Whistle-Blowers’ Haul Is Targeted

A federal law established at Abraham Lincoln’s urging to punish vendors who sold shoddy goods to the Union army has become the government’s most formidable weapon against healthcare fraud.

But the success of the law, which has recovered almost $8 billion in such fraud since 1987, has prompted an attack by pro-business conservatives, who want to cut back a critical provision: the authority to pay hefty rewards to whistle-blowers who provide inside information about improper activities by medical groups, drug companies and other healthcare providers.

Grover Norquist, a prominent conservative leading the campaign, called on Congress this summer to scale back the size of the rewards.

The Justice Department has not taken a position on his proposal.

The move to rein in the False Claims Act -- as the whistle-blower law is known -- is part of conservatives’ larger effort to limit corporations’ exposure to legal challenges. The effort has generally taken the form of seeking to place limits on access to the courts, as in the successful drive to curb class-action lawsuits and the continuing push for “tort reform.”

Under current law, whistle-blowers can get up to 30% of civil court settlements and judgments awarded to the government. In practice, just under 17% of the money recovered by the government goes to whistle-blowers.

Still, because some cases involve such huge dollar amounts, the average whistle-blower share works out to about $1.6 million a case.

Defenders of the law say that it is working as intended -- and that reducing whistle-blower awards would amount to a government surrender on healthcare fraud, which skims an estimated $60 billion a year from Medicare and Medicaid.

California is one of 15 states with their own versions of the federal law. On Thursday, Atty. Gen. Bill Lockyer sued 39 drug companies under state law for allegedly defrauding Medi-Cal out of hundreds of millions of dollars by manipulating prices. The case is based on a whistle-blower complaint filed by a small Florida pharmacy. The 39 companies were added to a lawsuit originally filed by California in 2003.

In recent years, the list of companies that have settled fraud cases with the government reads like a drug industry “who’s who.” Among them are Pfizer/Warner-Lambert, Schering-Plough, AstraZeneca, Bayer Corp., TAP Pharmaceutical Products and GlaxoSmithKline.

Since the mid-1990s, healthcare companies have replaced defense contractors as the main targets of federal fraud prosecutors. Lawyers who follow the issue estimate the Justice Department is currently investigating about 150 allegations of drug-pricing fraud.

One common scheme, called “marketing the spread,” involves boosting sales by offering pharmacies and healthcare providers discounts from the published prices used to calculate federal payments. Another involves selling medications for “off-label” uses that are not medically accepted.

In 2003, AstraZeneca agreed to pay $280 million to resolve allegations that it had conspired with providers to charge Medicare and Medicaid for free samples of Zoladex, a prostate cancer drug. The whistle-blower’s share of the settlement totaled nearly $48 million.

Under the False Claims Act, a whistle-blower can file a sealed civil suit on behalf of the government in federal court. Government prosecutors review the complaint and decide whether to take over the case.

Critics of the law say the prospect of riches leads employees to delay blowing the whistle so that the fraud -- and therefore prospective court damages -- can grow.

A Justice Department spokesman said the law contained a provision to prevent someone engaged in fraud from being rewarded as a whistle-blower. Another section provides that any reward go to the whistle-blower who first files a complaint. Someone who lets a scheme build up in hope of a bigger reward could lose it all if another person blows the whistle first.

Norquist is asking Congress to cap whistle-blower awards at $1 million. He also wants to require whistle-blowers to make documented efforts to fix problems from within before suing.

“The pendulum has swung too far and is now actually encouraging wrongdoing,” Norquist, president of Americans for Tax Reform, wrote in a memo to lawmakers this year. “For sure it is providing incentive not to report bad acts to employers. Instead, those witnessing these acts have the lucrative financial incentive to let them fester. “

Norquist is one of Washington’s best-known political operatives. His organization, which advocates limits on taxation, is active in political campaigns. Americans for Tax Reform lobbies on general-interest issues and specific business concerns.

Americans for Tax Reform lobbyist Daniel Clifton, who is handling the group’s whistle-blower campaign, said the drug industry was not involved in the effort and had provided no funding for it. He declined to say whether his organization received drug industry money, saying it did not disclose donors.

Clifton said the proposal to rein in the whistle-blower law was part of a broader effort against abuses of the legal system. Conservatives, emboldened by the success of such campaigns as the drive to limit lawsuits against gun makers and to make it harder to pursue class-action cases, are looking for new ways to discourage specific kinds of lawsuits.

“We have had some victories on tort reform, and we are trying to develop the next stream of initiatives,” Clifton said.

“It took eight years to pass class action [limits] and we finally broke through.... This is bench-building with another set of initiatives. Over time, it will build up and rise to the top of the agenda.”

Six lesser-known organizations have joined the effort. Two are headed by people who also work as Americans for Tax Reform lobbyists, including Clifton.

But Taxpayers Against Fraud President James Moorman, whose group represents whistle-blowers and their lawyers, said large rewards were justified because whistle-blowers were often unable to find other jobs in their field after they came forward to help the government.

Moorman questioned why Norquist’s group was taking on the issue at all. “This is not a tort reform issue,” he said. “This is fraud against the government. You would think a taxpayer organization would be on the other side of this.”

Leading congressional supporters of the False Claims Act said they suspected pharmaceutical companies were involved.

“This effort appears to be organized by companies that have themselves been sued ... for defrauding the Medicare and Medicaid programs,” Sen. Charles E. Grassley (R-Iowa) and Rep. F. James Sensenbrenner Jr. (R-Wis.) wrote in a recent letter to lawmakers.

Grassley heads the Senate Finance Committee, Sensenbrenner the House Judiciary Committee. Grassley co-authored a 1986 revision of the Civil War-era law that strengthened the incentives for whistle-blowers.

The main drug industry trade group, the Pharmaceutical Research and Manufacturers of America, said it was not behind the push to change the law.

“I would like to assure you that our association is not engaged in any such efforts to weaken or change the [False Claims Act],” a lawyer for the trade association, Marjorie Powell, wrote to Grassley. “Moreover, PhRMA has not approved of or encouraged such activity on behalf of any organization we support.”

Powell said in an interview that her organization had worked with Norquist on other projects, such as the Medicare prescription drug benefit, but not on this one.

Several major drug companies that have settled cases with the government said they would not take a position on the Norquist proposal. Spokespeople said the companies had established programs to encourage employees to report fraud to higher-ups.