Recent cases have brought increased attention to the California Department of Insurance’s (CDI) unique enforcement statute, the Insurance Fraud Prevention Act § 1871.7 (IFPA, or the Act). While the IFPA mirrors the False Claims Act (FCA) in several important respects – the IFPA, for example, includes qui tam provisions – it contains a striking difference. The Act authorizes the CDI or relators to bring claims on its behalf with respect to fraud on private insurance providers, as opposed to government payors.
The purported purpose of the IFPA is to “confront aggressively the problem of insurance fraud in [California] by facilitating the detection of insurance fraud. . . [and] requiring the restitution of fraudulently obtained insurance benefits.”1 CDI has been relying on the IFPA’s ban on employing “runners, cappers, steerers, or other persons” to obtain insurance clients or patients – a provision originally designed to regulate ambulance-chasing – to target activities of industry employees and agents, along with the healthcare providers with whom the companies interact. For example, CDI alleges that pharmaceutical sales representatives are “runners or cappers” employed to perpetuate a kickback scheme in violation of the Act.
In recent years, CDI has interpreted the breadth of the IFPA broadly and has obtained significant recoveries. Relators are increasingly including IFPA claims in traditional FCA complaints. Health care providers, device and pharmaceutical manufacturers, and other entities offering goods and services reimbursed by private insurance companies should be aware of the increasing prevalence of such claims and CDI’s aggressive enforcement tactics.
Implications for managing false claims act matters
It is important to note that the CDI’s intervention and prosecution decisions are often untethered to FCA enforcement decisions or the resolution of FCA claims. For example, in late 2018, the CDI intervened in a qui tam action filed under the IFPA alleging that a pharmaceutical company offered various kickbacks, such as cash, meals, gifts, and administrative nursing services, to physicians to induce and reward prescriptions that were reimbursed by private insurers.2 Notably, the CDI pursued – and continues to pursue – this action despite the Department of Justice and the State of California declining to intervene in a substantively similar suit against the company – filed by the same qui tam relator in Illinois federal court – alleging violations of the federal and various state FCAs, including California’s FCA.
The trajectories of these two suits, which were based on the same underlying facts, but on different statutory authority, highlight two important issues for defendants. First, defendants may not be able to rely on an FCA settlement agreement to preclude IFPA claims involving the same underlying conduct unless the terms of the release specifically include potential IFPA claims or are broad enough to subsume such claims. Second, as with the case in AbbVie, a declination or other refusal to pursue a case by a federal enforcer may not dissuade the CDI from pursing a case. Defense attorneys should be alert to the potential of such claims when settling federal actions, as it might not be evident until a qui tam complaint is unsealed, that there is a claim under the IFPA for which the CDI is expecting recovery distinct from any settlement amount agreed to by DOJ.
Scope of CDI’s IFPA enforcement authority
Although CDI’s use of the IFPA has been expanding, and there is little case law interpreting the scope of the IFPA, a recent decision by the Superior Court of California has imposed some significant limitations on the IFPA’s reach.3 In State of California v. SRCC Assoc., the court rejected all of CDI’s claims, finding no evidence of fraud under any of the “ever shifting” theories of liability advanced by CDI and the relator. The court’s decision followed a bench trial in which CDI alleged the defendants had violated the IFPA through “submission of false claims” and through “illegal patient steering.” The court found the evidence insufficient in several respects and entered judgment for the defendants. In so doing, the court may have raised the bar for future CDI enforcement actions.
First, the court narrowly defined the scope of claims potentially subject to the IFPA, as “limited to claims made only to California Insurance companies” and not claims made to healthcare savings plans, HMOs and to ERISA plans.4 The court agreed with defendants that “CDI vastly overreached in pursuing a case beyond its limited jurisdiction” by asserting jurisdiction over claims made to out-ofstate insurance carriers and to providers regulated by California’s Department of Managed Health Care.5 These jurisdictional parameters significantly limit the length of the CDI’s IFPA enforcement arm and the corresponding amount of damages potentially available to CDI for violations of the statute.
Second, the court confirmed the standard for reviewing IFPA claims is “specific intent to defraud” noting that “even if CDI had proved false statements or omissions, it has not proved that they were made with the specific intent to defraud . . . CDI’s attempt to water down this standard to require only ‘knowing’ misconduct is not persuasive.”6 In analyzing the alleged evidence of falsity, the court explained that where a civil action relies on a criminal statute, the doctrine of lenity requires that courts resolve “any ambiguity in the ambit of the statute’s coverage” in the defendants’ favor.7 Finally, the court ruled that CDI failed to prove that the alleged false statements or omissions were material.8
The court also held that the CDI did not prove an IFPA violation under its illegal patient steering theory. The CDI had argued that another entity, AIR (a former defendant), had referred patients to Serenity in exchange for a commitment that Serenity would discharge patients to its facilities. The court held that this theory failed in part because “there must be some cash consideration to make the referral unlawful” under the IFPA, which requires the defendant “employ” another to obtain insurance clients or patients. The court further held that even if it is possible to demonstrate a violation of this provision without an exchange of cash consideration, there was insufficient evidence of an unlawful steering scheme in this case because “CDI did not meet its burden of showing that the defendants ‘employed’ AIR as an unlawful ‘steerer’.”
The many limitations the SRCC court placed on IFPA liability potentially establish more stringent requirements for CDI and/or relators bringing IFPA claims, and thus may reduce the number of IFPA lawsuits. However, we must be cautious in reading too much into the SRCC decision because CDI has moved for a new trial and has also filed a notice of appeal regarding the judgment.
Regardless of whether the trial court’s decision remains in place, importantly for future cases, the court’s decision in SRCC criticized CDI for abdicating is statutory responsibility for taking “the primary responsibility for prosecuting [this] action” and permitting relator’s counsel to essentially take the lead. The court went on to say that “when serious charges are brought by a government agency there must be a sound, legal basis for doing so. When the Insurance Commissioner brings a case, it must be based on a violation of the Insurance Code. In other words, the Commissioner must ‘turn square corners’.” The court also criticized CDI for a “vast overreach of authority,” naming defendants and legal theories that “came and went.” In light of this admonishment, it is possible that the CDI will take a more active role in future investigations and lawsuits, which may also force them to narrow their focus in light of limited, though substantial, resources.
1. California’s Insurance Frauds Prevention Act, Ins. Code §§ 1871 et seq. at § 1879.
2. See State ex rel. Suarez v. AbbVie Inc., Case No. RG18893169 (Sup. Ct. Cal. Filed Feb. 15, 2018).
3. State of California v. SRCC Assoc., LLC, et al., Case No. BC 641254 (Sup. Ct. Cal. filed Sept. 6, 2019).
4. Id. at 1 (finding that “CDI’s jurisdiction was limited to claims made only to California insurance companies and that claims made to HCSPs, HMOs and to ERISA plans were not within the jurisdiction of the CDI”.
5. Id. at 10.
6. Id. at 13.
7. Id. at 14 (quoting Crandon v. U.S., 494 U.S. 152, 158 (1990).
8. Id. at 14.
9. Id. at 15-16.
10. Id. at 16.
11. Id. at 13.
12. Id. at 10.