Third Party Liability or the False Claims Act: It Is Time for Consultants to Pay the Price for Their Bad Advice, 29 J. Marshall L. Rev. 923 (1996)
Third Party Liability or the False Claims Act: It Is Time for Consultants to Pay the Price for Their Bad Advice, 29 J. Marshall L. Rev. 923 (1996)
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THIRD PARTY LIABILITY OR THE
FALSE CLAIMS ACT: IT IS TIME
FOR CONSULTANTS TO PAY THE
PRICE FOR THEIR BAD ADVICE
UNITED STATES V. DOLE'
Hillary Dole is an experienced registered nurse, most recently
employed as the head nurse at County Memorial Hospital's adult
and pediatric wing. Her husband, Newt, has held a string of jobs
that generally included accounting, bookkeeping and office
management responsibilities in small enterprises. Although they were
financially comfortable, the Doles were interested in a retirement
investment. After looking into a number of investment
possibilities, they decided to invest their life savings in a home health
agency. They hoped that such an investment would provide a
stable income and, ultimately, a financial gain on the sale of the
business when they eventually decided to retire.
To this end, the Doles purchased a small existing facility
with the intention of expanding the business. Shortly after the
sale, several consultants approached the Doles offering their
expertise in the area of Medicare and Medicaid reimbursement.
Many of the consultants pointed out that the client list the Doles
acquired included a very high proportion of Medicare patients and
that, as a result, the business was greatly dependent upon
Medicare revenues for its operating capital. Since the Doles had no
1. This hypothetical case illustrates the danger to operators of
Medicare-certified agencies who rely on unscrupulous third party consultants. The nature of
Medicare cost reporting often requires the service of consultants because
individuals who are unfamiliar with Medicare cost reporting will find difficulty in acquiring
even a working knowledge of the process. See infra notes 29-32 and accompanying
text for a discussion of the economic necessity of Medicare cost reporting
consultants. Federal law requires that the Health Care Finance Administration must
certify health care providers before they may provide services to Medicare patients.
42 C.F.R. §§ 489.1-489.18 (1995).
Consultants provide individuals with the opportunity to participate in
Medicare without first obtaining the necessary cost reporting expertise. See infra
notes 29-32 and accompanying text for a discussion of the economic necessity of
Medicare cost reporting consultants. There are, unfortunately, many consultants
who prey on unsuspecting providers, promising their clients additional cash flow.
This Note seeks to hold such consultants liable for the fraud contained in the cost
reports of their unwitting clients.
previous direct experience with Medicare cost reporting, they
decided to hire Dewey Cheatham, a consultant, to assist them.
The Doles agreed to pay the consultant a flat fee for the basic
filing of the annual Medicare cost report. Additionally, the
consultant agreed to suggest certain strategic cost reporting procedures.
The contract provided that if the Doles included Cheatham's
modifications in the annual cost report, the Doles would pay Cheatham
a percentage of any additional Medicare revenues resulting from
such suggestions. Cheatham identified several potential
enhancements to the Doles' cost report, each of which would increase
Medicare reimbursement. Impressed with Cheatham's
recommendations, the Doles implemented all of the suggestions in their
annual cost reports for their first three fiscal years.
After the Doles filed their third annual Medicare cost report,
the Department of Justice seized the records of the Doles' home
health agency. Agents from the Department informed the Doles
that the seizure resulted after an eighteen-month investigation for
Medicare fraud. The government terminated all Medicare
payments and indicted the Doles for filing numerous false claims with
the federal government. The false claims were directly related to
cost report modifications recommended by the consultant.
Although the Doles claim to have had no knowledge of any
fraudulent cost reporting activities, they are now facing civil and
criminal fines, penalties and forfeitures of nearly $500,000, as
well as the possibility of several years of imprisonment.2 While
the Doles now face severe legal penalties for their naivete, the
unscrupulous Cheatham walked away from the incident, leaving
the Doles to suffer the consequences alone.
The number of cases against people like the Doles is growing
at an astonishing rate.3 In light of the recent focus on Medicare
fraud prevention, this Note analyzes the ability of the federal
government to hold Medicare and Medicaid cost reporting consultants
liable for the fraud and abuse typically ascribed solely to their
clients.4 The purpose of this Note is to establish that the federal
government can, and should, charge the responsible third parties
for the fraud attributable to their clients under at least three
theories: 1) Third Party Theory, or Reliance Theory; 2) Criminal
Conspiracy Theory; and 3) Causation Theory.
Part I of this Note discusses the increasing grasp of Medicare
fraud and the government's response to this serious problem. Part
II outlines the purpose of the Medicare cost report, as well as the
responsibilities associated with cost report submission. Part III
examines state law doctrine and the federal courts' treatment
regarding third party liability. Part III also discusses the
applicability of the Reliance Theory to Medicare fraud. Part IV examines
the Federal False Claims Act and its applicability to third party
consultants in Medicare cost reporting. The Criminal Conspiracy
and the Causation Theories are actions under the penumbra of
the False Claims Act. Thus, Part IV discusses these theories as
well. Finally, Part V advocates the federal prosecution of Medicare
consultants individually or jointly with their clients to recover
some portion of the billions of tax dollars lost annually to
In 1994, the federal government spent roughly $162 billion
on the Medicare and Medicaid programs.5 Various sources
estimate that as much as ten percent, or $16.2 billion, of the 1994
Medicare budget now lines the pockets of criminals.6 Due to the
ever-growing losses to fraud,7 fraud loss prevention is currently a
nying text for a discussion of "Operation Restore Trust."
5. See MedicareHearings on ControllingCosts and Improving Care:Hearings
Before the Subcomm. on Health of the House Comm. on Ways and Means, 104th
Cong., 1st Sess. 76 (1995) (statement of William J. Scanlon, Associate Director,
U.S. General Accounting Office).
6. See Waste, FraudandAbuse in the Medicare Program:JointHearingBefore
the Subcomm. on Health and Environment and Subcomm. on Oversightand
Investigations of the House Comm. on Commerce, 104th Cong., 1st Sess. 65, 67 (1995)
[hereinafter Waste, Fraudand Abuse] (statement of Michael F. Mangano, Principal
Deputy Inspector General, Department of Health and Human Services); Gaming
the Health Care System: Trends in Health CareFraud:HearingBefore Senate
Special Comm. on Aging, 104th Cong., 1st Sess. 66 (1995) [hereinafter Gaming the
System] (statement of June Gibbs Brown, Inspector General, Department of Health
and Human Services).
7. 141 CONG. REC. S1116 (statement of Sen. Hatch). Experts estimate that
fraud bleeds the Medicare and Medicaid programs of five to ten percent of their
total annual outlay. Id. In the 1980 federal fiscal year, the Medicare program cost
American taxpayers $34 billion. Waste, Fraudand Abuse, supra note 6, at 67. Of
that, fraud claimed an estimated five to ten percent, or $1.7 to $3.4 billion. 141
CONG. REC. S1ll6 (statement of Sen. Hatch). Ten years later, in federal fiscal year
1990, the Medicare program cost $107 billion. Waste, Fraudand Abuse, supra note
6, at 67. Again applying the historical five to ten percent annual fraud loss
estiprominent item on the agendas of various federal agencies,
especially those which interact with and administer the Medicare and
Medicaid programs.' U.S. Attorney General Janet Reno recently
stated that she wants to "[l]et the message be very, very clear. We
have made health care fraud a priority and we will pursue it as
vigorously as we can.'
Demonstrating the Clinton Administration's commitment to
eradicating Medicare and Medicaid fraud, the Department of
Health and Human Services ("HHS") introduced a comprehensive
effort to combat the problem. In May, 1995, a joint effort known
as Operation Restore Trust became the latest and perhaps the
broadest-reaching weapon in the war against fraud.10 Operation
Restore Trust involves the coordinated efforts of the Federal
Bureau of Investigation, the HHS and state law enforcement
officials, and focuses on problems in the skilled nursing facility
(SNF), home health agency (HHA) and durable medical equipment
mate, the 1990 Medicare budget contributed $5.35 to $10.7 billion to illicit coffers.
