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A Foolish Way to Fight Fraud
Steve Malanga, New York Post, 3-29-06

Last July, the New York Times broke a story alleging widespread fraud and waste in New York's Medicaid program, the largest and most lavish in the nation.

The Times estimated that billions of dollars in the program were being misspent, leading many policymakers to call for legislative reforms. One of the reforms being suggested, however, is a state version of a federal law—the False Claims Act (FCA)—that encourages whistleblowers to disclose fraud in return for a stake of any monies governments are able to recover.

Malanga, a contributing editor at the Manhattan Institute's City Journal, writes that while Medicaid reform is an important goal, state versions of the FCA are fraught with perverse incentives.

Fighting Medicaid abuse requires a whole arsenal of weapons—new technologies to sniff out fraud, tougher criminal penalties and increased oversight of who's allowed into the program.

Because of the power and efforts of trial lawyers, the federal False Claims Act (FCA) gets lots of press attention in discussions of how to fight Medicaid fraud. And it has indeed helped U.S. prosecutors uncover some cheats—but it has also promoted abuse. The law allows whistleblowers who report fraud against the government to collect up to 30 percent of any money recovered from information they provide...

Since Congress amended the law in 1986, hiking the potential payout to whistleblowers, suits have grown tenfold, with nearly 70 percent of them involving health-care companies. Since 1986, whistleblowers have collected a staggering $1 billion.

But the huge potential payoffs invite abuse. In some cases, insiders have let fraud go on for years after detecting it, slowly gathering evidence and then leaving the company to sue...

A 1999 Government Accountability Office study criticized several FCA cases. In one, the GAO concluded that hospitals that had already agreed to pay steep fines to avoid going to trial had in fact been improperly accused. The study also found that prosecutors and whistleblowers targeted some firms for investigation not because they were plausible fraud suspects but merely because they were the biggest contractors in government health-care programs —that is, the deepest pockets for large paydays.

Malanga concludes that New York legislators should only enact an FCA provision with strict oversight that encourages whistleblowers to "end fraud at their employer before filing suits." Knee-jerk reform that puts trial lawyers in the position of enforcing fraud statutes will only lead to "an open season on legitimate companies."

Project FDA.
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