRB’s position may not affect the health care industry, other federal agencies are required to follow suit and adjust the per-claim penalties by July 1, 2016 and to make them effective by August 1, 2016.

An FCA violation results in “a civil penalty of not less than $5,000 and not more than $10,000, as adjusted by the Federal Civil Penalties Inflation Adjustment Act of 1990 (28 U.S.C. 2461 note; Public Law 104–410), plus 3 times the amount of damages which the Government sustains because of the act of that person.” Currently, the Department of Justice (“DOJ”) has set FCA penalties at a minimum of $5,500 and a maximum of $11,000 per claim. Even at the current level, many stakeholders think the per-claim penalties are out of line with any damage to federal health care programs. For example, a single claim for which the government reimbursed a provider $100 could result in a penalty of up to $11,000. And that penalty applies to every false claim.

What is behind the increase?

A section of the Bipartisan Budget Act of 2015, entitled the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015 (“2015 Adjustment Act”), requires federal agencies to update the civil monetary penalties within their jurisdiction. The 2015 Adjustment Act amended the Federal Civil Penalties Inflation Adjustment Act of 1990—which is incorporated into the text of the FCA—and enacted a “catch-up adjustment.” Notably, the “head of an agency” must adjust civil monetary penalties through an interim final rule (rather than through a proposed rule with a notice and comment period) by July 1, 2016, and the adjustment must take effect by August 1, 2016.

How is the increase calculated?

Under the “catch-up adjustment,” civil monetary penalties must be adjusted based on the difference between the Consumer Price Index (“CPI”) in October of the calendar year in which they were established or last adjusted and the CPI in October 2015, but the increase is capped at 150%. After the “catch-up adjustment,” agencies must then make additional annual adjustments.

DOJ last raised civil monetary penalties under the FCA to their current levels in August 1999, increasing the minimum penalty from $5,000 to $5,500, and increasing the maximum penalty from $10,000 to $11,000. This increase was consistent with the maximum 10% increase provided for in the 1996 Debt Collection Improvement Act (“1996 Act”).

It remains to be seen, however, how DOJ will handle the catch-up adjustment. RRB’s adjusted penalties were higher than many FCA observers expected. The reason is that, in a little-noticed wrinkle, the 2015 Adjustment Act repealed the 1996 Act. As a result of the repeal, RRB disregarded its penalty adjustment under the 1996 Act and concluded that its last adjustment was 10 years earlier, in 1986, when civil monetary penalties were set at a minimum of $5,000 and a maximum of $10,000. The additional time between the prior update (1986 versus 1996) affects the CPI multiplier. RRB applied a more than 215% CPI increase between 1986 and 2015 and calculated the penalties for false claims under the FCA and PFCRA as follows: a minimum per-claim penalty of $10,781 ($5,000 x 2.15628) and a maximum per-claim penalty of $21,563 ($10,000 x 2.15628).

Congress gave regulators discretion to adopt a smaller penalty increase if the agency head determines that the increase would have “a negative economic impact” or if the “social costs” of the increase outweigh the benefits. If the agency head opts for a smaller increase, the Director of the Office of Management and Budget must concur with the agency head’s determination. It’s not likely agency heads will seek a smaller increase in penalties because of both the looming July 1 deadline and the potential that smaller reductions will create the impression of being “soft” on purported fraud.

The Effect on Medicaid

The increased civil monetary penalties may cause problems in cases based on alleged false claims involving Medicaid. Medicaid recoveries from FCA cases are split between the states and federal government based on the individual state’s federal matching percentage of Medicaid: if an FCA recovery was $1 million in damages and penalties, and that state’s Medicaid Program receives 60% of its funding from the federal government, the state retains $400,000 and the federal government receives $600,000. The Deficit Reduction Action of 2005 (“DRA”) incentivized states to pass state FCA statutes “at least as effective” as the federal FCA statute by allowing the state to retain 10% more from any FCA recovery. According to our colleague Ellyn Sternfield of Mintz Levin’s Health Care Enforcement Defense Group, in order to qualify for the DRA recovery increase, and be as “effective” as the federal FCA, the state’s FCA penalties must be no less than required under federal law and regulation. Therefore, whatever standard DOJ adopts, states will have to amend state FCAs to qualify for the DRA-authorized increased recoveries. According to Sternfield, “multiple state legislatures have balked at mandating penalties of $5,500 – $11,000 per FCA violation; in many states, it will be difficult to get the requisite approval for the level of penalty increases recommended by the RRB.”

These are not the only possible FCA-related changes ahead. On April 28th, the House Judiciary Committee’s Subcommittee on the Constitution and Civil Justice (the “Subcommittee”) held a hearing on the FCA to examine “what more can be done to prevent, detect and eliminate false claims costing taxpayer dollars, while ensuring fair and just results.” Among possible FCA changes considered by the Subcommittee were encouraging businesses that work with the federal government to self-disclose false claims and requiring whistleblowers to make internal reports about suspected fraud before filing an FCA action. The Subcommittee invited two attorneys (including Neil Getnick, Chairman of the Taxpayers Against Fraud Education Fund), a law school professor and the CEO of a large health care system to testify at the hearing. Senator Chuck Grassley, an architect of the 1986 FCA amendments and strong proponent of FCA enforcement, also provided a statement.

Like many in the health care industry, we will be closely following these (and other) FCA developments in the months to come.