141 CONG. REC. S1116 (daily ed. May 22, 1995) (statement of Sen. Hatch).
Budgeted expenditures for the Medicare program alone, together with estimates for fraud
loss based on historical experience, for the last five years of the 20th century are
as follows (dollars in billions):
Yearly Estimates 1995 1996 1997 1998 1999
Expenditures $157.1 $178.3 $194.2 $210.8 $228.6
Low Estimate $7.9 $8.9 $9.7 $10.5 $11.4
High Estimate $15.7 $17.8 $19.4 $21.1 $22.9
Id.; Analytical Perspectives: Proposed 1996 Budget of the United States
Government, availablein 1995 WL 110790 (O.M.B.) (West Feb. 1995) (disclosing
estimated Medicare expenditures, federal fiscal years 1995-99).
8. Several congressional committees heard from representatives of a variety of
federal departments that health care fraud is a very real and present problem
requiring swift and stringent measures. See, e.g., Gaming the System, supranote 6,
at 66 (statements of June Gibbs Brown, Inspector General, Office of Inspector
General, Department of Health and Human Services, and Hon. Louis J. Freeh,
Director, Federal Bureau of Investigation); Health Care Fraud:Hearing Before a
Subcomm. of the Senate Comm. on Appropriations, 103rd Cong., 2d Sess. 60 (1994)
(statement of Bruce C. Vladeck, Administrator, Department of Health and Human
Services); Waste, Fraud and Abuse, supra note 6, at 67 (statement of Michael F.
Mangano, Principal Deputy Inspector General, Department of Health and Humn
Services); HHS Fact Sheet, May 3, 1995, reprintedin Medicare &Medicaid Guide,
(CCH) T 43,213 (May 18, 1995); 141 CONG. REC. H3373-74 (daily ed. Mar. 21, 1995)
(statement of Rep. Barrett).
9. Enforcement: NME to Pay $379 million in Penalties Under Settlement with
FederalAgencies, 3 HEALTH L. REP. (BNA) No. 27, at D-11 (July 7, 1994)
10. See Gaming the System, supra note 6, at 66 for statements and testimony
regarding Operation Restore Trust. Operation Restore Trust also will attack fraud
in the durable medical equipment (DME) supply industry. Id. However, this Note
deals with cost reporting consultants. Since DME suppliers do not file a Medicare
cost report, this Note will not address DME fraud.
(DME) industries. 1
Taxpayers can take solace in the fact that fraud loss does not
occur because federal contributions to the Medicare trust fund are
being thrown to packs of thieving providers, but primarily because
a few bad, albeit large, apples are at work. 2 Most Medicare and
Medicaid fraud may be ascribed to large schemes perpetrated by
closely held businesses. 13 However, that fact should work no
11. See Gaming the System, supra note 6, at 66 for a discussion of the
coordinated efforts of numerous federal agencies to combat medicare fraud.
12. Cost report fraud tends to manifest itself in large scale operations. See, e.g.,
United States v. Henry, [1994-1 Transfer Binder] Medicare & Medicaid Guide
(CCH) 41,995 (6th Cir. Nov. 29, 1993). In Henry, the federal government charged
the defendants with multiple instances of Medicare cost report fraud. Id. The court
entered a large judgment against three employees at a facility that served as a
home office for several home health agencies. Id. The judgment consisted of terms
of imprisonment totaling 10 years and more than $7.16 million in fines, forfeitures,
and restitutions. Id. The litany of alleged cost report fraud included concealing
transactions with related organizations and charging the profit earned by the
related organizations, a non-allowable cost, as an expense to the Medicare program. Id.;
see 18 U.S.C. §§ 1001-1002 (1988). Also, the defendant paid physicians to refer
patients to the defendant's agency and concealed these paybacks within employees'
compensation. Henry, [1994-1 Transfer Binder] Medicare & Medicaid Guide (CCH)
at 41,995. Referral payments are not only improper for Medicare purposes, but
also may be a violation of the Medicare anti-kickback statute. 18 U.S.C. §§
10011002 (1988); 42 U.S.C. § 1320a-7(b)(7) (1988). Additionally, the defendant in Henry
falsified accounting records to make it appear that the agency paid bonuses to
employees, although the payments were never made. Henry, [1994-1 Transfer
Binder] Medicare & Medicaid Guide (CCH) at 41,995. The scheme included the
creation of false payroll checks and illicit accounting entries as means to cover the
fraud. Id. Finally, the provider booked improbable amounts for business trip
mileage (e.g., 2,000 miles driven by a single individual in a single day) and included
personal travel cost to Cancun, Mexico, as Medicare reimbursable expenses. Id.
The largest court award to date was a $21 million consent judgment against
an operator of DME companies. Consent Decree Orders $21 Million Judgment,
Lifetime Ban from Medicare, 5 MEDICARE REP. (BNA) No. 21, at D-19 (May 27,
1994); and see United States v. Mickman, No. CIV.A.89-7826, 1993 WL 541683
(E.D. Pa. Dec. 22, 1993), affd, 52 F.3d 318 (3d Cir. 1995). The court found that
Mickman participated in a "scheme to defraud [Medicare], including filing of false
Certificates of Medical Necessity, falsification of authorization for payment forms,
billing for items never shipped, and the submission by the corporate defendants of
fraudulent claims." Mickman, No. CIV.A.89-7826, 1993 WL 541683, at *1.
13. Many of the largest recoveries related to Medicare fraud prosecution involve
enterprises, each of which only a handful of investors runs, but which operate like
much larger syndicates due to the volume of business they conduct with the
Medicare program. See, e.g., False Claims: National Lab to Pay $100 million to Settle
FalseClaims Allegations, 1 HEALTH L. REP. (BNA) No. 14, at D-16 (Dec. 31, 1992)
[hereinafter NationalLab]; NME, supra note 9, at D-11.
In December 1992, the Department of Justice announced a $111.4 million
settlement for false claims allegations, at that time the government's single largest
victory in the war against fraud. National Lab, supra, at D-16. The
Californiabased National Health Laboratories, Inc., performs blood tests nationwide. Id. The
settlement included three payees: the federal government, $100 million; state
Medicaid programs, $10.4 million; and the Civilian Health and Medical Program of the
mercy upon smaller scale schemes effected by less obvious
criminals. 4 Clever operators, understanding the loss tolerances of the
Medicare and Medicaid program administration and the Office of
the Inspector General and Department of Justice, know just how
far to push their schemes.'"
Uniformed Services (CHAMPUS), $1 Million. Id. The allegations involved
submission of false claims for unnecessary and unperformed services, for which the three
government programs paid a flat fee intended to approximate cost. Id.
A $379 million settlement against National Medical Enterprises, Inc.,
announced in June of 1994, dwarfed the 1992 National Lab settlement. NME, supra
note 9, at D-11. More than $324 million of the settlement related to losses bilked
from federal programs (Medicare, Medicaid, the Federal Employee Health Benefit
Program, and CHAMPUS), and $16.3 million related to state Medicaid program
losses. Id. The justice department charged National Medical Enterprises with
"unnecessary patient admission and treatment, extending patients' hospital stays to
maximize insurance coverage, billing insurance programs multiple times for the
same service or billing where no service was provided, and billing Medicare for
payments to doctors to induce referrals of patients to its [psychiatric and substance
abuse] facilities." Id.
