California’s Insurance Frauds Prevention Act, Ins. Code §§ 1871 et seq. (IFPA), is an unusual false claims statute.  It allows “interested persons” (aka whistleblowers or relators) to file false claims lawsuits based on the submission of false claims not to the government, but instead to an insurance company.  IFPA also allows the local district attorney or the Insurance Commissioner for the State of California to intervene in and control the lawsuit.  A civil lawsuit for insurance fraud, therefore, can be prosecuted without the allegedly victimized insurance company even being a party.  The statute authorizes onerous civil penalties ($5,000 and $10,000 per fraudulent claim) and an additional assessment of up to three times the amount of each claim for compensation.  Providers targeted by an IFPA action can quickly see their potential exposure rise to massive levels if many claims are in dispute.

IFPA has recently been applied beyond cases of traditional fraud to target allegedly improper payments made by pharmaceutical companies to doctors in connection with prescriptions, as well as a major hospital provider’s anesthesia charging practices.  It is expected that the Insurance Commissioner and Relators will continue applying this statute in a creative way. 

This creativity, coupled with the statute’s penalty provisions, makes IFPA a must-know statute for any entity that receives payments from an insurance company.  A number of important unsettled issues remain under IFPA, however, which must be considered by anyone who is considering bringing, or is forced to defend, such an action.

1.         Does IFPA apply to health care service plans (HCSPs) or only to traditional insurers?

Under California’s Penal Code, the submission of a fraudulent claim violates the law, whether the recipient is an HCSP or a more traditional indemnity insurer.  The Penal Code, for example, criminalizes false claims for “health care benefits” (Pen. Code § 550(a)(6)) without designating the type of payer who receives the claim.  IFPA is a civil enforcement companion to the insurance fraud provisions of the Penal Code, which would tend to suggest it should also reach claims submitted to HCSPs.  Critical differences in statutory language, however, may mean that a false claim submitted to an HCSP would not be subject to civil enforcement under IFPA.  This is no small issue in California, where HCSPs hold 80 percent of California’s health plan market.   

The basis for the limitation arises directly from the statute.  IFPA expressly uses terms traditionally associated with indemnity insurers.  Penalties attach only to claims made pursuant to a contract of insurance,” and “for each fraudulent claim presented to an insurance company ....”  Ins. Code § 1871.7(b), emphasis added.  While courts have occasionally described HCSPs as being in “the business of insurance,” and there are similarities in the offerings of the two types of payers, the Insurance Code defines “insurance” as “a contract where one undertakes to indemnify another against loss, damage or liability arising from a contingent or unknown event” – and provides that only a DOI-admitted insurer can execute a “contract of insurance” in California.  Ins. Code §§ 22, 24.  Moreover, IFPA is found in the Insurance Code.  HCSPs in California are not regulated by the Insurance Commissioner under the Insurance Code, but instead by the Department of Managed Health Care under the Knox Keene Act. 

The public policy behind proscribing false claims may favor applying the same civil and criminal remedies to the same set of payers and not restricting IFPA to traditional insurers.  But the plain statutory meaning of “insurance” does not cover all payers within the scope of the Penal Code, and trial courts in California have found that the statute is limited only to insurance companies.  It remains to be seen how a Court of Appeal will interpret the issue.

2.         Are IFPA actions triable to a jury?

IFPA does not expressly confer a right to jury trial.  It establishes penalties without specifying whether a judge or a jury awards them, and includes two specific references to “the court.”  First, it provides that “the court shall have the power to grant other equitable relief” including injunctions.  Sec. 1871.7(b)(emphasis added).  Next, it provides that penalties are “intended to be remedial rather than punitive,” and adds: “if the court finds ... that such a penalty would be punitive ... the court shall reduce that penalty appropriately.”  Id., subd. (c).

Who then adjudicates liability and the amount of penalties – the court or the jury?  Statutory construction does not definitively answer the question, so the answer depends instead on whether the “gist of the action” is legal or equitable.  Under the False Claims Acts, liability is premised on “damages,” which means the “gist of the action” is legal and liability may be tried to a jury.  IFPA is grounded in fraud, which also suggests an action at law.  But liability attaches to the amount of the false claim, even if it was not paid – which means no proof of “damages” is required.  Moreover, IFPA’s penalties “are intended to be remedial rather than punitive.”  Both of these factors point toward equity as the “gist” of an IFPA action.  These factors, the references to the role of the “court,” as well court holdings that other statutes authorizing penalties in California are equitable tend to support a court trial.  Courts, however, are required to resolve doubts in favor of the right to a jury trial, and definitive appellate guidance remains lacking.

3.         Is a “misleading” statement actionable under IFPA if it violates consumer-protection statutes but not the Penal Code?

IFPA directly incorporates provisions of the California Penal Code to establish the underlying elements of the violation.  It references Penal Code section 550(b)(1), for example, which criminalizes the presentation of statements containing “misleading” information, and which traces its roots to the common law of fraud, in which “misleading” statements are actionable only if they actually mislead the recipients. 

By contrast, the preamble to IFPA declares that health insurance fraud “is a particular problem for health insurance policyholders” and “causes losses in premium dollars and increases health care costs unnecessarily.”  Ins. Code § 1871(h).  That broad language invites comparisons to California’s Unfair Competition Law and its Consumer Legal Remedies Act  , under which conduct that is “likely to mislead a reasonable consumer” is sufficient to constitute a “fraudulent” practice.

The Insurance Commissioner has contended in litigation that a UCL-CLRA standard should apply in IFPA cases.  The Commissioner has suggested that an insurance claim could be false even if the insurance company was not deceived, because health care providers and insurers could collude to process inflated or even fictional claims, passing the costs along to unknowing consumers who ultimately pay the bills through higher premiums.  According to the Commissioner, such claims would be “false” as to consumers even if they were accepted by the payers.  In the Commissioner’s view, the consumer-protection purpose of IFPA should allow civil actions in such cases, even if the claims were not fraudulent within the meaning of the Penal Code. 

Recent appellate case law does not mention either the UCL or CLRA but does suggest that the common law of fraud will continue to the touchstone for what is misleading – that is, as one recent decision found, IFPA will cover “claims that result from deceit or conduct done with an intention to gain an unfair or dishonest advantage.”  This issue, as well, remains an evolving one.