Medical Fraud can be Difficult to Prove

July 29, 2017

Although allegations of fraud are common in a medical practice, they can often be more difficult to prove than most people realize.

In what has become an almost daily part of my practice, a physician client, or someone they have referred needs a consultation. The new matter involves some kind of fraud, either in the insurance context, or in a dispute between two companies who were parties in a contract. The physician relates, he or she is particularly alarmed by allegations that they are personally liable for the "fraud," due to something called "alter ego" and "piercing the veil." Pleading these hollow words, with no facts to back them up, is easy. Fraud is not, however, easy to prove. 

Allegations of fraud in an ordinary contract case don't have to ruin your day, or your life savings.    There are numerous strategies and defenses available to you to wipe out these baseless claims; strategies which allow the judge to dismiss individuals, from the list of company defendants.

Federal courts are particularly intolerant of naked allegations amounting to "fraud as a scare tactic." Often, these allegations can be dismissed with the first defensive pleading-before any depositions or discovery can take place. This is because the federal rules require the plaintiff to have his ducks in a row before the suit is filed.

Rule 9.b requires that the Plaintiff plead each element of a fraud claim with "particularity the circumstances constituting fraud or mistake." This requires factually specific allegations of "who, what, when, where and how" the alleged fraud caused specific injury. (It is generally understood "why" someone would commit fraud, so "why" is not on the list of required elements.)

A lawsuit describing a fraudulent scheme, and as a result of which, somebody lost money, usually isn't good enough.   

To illustrate, suppose a hospital employee hears of an alleged fraudulent scheme designed to increase profits for the hospital. She sues as a whistleblower under federal law and begins counting her bounty of chickens, which she feels are certain to hatch. 

 The fatal flaw-the whistleblower cannot name in her pleading a single patient, not one single claim, not one single date, and not one single payment made in this allegedly fraudulent scheme.  She has failed the "who, what, when, where and how" test. And her case can be over with a motion to dismiss, with no discovery. This is also called the "Iqbal/ Twombly rule," named after two US Supreme Court opinions. Iqbal/ Twombly forbids plaintiffs from throwing allegations against a wall, attorney's fees to the winner.

These procedural defenses go hand-in-hand with a number of court-created "common law" defenses which are available in fraud cases, preventing recovery, even when the plaintiff claims to have been misled, which allegedly caused a loss. This can be seen most recently in the US Supreme Court opinion in a False Claims Act case, Universal Health Services v. United States ex rel. Escobar. There, the Court emphasized not all certifications of compliance are "material" misrepresentations, and therefore, not false and fraudulent.   

The "materiality" inquiry focuses on the misrepresentation's "effect on the likely or actual behavior of the recipient of the alleged misrepresentation."  First, the Medicare contractor in a FCA case must have acted in reliance upon the allegedly false statement, for example as a condition of participation or condition of payment. Second, the statement must have been a significant factor in inducing the Medicare contractor to make the payment. According to Escobar, "minor or insubstantial" representations, even if false, "cannot" be "material."  Further, the court advised, if the "Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material." Additionally, statements of "opinion" or "puffing" about the quality of services are likewise not normally actionable as fraud.