Most recently, on August 24, 1995, a federal grand jury indicted American
Health Care, Inc. (formerly ABC Home Health Services Inc.), as well as executives
of the corporation, on 82 counts relating to an alleged conspiracy. False Claims:
FederalOfficialsAnnounce Indictment of ABC Home Health for Medicare Fraud,4
HEALTH L. REP. (BNA) No. 35, at D-16 (Aug. 31, 1995). The government charged
American Health Care with abuses including, but not limited to, the following:
The indictment alleges ABC fraudulently obtained reimbursement from the
Medicare program for personal airplane trips by [Jack and Margie] Mills[,
the president and chief executive officer, and the chief operating officer,
respectively,] and their friends and family members to Cozumel, Mexico,
college football games, and other personal excursions; rebates or kickbacks
from the vendor of aircraft fuel; and wages and salaries of ghost employees
of ABC who did not work full-time for ABC performing patient care-related
14. Many cases involving Medicare fraud do not relate to elaborate and
sophisticated stratagem, but still may result in large amounts of fraud loss. Frequently
providers merely suppress the related nature of business transactions. See, e.g.,
United States v. Calhoon, 859 F. Supp. 1496 (M.D. Ga. 1994); United States v.
Kensington Hospital, [1993-1 Transfer Binder] Medicare and Medicaid Guide
(CCH) 41,053 (E.D. Pa. Jan. 21, 1993); United States v. Oakwood Downriver
Medical Ctr., 687 F. Supp. 302 (E.D. Mich. 1988). In Calhoon, the government
indicted the defendant on fourteen counts, three counts of mail fraud and eleven
counts of Medicare fraud, for failure to disclose the related parties with which it
did business. 859 F. Supp. at 1497. In Kensington, the government convicted the
defendant on six counts of fraud and fraud-related crimes stemming from the
manipulation of the Medicare cost report. [1993-1 Transfer Binder] Medicare and
Medicaid Guide (CCH) at 1 41,053. The provider manipulated the cost report to
channel Medicare funds to organizations related to the provider. Id. The defendant
in Oakwood Downriverwas related to a clinic through interlocking boards of
directors, but did not disclose the relationship in the Medicare cost report. 687 F. Supp.
15. See Waste, Fraud andAbuse, supra note 6, at 67 (statement of Michael F.
Mangano, Principal Deputy Inspector General, Department of Health and Human
This class includes the minority of health care consultants
who would subject their unwitting clients to the potential criminal
and civil sanctions for commission of a fraud upon the
government.16 Such consultants are motivated by the higher
commissions they will earn as a result of their clients' increased
reimbursement. 7 Moreover, the subset of the consulting industry
that induces clients to misrepresent reimbursable Medicare or
Medicaid expenses does so without threat of repercussion. To date,
the con8sulting industry appears entirely untouched by fraud
The amount of fraud loss directly attributable to improper
recommendations by consultants is presently indeterminable.
Many cases brought under the federal False Claims Act (FCA),
however, result in very large liabilities against providers."9 Quite
probably, some of these cases resulted from consultant-driven
fraud with the unwitting providers bearing the burden of a
judgment or settlement while the consultant walked away
untouched.20 Moreover, when the provider understands that the
consultant's suggested scheme is fraudulent, a criminal conspiracy
is present.2 ' Although no case establishes the existence of
Services) and at 73-80 (statement of Sarah F. Jaggar, Director, Health Financing
and Policy Issues, Health, Education, and Human Services Division, United States
General Accounting Office) for a discussion of governmental fraud loss exposure
16. See False Claims Act (FCA), 31 U.S.C. § 3729(a) (1994) for the penalties
available under the FCA.
17. See supra notes 1-2 and accompanying text for a discussion of the
hypothetical case United States v. Dole.
18. See supra notes 11-14 for a discussion of Medicare fraud cases in which the
government named only the provider in its suits for fraud.
19. See supra note 13 for a description of judgments against providers under
20. See infra notes 47-50 and accompanying text for a discussion of cost
reporting certification and liability under the FCA. Cf FloridaNursingHome Agrees to
Repay more than $400,000, HFALTH CARE DAILY (BNA) at D-9.1 (June 15, 1995)
[hereinafter FloridaNursing Home] (discussing billing fraud liability attributable
to consultant). No U.S. court has yet adjudicated the liability of Medicare
consultants for the fraudulent acts of their clients. However, the FloridaNursing Home
settlement and surrounding facts suggest that the provider accepted liability for
the fraud of their consultants. Id.
21. See United States v. Murphy, 937 F.2d 1032, 1038-39 (6th Cir. 1991)
(holding that rigging of bids submitted to the federal government may be actionable
under the conspiracy theory of the False Claims Act); Kelsoe v. Federal Crop Ins.
Corp., 724 F. Supp. 448, 452-53 (E.D. Tex. 1988) (holding that individuals who
conspire to submit fraudulent crop insurance claims are liable under the False
Claims Act); United States v. Hill, 676 F. Supp. 1158, 1182 (N.D. Fla. 1987)
(holding that conspiring to get false claims paid from Farm Home Administration and
Small Business Administration may be actionable under the False Claims Act). See
also infra notes 49-50, 127-52 and accompanying text for a general discussion of
the False Claims Act and conspiracy theories.
consultant's liability in such a situation, the law recognizes
instances in which causation is attributable to a third party.22
Typically, Medicare and Medicaid fraud fits into two general
categories: billing fraud and cost report fraud. 23 Billing fraud
occurs when an individual submits a Medicare or Medicaid claim to
the insurance carrier for payment, notwithstanding the fact that
the services for which the provider seeks payment were never
rendered or were unnecessary.24 Cost report fraud occurs when a
party files a Medicare cost report knowing that the program does
not cover certain costs for which the party seeks reimbursement."
22. Recently, the federal government reached a $414,000 settlement with a
Florida nursing home, CHR Associates, Inc., d/b/a Claridge House, for improper
Medicare claims. FloridaNursing Home, supra note 20, at D-9.1. A third party
billing company, Handled With Care, submitted the claims on behalf of the nursing
home. Id. The government has not announced that it will prosecute the billing
agent. Id. Instead, the Justice Department elected to pursue the provider directly.
Id. The third party submitted claims that supposedly corrected the provider's
omissions, but these so-called corrections actually were the third party's fraudulent
inventions. Id. Like the Doles in the introductory hypothetical, the provider denied
any wrongdoing and claimed that it justifiably relied on the assurances of Handled
With Care because the firm was expert at recovering lost claims. Id. See infra
notes 29-32 and accompanying text for a discussion of the reliance that small
agencies reasonably place on the work of consultants. CHR Associates, Inc., the
provider in FloridaNursingHome, certainly reaped the benefits of any fraudulent claims
submitted by the billing agent since the claims were paid to them directly, but the
billing consultant also received payment based on a percentage of the allegedly
"lost claims" recovered. FloridaNursing Home, supra note 20, at D-9.1.
23. NME, supra note 9, at D-11. NME is a durable medical equipment (DME)
supplier. Id. DME suppliers do not file cost reports for reimbursement. See infra
notes 38-39 and accompanying text for a discussion of Medicare cost reporting
forms. Instead, DME suppliers bill the various Medicare contractors directly for
payment, knowing that only a small percentage of all claims processed are actually
reviewed. Waste, Fraudand Abuse, supra note 6, at 67. This arrangement makes
DME and other directly billed services particularly attractive to parties who would
defraud the government by billing for excessive or undelivered services. Id.
Cost report fraud differs from billing fraud in that billing fraud is usually
committed by filing a series of false bills, while cost report fraud manifests itself in
a single document. See, e.g., Henry, [1994-1 Transfer Binder] Medicare & Medicaid
Guide (CCH) at 41,995 (holding that cost report fraud includes the following
activities: concealing transactions with related organizations and charging profit of
same as expense to Medicare program, concealing kickbacks to physicians for
patient referrals, falsifying accounting records to inflate expense and including
personal travel cost as Medicare reimbursable expense); United States v. Alemany
Rivera, 781 F.2d 229, 232 (1st Cir. 1985) (holding that concealing transactions with
related organizations constitutes cost report fraud); United States v. Smith, 523
F.2d 771, 776-78 (5th Cir. 1975) (detailing how concealing personal home
remodeling expenses and concealing transactions between hospital and nepotistic joint
venture, including personal home diaper delivery service costs with hospital laundry
account, are examples of cost report fraud); United States v. Calhoon, 859 F. Supp.
