In fiscal year 2015, the U.S. Department of Justice ("DOJ") recovered more than $3.5 billion from False Claims Act ("FCA") cases. A staggering $1.9 billion of that amount was recovered from health care providers who were alleged to have provided unnecessary care, paid kickbacks or overcharged federal health care programs. While this amount may seem high, the drastic increases in FCA penalties expected this summer have the potential to skyrocket FCA recoveries in coming years. DOJ has not yet released the increased penalty amounts that would apply to FCA cases involving companies in the health care and life sciences industries, but penalty increases released this month by another agency, the U.S. Railroad Retirement Board ("Railroad Board"), seem to be a good indication of what providers can expect.
On May 2, 2016, the Railroad Board released an interim final rule, which will take effect on August 1, 2016, that nearly doubles the penalty amounts for false claims submitted to the Railroad Board. The mandatory minimum penalty will increase to $10,781 per claim and the maximum penalty to $21,563 per claim. The current civil monetary penalty amounts under the FCA (which apply across all federal agencies) range from $5,500 per claim (minimum) to $11,000 per claim (maximum).
|False Claims Act Penalties: Breaking Down the Numbers|
|Date and Legislation||Minimum Penalty||Maximum Penalty||Additional Facts|
Federal False Claims Act
31 U.S.C. § 3729
Inflation Adjustment Act
|$5,500||$11,000||This adjustment was no more than 10% of the previous penalty amount due to the cap imposed by the Debt Collection Improvement Act of 1996.|
Federal Civil Penalties Inflation Adjustment Act Improvements Act (Bipartisan Budget Act of 2015, Section 701)
|$10,781||$21,563||The minimum and maximum penalty amounts are derived by multiplying:
(a) the 1986 penalty amounts; with
(b) the Consumer Price Index for all Urban Consumers (CPI-U) percentage increase between 1986 and 2015 (which is 215.628%).
Federal agencies that handle FCA cases are required (under the Bipartisan Budget Act of 2015 (the "Act")) to publish rules updating their FCA penalty amounts by July 1, 2016, with the new amounts becoming effective on August 1, 2016. And the penalty increases may not stop there. Under the Act, federal agencies may make annual adjustments to penalty amounts on January 15 of each year. The allowable increase is based on the percent increase between the Consumer Price Index for all Urban Consumers ("CPI-U") from the previous year and the CPI-U from two years before. In other words, if the Railroad Board were to increase the minimum and maximum penalties in 2017, the adjustment would be calculated by multiplying the 2016 penalty amounts ($10,781 (minimum), $21,563 (maximum)) with the percent change between the CPI-U for October 2016 and October 2015.
It is important to remember that this interim final rule is specific to the Railroad Board, and therefore does not apply broadly to health care FCA cases. Still, it strongly suggests that other agencies, including DOJ, are headed in the same direction. Health care providers and life sciences entities should be thinking about the implications of the impending penalty increases. For example, higher penalty amounts could make it harder for defendants to reach favorable settlement agreements as relators and the government will have a stronger argument for starting negotiations at much higher numbers. Also, note that the increased penalties do not affect the government's ability to seek treble damages in FCA cases. At the end of the day, though, we suspect that the government will avoid being too aggressive in pushing for extremely high penalty amounts as these could potentially incite challenges under the excessive fines bar of the Eighth Amendment of the U.S. Constitution.
If you are interested in commenting on this interim final rule, note that the Railroad Board has a condensed comment period. Comments must be submitted on or before July 1, 2016. Since future penalty adjustment increases do not require prior public notice or comment, this may be one of the few opportunities for health care stakeholders to weigh in.
 The Railroad Board is an independent executive agency that administers retirement, survivor, unemployment, or sickness benefit programs for railroad workers and their families. As part of the retirement program, the Railroad Board has administrative responsibilities under the Social Security Act to provide railroad workers benefit payments and Medicare coverage.
 Agencies can, through rulemaking, choose to increase penalties by a lesser amount than the new formula dictates, but only if the Secretary of the agency finds, and the Director of the U.S. Office of Management and Budget concurs, that increasing the penalty by the required amount will have a negative economic impact or that the social costs outweigh the benefits.
- Member of the Firm