The California Insurance Fraud Prevention Act

The California Insurance Fraud Prevention Act is a very unique and powerful law that qui tam whistleblowers can use to recover substantial funds for fraud committed against insurance companies in California. It is unique because it allows private whistleblowers to recover funds for fraud committed against private insurers. It is powerful because it allows the recovery of triple damages, plus penalties.

False Claims Acts Do Not Cover Private Insurance

The federal False Claims Act (“FCA”) is the primary whistleblower statute used in the United States.  However, the FCA only permits whistleblowers to pursue insurance fraud committed against government programs, such as Medicare and the Department of Defense. Most State False Claims Acts suffer from the same limitation.

These law do not allow whistleblowers to sue for damages suffered by private insurance companies. This leaves a considerable amount of fraud unpunished, since most fraud committed against government insurers is also perpetrated on private insurers.

Private Insurance is Covered by the CA Insurance Fraud Prevention Act

The California Insurance Fraud Protection Act (the “Act”) permits whistleblowers to sue companies or individuals who seek to defraud private insurance companies. This is really, really important, since there are far more people insured by private insurers than people insured by the government. For example, of adults under the age of 65 who have some form of healthcare insurance, 20% have government insurance, and 70% have private insurance.

False Claims Acts Have Not Been Widely Used in Managed Care

Certain government healthcare programs, including Medicaid and Medicare, have several offerings which can be put into two categories: “fee for service” and “managed care.”

Fee for service healthcare coverage involves individual payments from the government to the provider (such as a doctor or hospital) for each service received by the patient.

Managed care involves a single, capitated payment from the government to an insurer working on the government’s behalf. Such insurers are commonly known as “managed care organizations” or “MCO’s.” Once the government pays the MCO, it is the MCO’s responsibility to pay individual bills submitted by providers for each service received by the patient. If the MCO pays out less than  it received from the government, the MCO keeps the profit. If the MCO pays out more than it received from the government, the MCO loses money. But regardless of whether the MCO makes money or loses money, the single payment from the government stays the same.

The federal FCA and the state FCA’s have rarely been used to pursue fraud committed against MCO’s, because defendants in such cases can argue that the fraud in question wasn’t committed against the government, since: 1) the MCO pays individual service bills in this context, not the government, and 2) the government didn’t lose any money, i.e., it paid the same amount, regardless of the fraud.

That the federal FCA and the State FCA’s aren’t used to go after MCO’s is important because most government beneficiaries are covered by managed care. For example, well more than half of Medicaid beneficiaries are enrolled in managed care vs. fee for service. So the amount of fraud going unpunished is huge.

The California Insurance Fraud Prevention Act May be Applicable to Managed Care

The Act applies to, among other things, a “contract of insurance.” For example, the Act makes it unlawful to

“[k]nowingly present or cause to be presented any false or fraudulent claim for the payment of a loss or injury, including payment of a loss or injury under a contract of insurance.”

As of the time this article was written, the courts in California had not decided whether an insurance contract involving managed care fits within the scope of the Act. But there is certainly a strong argument that a “contract of insurance” includes a managed care contract of insurance.

Triple Damages and Penalties Can be Recovered

Much like the federal FCA and the State FCA’s, the Act provides for triple damages, plus penalties of $5,000 – $10,000 for each false claim. Specifically, the Act says that

“[e]very person who violates any provision of this section or Section 549, 550, or 551 of the Penal Code shall be subject, in addition to any other penalties that may be prescribed by law, to a civil penalty of not less than five thousand dollars ($5,000) nor more than ten thousand dollars ($10,000), plus an assessment of not more than three times the amount of each claim for compensation.”

Rewards for Qui Tam Whistleblowers are Significant

The federal FCA and the State FCA’s provide for awards to whistleblowers between 15-30%.  The Act provides greater incentives to qui tam whistleblowers, because it permits them to receive between 30-50% of the amount paid by the defendant.

Conclusion

The California Insurance Fraud Prevention Act is a very unique and powerful law. It permits whistleblowers to pursue fraud committed against private insurance companies, and it allows for substantial rewards to the whistleblower. Berger Montague has deep experience and success in the qui tam field, and a unique approach to representing our clients.