1496, 1499 (M.D. Ga. 1994) (holding that a defendant who sought reimbursement
for non-allowable advertising expenses had committed cost report fraud).
24. See, e.g., NationalLab, supra note 13, at D-11.
25. See, e.g., Henry, [1994-1 Transfer Binder] Medicare & Medicaid Guide
Most providers in the three targeted industries - HHAs,
SNFs and DME supply - are well informed regarding claims
billing procedures.26 Therefore, providers typically perform this
task without the assistance of a contractor.27 Given the limited
involvement of consultants with claims billing practices, third
party liability issues rarely arise in conjunction with billing
On the other hand, the cost reporting function requires a
great deal of knowledge of federal and state regulations regarding
cost reimbursement.2 9 Providers of health care services are,
therefore, more likely to require a specialist, consultant or
management company to assist them where cost report reimbursement
issues are involved.30 Consultants frequently prepare the cost
reports for their clients and, although the client ultimately signs
the certification page,3 1 the consultants typically exercise a large
amount of professional discretion regarding the presentation of
expenses and revenues in the cost report.32
Even though third parties exercise a great deal of control and
discretion over cost reporting, all of the major litigation regarding
Medicare fraud has thus far focused directly on the providers
themselves.33 While third party consultants are inexorably
linked with the filed cost report, the government universally
ignores consultants when it names parties in health care fraud cases.'
II. THE MEDICARE COST REPORT
This Part explains the official government uses of the vehicle
for a discussion of the implications of signing a certification.
32. See 42 C.F.R. § 413.9 (1995). The Medicare program should only reimburse
providers for reasonable and necessary costs related to the provision of covered
services to Medicare eligible patients:
(a) Principle. All payments to providers of services must be based on the
reasonable cost of services covered under Medicare and related to the care of
beneficiaries. Reasonable cost includes all necessary and proper costs
incurred in furnishing the services, subject to principles relating to specific
items of revenue and cost....
(1) Reasonable Cost.... The regulations in this part take into account both
direct and indirect costs of providers of services. The objective is that under
the methods of determining costs, the costs with respect to individuals
covered by the [Medicare] program will not be borne by individuals not so
covered, and the costs with respect to individuals not so covered will not be
borne by the program....
) Necessary and proper costs. Necessary and proper costs are costs that
are appropriateand helpful in developing and maintainingthe operationof
patientcare facilities and activities.They are usually costs that are common
and accepted occurrences in the field of the provider'sactivity.
) The determination of reasonable cost of services must be based on cost
related to the care of Medicare beneficiaries.... However, if the provider's
operating costs include amounts not related to patient care, specifically not
reimbursable under the program, or flowing from the provision of luxury
items or services (that is, those items or services substantially in excess of or
more expensive than those generally considered necessary for the provision
of needed health services), such amounts will not be allowable....
42 C.F.R. §§ 413.9(a)-(c) (1995) (emphasis added).
Intentional or even reckless inclusion of non-allowable costs, including
non-allowable direct costs as well as overhead costs, in a Medicare cost report would
constitute a false claim against the federal government within the meaning of the
False Claims Act. See infra notes 49-50 and accompanying text for a general
discussion of the False Claims Act, and supra notes 12-14 and accompanying text
regarding the intentional inclusion of non-allowable personal or non-patient care
related expenses in the Medicare cost report.
33. See supra notes 12-14 and accompanying text for a discussion of various
cases involving Medicare fraud. In all of those cases, the federal government
pursued only the providers.
34. See supra notes 12-14 and accompanying text.
of cost report fraud: the Medicare cost report. This Part also
describes what types of health care facilities must file Medicare cost
reports. Finally, this section discusses the requirements that the
government imposes upon providers seeking Medicare cost
The Health Care Finance Administration (HCFA), publishes
Medicare regulations in an imposing series of manuals.35 Though
larger entities can afford to pay an employee trained in Medicare
reimbursement to stay abreast of the regulatory developments
and to file the Medicare cost report, smaller providers such as
HHAs and SNFs frequently contract with a third party consultant
for these services.36 Consultants thus perform a service that is
essential to the ability of many providers to participate in the
Medicare program and to render health care services to Medicare
Most providers certified to participate in the Medicare
program must submit a Medicare cost report.3" This annual cost
report is a standard form the government uses to determine the
portion of a provider's total cost attributable to Medicare patient
care.39 Medicare pays each provider a series of estimated
payments intended to approximate actual reasonable cost. 4
Medicare makes these payments on an interim basis and calculates the
amount based upon claims submitted at the time care is given.4 1
A fiscal intermediary42 then audits the cost report and makes a
final determination regarding the apportionment of cost between
tion of Medicare allocable cost, and each type of facility is limited by various
capitations. Id. HCFA does not require certain types of providers of patient care
services, such as hospices, to file cost reports. 42 C.F.R. § 413.20 (1995).
39. 42 C.F.R. §§ 413.24(a)-(d), 413.60-74 (1995). The various cost reports
compute "actual cost" differently for each provider type. See generally HCFA PUB. No.
15-II (1995). Medicare pays skilled nursing facilities and most hospitals on the
basis of the facility's average cost per dollar of revenue for ancillary services.
HCFA Pub. 15-11, §§ 2813-14, 2817.2-2817.5 (1993). Medicare pays hospitals for
routine services (i.e., those requiring admission as an inpatient) on the basis of
diagnostic related groups, or DRGs. HCFA Pub. 15-II, §§ 2815, 2817-2817.1 (1993).
HCFA statistically generates DRCs to represent a form of fee for service based
upon the type of procedure. See, e.g., Provider Agreements and Supplier Approval,
60 Fed. Reg. 45,893-908 (1995).
In addition to the DRG payment, hospitals may receive exceptional "outlier"
payments for patients whose severity of illness exceeds the threshold for the
specific DRG. Id. at 45,931-32. Furthermore, Medicare pays some hospitals additional
amounts for capital costs, organ acquisition programs, graduate medical education
teaching programs, paramedical teaching programs, Medicare bad debts and
disproportionately high percentages of patients receiving public aid. HCFA PuB.
No. 15-I, § 2817.1 (1993).
Medicare pays skilled nursing facilities for routine services on the basis of the
facility's average cost per Medicare patient day. HCFA PUB. No. 15-I, § 1618
(1993). Finally, Medicare pays home health agencies for skilled care on the basis of
the average cost per visit. HCFA PuB. No. 15-I, § 3215 (1995). HHAs also receive
payment for medical supplies and certain drugs on the basis of the facility's
average cost per dollar of revenue for such items provided to Medicare patients. Id.
Reimbursable cost for each facility is subject to certain limitations. Medicare
regulations limit SNFs, HHAs, and hospitals to the lesser of cost apportioned to
the Medicare program or the revenue attributable to Medicare patients. HCFA
PuB. No. 15-1, §§ 2600-2616 (1985). Furthermore, Medicare regulations limit SNFs
and HHAs to HCFA published cost capitations. HCFA PUB. No. 15-II, §§ 1618,
3215.1 (1995). In any event, the cost attributed to the Medicare program must be
necessary and proper according to Medicare regulations and statutes. See supra
note 32 and accompanying text for a discussion of the requirement that costs be
reasonable and necessary.
40. 42 C.F.R. § 413.9(a)(1) (1995). See supra note 32 for a discussion of the
Medicare regulations regarding reasonable cost.
41. 42 C.F.R. § 413.9(a)(1).
42. Current U.S. law authorizes the Secretary of the Department of Health and
Human Services to contract with public and private entities that serve as
intermediaries. 42 U.S.C. § 1395h (1988). Medicare regulations define an intermediary as
"an entity that has a contract with HCFA to determine and make Medicare
payments for Part A or Part B benefits payable on a cost basis... and to perform
other related functions." 42 C.F.R. § 421.3 (1995).
