Common Fraud Schemes

Overview

The Government expends funds under a wide variety of programs. Certain types of fraud are more frequently encountered in particular programs than others. The schemes are thus grouped together below under the programs in which they are most often found:

• Defense
• Medicare/Medicaid
• Education
• Housing
• Environmental
• Generic Schemes

Defense

Cost Mischarging

Contractors often perform services for the government on a cost-plus basis, where they are paid for the cost of making a product plus an additional fee. It is inappropriate for a contractor to charge the government under the cost-plus contract for the costs it incurs while working on other contracts such as fixed-price government contracts or commercial contracts. False Claims Act cases are often predicated on the knowing misallocation of such costs.

Violations of the Truth-in-Negotiations Act

The government often purchases products that can only be produced by a single company. In these cases, where competitive bidding is not available, the government must negotiate a price with the company based on the manufacturer’s costs of producing the product. The Truth in Negotiations Act (“TINA”) requires the company to truthfully disclose all relevant cost information and provide a certification to that effect to the government. Intentionally inflating costs in order to obtain a higher price from the government may constitute a violation of the False Claims Act.

Product Substitution

Government contracts often describe the exact specifications of the components that are to be used by contractors in manufacturing products for delivery to the government. In order to reduce their costs, manufacturers will sometimes substitute cheaper components for those they promised to deliver to the government. Such conduct may be actionable under the False Claims Act.

Defective Products

Because of the often critical uses it has for the products it purchases, the government frequently has stringent quality requirements. Government contracts often require that contractors employ particular manufacturing processes or that they test their products according to specific guidelines. In such cases, contractors are normally required to certify that they are delivering products that have been manufactured according to the specified standards. If they represent that they have met such standards, when they are aware that they have not, they may be liable for submitting false claims.

Medicare/Medicaid

Billing for Services or Supplies Not Provided

One of the more blatant forms of health care fraud is billing for medical services that were never actually provided to patients. This form of fraud can be found in most sectors of the medical industry, from hospitals to nursing homes. For example, nursing homes have been sued for billing the government for incontinence products not actually used by patients. Similarly, doctors have been held liable for collecting payments from Medicare for patients they never even met.

Upcoding

Health care providers often bill for their services by attributing a particular ICD-9 or CPT code to the particular service provided. In order to increase revenues, health care providers will sometimes assign codes that are associated with a higher level of service than the level of service actually provided. The knowing submission of such false claims is potentially actionable under the False Claims Act.

Unbundling

Medicare regulations require that certain procedures (e.g., blood tests) be coded and billed together as one group, rather than broken out and billed separately. Health care providers will nonetheless sometimes break out the individual tests or services and bill them separately, thus increasing the payment by the government for the service. This conduct is not permitted and often a basis for suit under the False Claims Act.

Medical Necessity

Medicare/medicaid regulations require that medical services billed to the government be medically necessary. Health care providers will sometimes falsely represent that certain medical services, supplies or equipment are medically necessary in order to collect payment for services that would otherwise be ineligible for reimbursement. Numerous cases have been filed challenging fraudulent claims of medical necessity.

Fraudulent Cost Reports

Health care facilities are reimbursed by Medicare for certain overhead costs in addition to the reimbursements they receive for treating individual patients. The amount of such reimbursements is largely dependent on the costs incurred by the health care facility in preceding years for expenses such as personnel and capital improvements. If the health care facility overstates or improperly characterizes its expenses, it is able to inflate the amount of its reimbursement beyond that to which it is entitled. This is a growing field of liability under the Act.

Pharmaceutical Fraud

Numerous forms of fraud are common in the pharmaceutical industry, including off-label marketing of drugs, misrepresenting “average wholesale prices” of drugs in order to charge Medicaid higher prices, and paying kickbacks to doctors for prescribing drugs.

Education

False Representations Regarding Student Qualifications

The Department of Education’s financial aid programs often require that students meet certain minimal academic standards in order to qualify for financial aid. Some post-secondary schools (e.g., trade schools) will falsify records relating to the qualifications of their students in order to assure that the students qualify for financial aid. When the students receive the financial aid, the money is normally then paid to the school for tuition or related expenses. The school is potentially liable for all financial aid improperly obtained in this manner.

False Representations Regarding Student Enrollment

A student is obviously only entitled to financial aid when he or she is enrolled in school. Some institutions, however, will continue to list a student as enrolled after he or she drops out in order to continue collecting financial aid. This again is a potential basis for suit under the Act.

Housing

False Representations Regarding Qualifications of Purchasers

The Department of Housing and Urban Development and the Department of Veterans Affairs both guarantee loans made to certain individuals (e.g., low income persons and veterans) for housing. Financial institutions therefore have an incentive to lend money to these individuals, since they can charge loan fees yet not bear the risk of loss normally associated with making a loan. In order to assure prudent lending practices under these circumstances, the government requires that the borrowers meet certain minimal qualifications. Some financial institutions, however, knowingly misrepresent the qualifications of borrowers in order to make loans that would otherwise not qualify. When the borrowers default, the government then has to pay on the guarantee.

Environmental

False Environmental Compliance Certifications

A recently developing source of liability under the Act is false certification by Government contractors of compliance with environmental statutes or regulations, such as the Clean Water Act or the Clean Air Act. The Government often requires certification of compliance with such statutes as a prerequisite to payment. Falsely claiming compliance can thus provide a basis for suit.

False Statements to Avoid Fines, Penalties, or Forfeitures

The False Claims Act has been used successfully to prosecute parties not doing business with the government, who have made false statements to avoid payment of fines or penalties for environmental violations. Similar cases have been brought against private parties who have made false statements to avoid the payment of customs duties or forfeitures. The plaintiffs in these cases have argued that the defendants made false statements to reduce obligations that would otherwise be due the government. The often contingent nature of the alleged obligations, however, has resulted in mixed decisions in these cases. The law continues to evolve on the subject.

Generic Schemes

Bid-rigging

Bid-rigging occurs when companies bidding on a particular contract secretly agree in advance on how each of them will bid. The companies thus determine who the government will select and normally cause it to pay more than it would under competitive conditions. The companies then either share the extra profits or simply take turns as the winning bidder on successive contracts. The inflated claims for payment in such cases are normally actionable as false claims.

Bribery

Although such cases are not common, government employees occasionally are found to have accepted bribes, gratuities or other consideration for favoritism in the contracting process. Contractors who submit claims for payment pursuant to contracts procured by such fraud are normally subject to liability under the False Claims Act for at least the amount of the bribe and/or any increase in the contract price that resulted from the bribe.

False Progress Reports

Many government contracts call for payments to be made based on the progress of the contractor in completing the required work. Contractors will sometime make false representations regarding their progress in order to receive payments sooner rather than later. Such false representations, which result in the government losing interest on the pre-paid funds, can form the basis for liability under the Act.

Kickbacks

Whenever a company is entitled to reimbursement by the government for its costs, the possibility of kickbacks harming the government is present. The scheme typically works as follows: The company doing business with the government overpays a supplier and bills the government for the full amount it paid to the supplier. The company then has a separate arrangement with the supplier by which part of the money overpaid to the supplier is “kicked back” to the company or one of its representatives. The original claim to the government for the inflated amount is the false claim.

 BAA/TAA Violations

The Buy America Act and Trade Agreements Act contain provisions requiring government contractors to do purchase certain supplies from American businesses.  Violating these requirements can be potential sources of liability under the False Claims Act.