DOJ ends controversial demand letter’ campaign

In what may be the first major victory against the federal government's aggressive — and some say intimidating — use of the False Claims Act to bully hospitals into quick settlements, the Department of Justice has agreed to stop sending letters to hospitals demanding restitution for alleged billing fraud.

Justice's announcement to replace the demand letters with toned down "contact" letters came a week after a March 31 meeting between department officials and representatives of the Chicago-based American Hospital Association.

In that meeting, the AHA urged that Justice agree not to pursue false claims actions against hospitals when less than $100,000 is in dispute, and to temporarily suspend use of the False Claims Act. The DOJ refused both requests, and a department spokesperson vigorously denies that the DOJ has caved in to any demands or criticism leveled against it either by special interest groups like the AHA or members of Congress such as Rep. Bill McCollum (R-FL), who has co-authored a bill to water down the False Claims Act.

Even so, the decision to discontinue use of the demand letters comes only weeks after 46 Colorado hospitals were hit with written allegations about false billing practices. The letters they and other hospitals have already received typically contained a dollar amount and a demand that the hospital repay Medicare or face steep penalties. The less belligerent contact letters, on the other hand, will still state the DOJ's suspicions of billing fraud but will not include specific demands for financial restitution.

For the demand letters, the DOJ got billing information from Medicare carriers through the Health Care Financing Administration, then analyzed the information to detect irregular claims submissions patterns. The plan had been to hit all 50 states and all 4,700 hospitals in the Prospective Payment System, says Leo Reichert, JD, an attorney with the firm of Parker, Hudson, Rainer and Dobbs, LLP in Atlanta, and a former member of the U.S. Attorney's Office.

Reichert says the idea for the demand letter project started when the DOJ became involved in investigating 72-hour window violations a few years ago. "It was a new idea for these kinds of nationwide investigations," he says. "It was relatively inexpensive for the government to pursue the claims, and the potential recoveries would be significant."

Indeed, the demand letters have been a cash cow for the federal government, according to the Department of Justice's own statistics. For example, in its 1997 annual report on health care fraud and abuse, the DOJ claimed that "a significant portion of the $1.087 billion collected [by the government in health care fraud cases] was the result of nationwide investigations into fraudulent billing practices of hospitals and independent laboratories" — two key targets of the demand letters. (In addition to hospitals charged with 72-hour window violations, independent laboratories also received letters as part of the government's lab unbundling project.)

One reason the letters were so successful, Reichert says, is that no one ever resisted them. "Not a single hospital in the 25 or 30 states they targeted fought them on it," he says. "Everyone kept rolling over and settling. The AHA was trying to find a hospital or hospitals to fight this aggressive use of the False Claims Act, but everyone was afraid to challenge them. The amount of money involved could become very significant if you fight, and the settlement ranges are fairly reasonable."