Medicare and non Medicare functions.' Upon completion of the
audit, the fiscal intermediary computes a final settlement by
comparing the audited cost apportioned to the Medicare program with
the total interim payments. 44 The difference between amounts
paid to the provider and the costs attributable to services
rendered to Medicare patients is the final settlement.'
The cover sheet of every Medicare cost report contains a
certification statement that the provider's administrator must sign
before the intermediary accepts the cost report as valid." The
certification includes a statement that all information contained
within the cost report is factually accurate. 47 By signing this
certification, the administrator acknowledges an understanding that
false statements are punishable by fine, imprisonment or both.'
When proof exists that a provider intentionally
misrepresented information in the Medicare cost report, the government may
use the certification, pursuant to the False Claims Act,49 to
prosecute the administrator or the provider for fraud. 0 Since
Medi43. 42 U.S.C. § 1395h.
45. 42 C.F.R. § 413.64(0 (1995). "Interim payments are made on the basis of
estimated costs. Actual costs reimbursable to a provider cannot be determined
until the cost reports are filed and costs are verified. Therefore, a retroactive
adjustment will be made at the end of the reporting period.. ." Id.
46. See 42 C.F.R. § 413.24(f)(4Xiii) (1995).
47. 42 C.F.R. § 413.24. The cost report certification, which follows a statement
regarding penalties for fraud, is typified by the hospital certification:
The following statement must immediately precede the dated signature of
the [entity's] administrator or chief financial officer: I hereby certify that I
have read the above certification statement and that I have examined the
accompanying electronically filed or manually submitted cost report and the
Balance Sheet Statement of Revenue and Expenses prepared by -
(Provider Name(s) and Number(s)) for the cost reporting period beginning
and ending __ and that to the best of my knowledge and belief, this report
and statement are true, correct, complete and prepared from the books and
records of the provider in accordance with applicable instructions, except as
noted. I further certify that I am familiar with the laws and regulations
regarding the provision of health care services, and that the services
identified in this cost report were provided in compliance with such laws and
42 C.F.R §413.24(f)(
)(iii). See PROVIDER REIMBURSEMENT MANUAL PART II, HCFA
PUB. No. 15-II, §§ 1606.1, 2890, 3203.1 (1995) (setting forth instructions for filing
Office of Management and Budget ("OMB") forms 00938-0022, HHA certification,
and 00938-0050, Hospital certification).
49. False Claims Act, 31 U.S.C. §§ 3729-30 (1988).
50. Id. at § 3729(a). The False Claims Act provides for "a civil penalty of not
less than $5000 and not more than $10,000, plus three times the amount of
damages which the Government sustains...".Id. The Act imposes liability for conduct
of individuals with "actual knowledge of the information.... deliberate ignorance
of the truth or falsity of the information; or ...reckless disregard of the truth or
falsity of the information, and no proof of specific intent to defraud is required." Id.
care regulations do not require third party consultants to sign the
certification, the liability of consultants for their fraudulent
conduct in preparing the cost report remains untested.
III. PRESENT STATUS OF THIRD PARTY LIABILITY LAW
This Part explores state tort law as it relates to third party
liability. The first Section sets forth a brief history of the law in
this area. Section B discusses the majority and minority views of
the state courts with regard to third party liability. Finally,
Section C explains the applicability of existing tort law to third party
preparers of Medicare and Medicaid cost reports.
A. The History of Third PartyLiability
Early New York cases introduced the concept of third party
liability into American jurisprudence.5 1 These cases established
that a party is liable to another, even absent privity of contract,
where that party: 1) communicates, 2) information, spoken or in
writing; 3) to another party; 4) with the expectation that the other
party will provide the information to a third party. 2 Today,
under the doctrine of third party liability, many professionals who
render information services may be liable for negligence or fraud
to third parties acting in reliance on those services.53 Since
Medicare consultants are professionals who render information
services, which they expect their clients to rely upon, they too should be
subject to third party liability. 4
at § 3729(b).
51. See, e.g., Ultramares Corp. v. Touche, 174 N.E. 441 (N.Y. 1931) (examining
auditor's liability to lenders relying on financial statements); Glanzer v. Shepard,
135 N.E. 275 (N.Y. 1922) (holding public weigher liable to buyer); Milliken v.
Western Union Tel. Co., 18 N.E. 251 (N.Y. 1888). In Milliken, the court held that the
defendant telegraph company owed a duty to the intended recipient of a message,
though the sender of the message sought the telegraph company's service. Id. at
252. In Glanzer, a seller of beans engaged a weigher to issue a certificate of the
weight of his product. 135 N.E. at 275. Thus, between the weigher and seller there
was privity of contract. Id. However, the court held that the buyer, who was in
privity of contract with only the seller, could assert a duty against the weigher for
negligent performance of its duty because the weigher knew the buyer was to be
"end and aim of the transaction." Id.
52. See Ultramares, 174 N.E. at 441; Glanzer, 135 N.E. at 275; Milliken, 18
N.E. at 251 (each discussing the evolution of third party liability to parties in
privity). See infra note 66 and accompanying text for a discussion of the modem view
of the privity doctrine.
53. See Denise M. Orlinski, An Accountant's Liability to Third Parties:Bily v.
Arthur Young & Co., 43 DEPAUL L. REV. 859, 860 (1994) (presenting a history of
the evolution of third party liability for accountants); Anna S. Rominger,
Accountants' Common Law Liability to ThirdParties,37 RES GEsTAE 508, 511 n.18
(1994) (discussing third party liability evolution and its application to accountants).
54. See infra notes 60-62 and accompanying text for a discussion of third party
Justice Cardozo, in his landmark 1931 majority opinion in
Ultramares Corp. v. Touche, first applied third party liability to
the accounting industry.5 5 Under this general theory, an
accountant is liable to third parties acting in reliance upon the
accountant's work, even absen5t6 privity of contract between the
accountant and the third party.
In Ultramares,the defendant accountants performed an audit
of their client's accounting records, and then prepared financial
statements based upon the audit5. 7 However, the accountants
performed the audit negligently and, as a result, the financial
statements contained material errors.5" Although a third party
acted in reliance upon the misrepresented information and
thereby suffered an injury, Justice Cardozo held that the third party
plaintiffs were not entitled to maintain a cause of action for
negligence absent contractual privity, or its equivalent, with the
accountants.59 Today, most American jurisdictions have embraced
the concept of third party liability, although the states apply three
different tests. 60
B. Majority and Minority State Views
Over the sixty-five years since Ultramares, state courts
developed three well-defined categories of plaintiffs that may assert
liability of professionals that render information services. See also Ultramares,174
N.E. at 448. Justice Cardozo espoused, in dicta, that "[liability for negligence if
adjudged in [Ultramares] will extend to many callings other than an auditor's.
Lawyers [and]... [t]itle companies," under the proper circumstances, would also
yield to this authority. Id.
55. Ultramares,174 N.E. at 444.
57. Id. at 442.
58. Id. at 442-43. The modern approach to auditing performed by public
accountants involves the use of generally accepted auditing standards to assure that
those who perform audits exercise the skill and care required of the industry.
CODIFICATION OF ACCOUNTING STANDARDS AND PROCEDURES, Statement on Auditing
Standards No. 1, § 150 (Am. Inst. of Certified Pub. Accountants 1972).
59. Ultramares,174 N.E. at 443. In Ultramares,the accountants were sheltered
from liability for negligent misrepresentation to the creditors of the firn's client.
Id. at 448. Justice Cardozo, distinguishing third party liability for negligence from
third party liability for fraud or misrepresentation, stated that "if there has been
neither reckless misstatement nor insincere profession of an opinion, but only
honest blunder, the ensuing liabilityfor negligence ... is to be enforced between the
parties by whom the contracthas been made." Id. (emphasis added). Cardozo
contrasted these causes of action founded in negligence with intentional fraud or
misrepresentation. Id. The professional cannot insulate himself from these causes of
action, Cardozo held, by claiming a lack of privity. Id. This Section of the Note
focuses on the negligence facet of third party liability claims. Where a consultant's
acts rise to actual fraud, the FCA provides a more useful tool.
60. See Orlinski, supra note 53, at 860 nn.5-7 for a discussion of jurisdictions
that have decided cases involving third party liability of accountants.
third party actions against accountants: 1) parties in privity, or
near privity, of contract with the accountant; 2) members of an
identifiable group whose reliance on the accountant's
representations is actually foreseeable from the bargain between the parties;
and 3) parties whose reliance on the accountant's representations
is merely reasonably foreseeable.61 Many courts have also held
that third party liability should be imposed not only on
accountants, but also on various other professionals who render
information services to the public. 62
The privity and near privity rule, which developed out of the
Ultramares case, is the most conservative application of third
party liability. 63 Under this rule, only those plaintiffs whose
relationship approximates privity to the contract between the
accountant and the client may assert liability against the accountant. 64
This approach is a minority rule among the states that have
embraced the notion of third party liability.65 Proponents of this
approach advance the fairness to the accountant and
foreseeability of plaintiffs as major benefits of this approach. 6 Detractors
61. See Rominger, supra note 53, 512 nn.20-35 for a discussion of the three
third party liability categories; see also Orlinski, supra note 53, at 861 nn.5-7
(discussing rulings by state courts in each of these three general categories).
62. See, e.g., Thomas v. Chase Manhattan Bank, 1 F.3d 320, 327 (5th Cir. 1993)
(holding bank liable to trustee and investors for bank's withholding of superior
knowledge resulting in loss to plaintiffs); Lincoln Alameda Creek v. Cooper Indus.,
829 F. Supp. 325, 328-29 (N.D. Cal. 1992). Applying California law, the court in
Lincoln Alameda stated, in dicta, that "for all groups of information-supplying
professionals, liability is limited to those persons the information is intended to
benefit." Id. (citing Bily v. Arthur Young & Co., 834 P.2d 745, 767 (Cal. 1992)). The
Bily court recognized that, besides accountants, "other groups of professionals, such
as engineers, supply information and evaluations for others to use." Id. at .328.
63. See Ultramares,174 N.E. at 441. See infra note 66 for a discussion of the
64. See Orlinski, supra note 53, at 872 nn.101-03 (discussing the Ultramares
decision and the privity doctrines); supra note 54 for an explanation of the
Ultramaresholding; infra note 66 for a discussion of the limited application of the
65. See Rominger, supranote 53, at 515 n.24 for a listing of the states that
embrace this approach. Seven state courts and two federal district courts interpreting
the laws of two additional states have adopted the privity rule. Id.; see also
Orlinski, supra note 53, at 875 n.137 and accompanying text for a discussion ofthe
states in favor of this approach.
66. The privity doctrine, as applied to negligence, appeared under a flag of
caution waved by Justice Cardozo: "If liability for negligence exists, a thoughtless slip
or blunder, the failure to detect a theft or forgery beneath the cover of deceptive
entries, may expose accountants to a liability in an indeterminate amount for an
indeterminate time to an indeterminate class." Ultramares,174 N.E. at 444. Many
courts embraced this oft-quoted passage with circumspection until the actual
foreseeability approach was introduced in 1968, over 36 years later. See Rusch Factors,
contend that a negligent accountant should bear a greater burden
for the misstatements because the accountant is in a better
position to detect the problem and to prevent the loss.67 Instead,
those who oppose the privity approach argue for a broader
protected class, such as that afforded by the actual foreseeability
2. Actual ForeseeabilityRule
The actual foreseeability test presumes that a class of
potential plaintiffs is readily identifiable from the nature of the
contract between the accountant and the client6. 9 A special purpose
audit typifies such a situation.7 ° In this type of engagement the
accountant may render an opinion on a client's financial
statements so that the client can distribute the statements to an
identifiable group of potential investors. 71 One or more of these
investors may then choose to lend money to the client based upon
the representations in the financial statements. 72 Both the
accountant and the client expect that these potential creditors will
act in reliance on the financial statements. Thus, the lenders'
the representations in the financial statements.72 Both the
accountant and the client expect that these potential creditors will
act in reliance on the financial statements. Thus, the lenders'
reliance on the financial statements is actually foreseeable as the
result of the audit contract, even though the lenders are not in
privity with the accountant.73
The majority of those states that have ruled on the subject
apply the actual foreseeability test.74 The advocates of this test
believe that the more narrowly tailored privity test unfairly
insulates the accountant from the actually foreseeable plaintiff7. 5
Moreover, the proponents stress that the actual foreseeability test
would not extend the liability of the accountant to an infinite
number of plaintiffs, but only to those which the accountant would
3. Reasonable ForeseeabilityRule
Of all three approaches, the reasonable foreseeability test
extends the accountants' liability to the greatest number of
potential plaintiffs.7 7 This approach does not require that the plaintiff
be a party in privity, or near privity, with the accountant.7 8
Neither must the plaintiff charge the accountant with knowledge of
any specific use that the client will make of the accountant's work
as required under the actually foreseeable approach. 79 This most
inclusive of the three tests requires only that the accountant
would reasonably foresee the plaintiffs use of, or reliance upon,
the accountant's work. 0 The subjective reasonable foreseeability
test is the rule in only a minority of states."1
4. Sixty-Five Years of Ultramares
Today, the elements essential to assert third party liability
are the same under the three general tests8. 2 The distinction
between those tests is the degree of notice that a third party will
rely on the work of the professional.8 3 States occasionally shift
among the three rules,8" so the challenge is to fit the work of a
particular professional, such as the reimbursement consultant,
into all three tests.
For the application of any of the three third party liability
rules discussed above, the federal government becomes a third
party acting in reliance upon the work of the consultant. 5 Thus,
where the government suffers an injury as the result of negligent
or wrongful acts of a provider's consultant, a third party liability
issue arises8. " Medicare consultants could, under the proper
circumstances, be subjected to liability under each of the three
1. Reimbursement Consultantsand the Three Tests
Starting with the broadest test, the reasonable foreseeability
rule, a consultant is liable to the government as a reasonably
foreseeable party.s s The federal government, through its contractor,
the fiscal intermediary, is often in a position of placing
substantial reliance on the filed data, as well as on the representations of
the consultant8. 9 The cost report has one intended use - the
82. Rominger, supra note 53, at 512 nn.20-35; see also Orlinski, supra note 53,
at 861 nn.5-7 for a discussion of the three third party liability categories.
83. See Orlinski supranote 53, at 872 nn.101-03, 880 nn.162-65 for a discussion
of the Utramares doctrine and the notice requirements under the actual
foreseeability test; see alsoRosenblum, 461 A.2d at 153 (discussing the reasonable
84. See, e.g., Bily v. Arthur Young and Co., 834 P.2d 745 (Cal. 1992).
85. See supra notes 42-45 and accompanying text for a description of the
reliance the government places on the work of consultants.
86. See supra notes 42-45 and accompanying text for a discussion of the
responsibilities of the fiscal intermediary. See also 42 C.F.R. § 413.64(f)(
(enumerating rate setting duties of the fiscal intermediary).
87. Rominger, supra note 53, at 512 nn.20-35; see also Orlinski, supra note 53,
at 861 nn.5-7 for a discussion of the three third party liability categories.
88. See supra notes 77-80 and accompanying text outlining the "reasonable
foreseeability" test; see also Impex Agric. Commodities, 576 F. Supp. at 591
(applying the reasonable foreseeability test).
89. See supra notes 42-45 and accompanying text for a discussion of how the
government relies on data in filed cost reports.
generation of an annual final settlement for Medicare
reimbursement.9" That is, when a provider submits a Medicare cost report
to the federal government, the provider necessarily understands
that the government will rely on the data contained in the cost
report. Likewise, Medicare consultants necessarily know that the
government will rely on any of their contributions to the cost
report. Therefore, the government is a reasonably foreseeable
party that will act in reliance on the consultant's work.9 '
Moreover, the federal government is not simply one intended
user of the cost report, and thus a party whose reliance on the
consultant's work is merely reasonably foreseeable.9" The
government is virtually the only intended user of the cost report, and
therefore an actually foreseeable party.9" Accordingly, this also
satisfies the classification scheme of the actual foreseeability rule
for establishing third party liability.9 The actual foreseeability
test, while narrower in defining the appropriate class of potential
plaintiffs, remains substantially the same as the reasonable
foreseeability test in its determination of reliance.95
The privity or near privity test, however, provides the
narrowest of the three potential plaintiff classifications.96 Yet, even
under this test, the federal government may sometimes assert
third party liability claims against Medicare consultants who
participate in filing fraudulent cost reports.9 7 In many cases, the
consultant confers directly with the government representative on
behalf of the client, not only during the preparation stage of the
engagement, but also during the intermediary's audit of the cost
Where the consultant interacts with the government
regarding the cost report, case law supports the contention that the
relationship approaches or equals privity." At least in cases where a
Medicare consultant interacts with governmental representatives
regarding a client's cost report, the government should satisfy the
near-privity requirement of the more stringent test under
Ultramares."° At issue under all three tests is the degree to
which the government may reasonably be expected to rely on the
work of the third party consultant. °1
2. The Issue of Reliance
The extent to which the government relies upon the
representations of the consultant is arguably minimal. 2 That is, the
118 (N.Y. 1985). The test, as refined in CreditAlliance, and accepted as the
governing rule in those jurisdictions which require privity or near privity, refers to the
negligent party's conduct and linkage of that party to the injured plaintiff or
plaintiffs. See supra note 66 and accompanying text for a discussion of the linkage of
parties under the privity or near privity approach. Cases involving the negligent or
willful conduct of Medicare consultants contain the necessary linkage between such
consultants and the federal government.
98. See supra notes 38-45 and accompanying text for a description the Medicare
cost report and the cost reporting process.
99. See Orlinski, supra note 53, at 872 nn.101-03 (discussing the Ultramares
decision and the privity doctrines); see supra note 54 for an explanation of the
Ultramaresholding, see supra note 66 for a discussion of the limited application of
the privity doctrine. The conduct of consultants, in their interactions with the
government, provides the necessary linkage to find a relationship approaching privity.
Id. In EuropeanAmerican Bank and Trust Co., decided with Credit Alliance v.
Arthur Andersen & Co., the court held that the defendant accountants bridged the
nexus necessary for the formation of a relationship approaching privity. Credit
Alliance, 483 N.E.2d at 120. The accountants knew of the identity of the third
party plaintiffs, of their intent to rely upon defendants' audit work, and of the
"particular purpose" for such reliance. Id. Moreover, the accountants and the third
party plaintiff communicated, in writing and otherwise, and went so far as to meet
together to discuss the issues relating to the accountants' client, Majestic Electro.
100. See supra notes 55-59 and accompanying text for a discussion of the
101. See Orlinski, supra note 53, at 872 nn.101-03, 880 nn. 162-65 for a
discussion of the Utramaresdoctrine and the notice requirements under the actual
foreseeability test; see also H. Rosenblum, Inc. v. Adler, 461 A-2d 138, 153 (N.J. 1983)
(discussing the reasonable foreseeability theory).
102. See, e.g., Lampert v. Mahoney, Cohen & Co., 630 N.Y.S.2d 733, 735 (N.Y.
App. Div. 1995) (holding that plaintiff may assume the risk where plaintiffs own
examination would have identified misrepresentation resulting in loss). The
Medicare fiscal intermediary could prevent some instances of fraud loss by performing
government has an administrative duty to assure that the cost
reports are accurate and reasonably free from material
misstatement. 10 3 However, that duty only arises at the time that the
government completes its audit and review procedures and issues
a final settlement of the cost report.'"
In the time between the date the provider files the cost report
and the date the government issues a final settlement, the
government relies upon the filed data for a variety of uses, such as the
setting of reimbursement rates.0 5 If a cost report contains
material misstatements that inflate the cost attributed to the Medicare
program, the government is exposed to losses that may not
become evident for a period of years.1" Take the situation of the
Doles, for example, from the hypothetical case introducing this
The Doles filed their cost report for the fiscal year ending
December 31, 1993, in the first six months of 1994.107 Within
sixty days of acceptance, the fiscal intermediary issued an initial
settlement and perhaps used the filed data to recalibrate the
provider's reimbursement rate.'08 After that essentially cursory
the analysis necessary to assure that data submitted by the provider is accurate.
Id. However, where the inaccuracies are latent and the misrepresentations
carefully cloaked within layers of legitimate data, the means necessary to assure that the
data is free from material error become unreasonable under the circumstances. See
infra note 105 and accompanying text for a discussion of prompt payment
mandated by federal regulations. See supra notes 42-45 and accompanying text for a
discussion of fiscal intermediaries; see also 42 C.F.R. § 413.64(f)(
) (1995) (describing
the timing requirements for cost report final settlement).
103. 42 C.F.R. §§ 413.20, 421.100(c) (1995); INTERMEDIARY MANuAL 13-4, §
104. See 42 U.S.C. § 1395h (1988); 42 C.F.R. § 413.64(f) (1995).
105. See 42 C.F.R. §§ 413.60, 413.64(c) (1995) (discussing Medicare
reimbursement rate setting). Other uses of the filed cost report include the mandatory
determination of an initial settlement due to the provider within ninety days of receipt
of the cost report by the intermediary. 42 C.F.R. § 413.64(f(
) (1995). "In order to
reimburse the provider as quickly as possible, an initial retroactive adjustment will
be made as soon as the cost report is received. For this purpose, the costs will be
accepted as reported, unless there are obvious errors or inconsistencies, subject to
a later audit." Id. The regulations calling for an initial retroactive settlement
require only minimal scrutiny by the government until the final settlement is made.
Id. "When an audit is made and the final liability of the program is determined, a
final adjustment will be made." Id. Thus, the government necessarily places
reliance in the fied data absent "obvious errors or inconsistencies." Id.
106. See supra notes 42-45 and accompanying text for a discussion of fiscal
intermediaries; see also 42 C.F.R. § 413.64(f)(
) (describing the timing requirements for
cost report final settlement).
107. See 60 Fed. Reg. 33,137 (1995).
108. See supra note 105 and accompanying text for a discussion of the use of
filed cost reports. Note that the fiscal intermediary may place substantial reliance
on filed cost reports for setting payment rates. 42 C.F.R. § 413.64(f)(
). Where a
filed cost report reflects overstated Medicare cost, the payment rate may be
review for initial settlement,"°o the fiscal intermediary did
nothing with the cost report until the fiscal intermediary issued a final
settlement, months or even years later."0 Because of the limited
scope of the review of cost reports at the time of initial settlement,
the government's intermediary necessarily places substantial
reliance on the work of the cost report preparer."' In addition
to the nature of this reliance, the nature of the consultants' work
brings third party reimbursement specialists within the ambit of
common law third party liability rules.
3. Third PartyReimbursement Consultants as Information
Courts have established third party liability against a
broadening class of professionals rendering information services to the
public." Because many consultants are certified public
accountants (CPAs) or are associated with divisions or departments of
public accounting firms, the liability typically attached to
accountants should apply to consultants as well." 3 In addition,
attorneys, whose traditional duties have given rise to third party
liability in theory as well as in case law, frequently act as cost
reporting consultants." 4 Even though consultants are not typically
engaged to certify the accuracy of the financial statements from
which the cost report is prepared, their clients engage them to
prepare cost reports in accordance with Medicare regulations and
federal statutory law."'
It is unreasonable to assume that consultants would inform
clients of the fraudulent nature of certain cost report
modifications that would expose the client unknowingly to civil and
criminal penalties."' Clients engage their professional consultants to
present cost reports accurately so that the client may submit the
ed as a result of the fiscal intermediary's reliance on the filed cost report. Id.
110. 42 C.F.R. § 413.64(f)(
111. See supra note 105 for a discussion of the initial settlement regulations.
112. See supra note 62 for a discussion of the growing category of potential
defendants under third party liability theory.
113. See Orlinski, supra note 53, at 861 n.18, (discussing the reach of third party
liability and the breadth of affected parties).
114. See, e.g., Ultramares,174 N.E. at 448 (discussing the scope of the privity
rule); see also Orlinksi, supra note 53 (discussing the application of third party
liability to a variety of information service professionals).
115. See supra notes 46-47 and accompanying text for a discussion of the
medicare cost report certification. Also, see supra notes 1-2 and accompanying text
regarding the hypothetical case United States v. Dole for an illustration of those
116. See supra note 47 and accompanying text for a discussion of the cost report
cost report to the government." 7 Where negligent or fraudulent
representations incriminate a provider, potentially an innocent
party, the government, as a third party plaintiff, should pursue
the consultant, an information service professional, jointly or
severally with the client. 8
The consultant's function, after all, is to prepare the cost
report as accurately as possible.' 19 There are those consultants
who seek to hide as many creative elements of reimbursement
maximization fakery as possible, assuming that the government
surely cannot catch them all.120
Consultants fulfill a necessary and often essential role. They
provide the technical knowledge required for Medicare provider
participation to smaller players who cannot afford to educate
themselves in a technical, dynamic and complex body of
details. 12' The Doles, for example, in the hypothetical case
introducing this Note, had no previous experience with Medicare
reimbursement. 122 If the Doles were required to file the Medicare
cost report without any technical assistance, they may have
recon117. See supra notes 47, 50 for a discussion of the penalties available under the
FCA and Medicare regulations. The certifying client only intends to purchase the
accurate preparation of the cost report. If the client has any other intentions, then
by signing the certification page of the cost report the client exposes herself to the
penalties available under the False Claims Act. See supra notes 49-50 for a
discussion of FCA penalties. In such a case, a government action asserting a negligence
theory against a provider is thus unnecessary as a criminal basis exists.
118. See infra Part V for a discussion of the proposal to encourage federal
authorities to clamp down on Medicare consultants, and see also Temple v. Synthes
Corp., Ltd., 498 U.S. 5, 7 (1990) (holding that joint tortfeasors need not be joined
under FED. R. Civ. P. 19(a)).
119. See supra notes 25-32 for a discussion of the client's expectations of the cost
120. See FloridaNursing Home, supra note 20, at D-9.1 (discussing consultant
fraud); see supra notes 21-23 and accompanying text for a discussion of cost
reporting machinations. In many cases, it is conceivable that consultants drove these
schemes by recommending cost report modifications to their clients to give the
appearance of reimbursement maximization. See Florida Nursing Home, supra
note 20, at D-9.1. While the government has never launched litigation against a
Medicare consultant as a third party defendant, the various theories of third party
liability appear to open the doors to the government to take this type of action. Id.;
see supra notes 112-26 and accompanying text for a suggestion of the possible
application of third party liability to health care consultants.
121. See supra notes 1-2 and accompanying text regarding the hypothetical case
United States v. Dole. The economic practicality of the health care industry
requires that smaller players seek out qualified cost reporting professionals. See
supra notes 29-32 and accompanying text for an explanation of why smaller
entities may require the services of medicare consultants. Providers need consultants
to assist with the reimbursement issues associated with health care businesses
that deal with Medicare. Id. Simply put, without the assistance of consultants,
many health care providers could not service the population of Medicare
beneficiaries due to the complexity and dynamics of the industry. Id.
122. See supra notes 1-2 for a discussion of the introductory hypothetical.
sidered their decision to purchase the home health agency.
Thousands of providers, such as the Doles, rely on consultants to apply
the regulations and statutes legitimately in a manner that will
not place the providers in legal jeopardy. 123
Similarly, the government expects consultants to exercise
professional judgment and conform to the applicable laws, relying
perhaps more on the consultant than on an independent provider
lacking the assistance of outside contractors.' 14 Thus, when a
consultant represents that she is serving as the client's paid cost
report preparer, the consultant implicitly certifies that she has
presented the cost report in accordance with the applicable
regulations and statutes. 125 If, however, these consultants are held
blameless, then the incentive to adhere to the Medicare
regulations and statutes may be destroyed by the competing need to
impress the client with additional revenue. 26 Therefore,
negligence actions in tort may prove a great deterrent to
consultantinduced fraud. However, federal statutes would provide an even
greater anti-fraud tool.
IV. THE FEDERAL FALSE CLAIMS ACT
Congress originally enacted the Federal False Claims Act
(FCA)127 in 1863 to provide for civil penalties against parties
who commit fraud against the government.' 2 In its original
form, the FCA provided for penalties of double damages and
permitted the claim to be asserted by a private qui tam
representa123. See supra notes 29-32 and accompanying text for a discussion of clients'
expectations of their cost reporting consultants.
124. See supra note 105 and accompanying text for a brief discussion of the
federal regulations mandating prompt payment to providers. The health care industry
expects a large degree of professionalism from consultants in the field of Medicare
reimbursement since consultants typically hold themselves out publicly as
"competent member[s] of the profession in obtaining and communicating information."
Orlinski, supranote 53, at 868. See RESTATEMENT (SECOND) OF TORTS, supra note
70, § 552(1) (discussing suppliers of information).
125. See RESTATEMENT (SECOND) OF TORTS, supra note 70, § 552(1). No client
expects his consultant simply to take a "here, sign this" approach with the cost
report, as the certification page and its enumerated penalties makes clear the
ramifications of falsities knowingly included in the cost report. See supra note 47.
A client who clearly relies upon the consultant to assure the propriety of the data
submitted to the government, and who then certifies to such accuracy in
reasonable reliance upon the consultants' work, is entitled to the accountability
associated with other professions. See Orlinski, supra note 53, at 868 (discussing client
expectations of consultants); see also RESTATEMENT (SECOND) OF TORTS, supra note
70, § 552(1).
126. See, e.g., FloridaNursing Home, supra note 20, at D-9.1 for an illustration
of consultants' pecuniary motivation to misstate their clients' cost report data.
127. False Claims Act, 31 U.S.C. §§ 3729-30 (1988).
128. Act of Mar. 2, 1863, ch. 67, 12 Stat. 696 (1863) (codified as amended at 31
U.S.C. §§ 3729-30 (1988)).
tive, or "relator," who would receive one half of the penalties
recovered." Over time, the FCA became a tool to enlist the
assistance of private individuals in policing adherence to certain
Today's FCA provides for more stringent penalties than did
its forerunner. 1" Also, the formal qui tam provisions allow
specific awards to relators who bring actions on behalf of the
government. 32 For these reasons, qui tam actions under the FCA are a
major source of litigation in the field of health care fraud. 3
The FCA applies to health care fraud in the same manner as
to any fraudulent claim against the government." There are
many examples demonstrating the effectiveness of FCA actions,
via both qui tam and independent government suits, against those
who commit Medicare fraud." Both forms of Medicare fraud
cost report and billing fraud - are actionable under the FCA.'3
129. Francis J. Serbaroli, ProviderLiabilities Under the False Claims Act, 212
N.Y.L.J. 63 (1994). For a critical analysis of the application of the False Claims Act
to health care fraud, see generally David J. Ryan, The False Claims Act: An Old
Weapon with New Firepoweris Aimed at Health CareFraud,4 ANNALS HEALTH L.
127 (1995). But see Clinton A. Krislov, Scrutiny of the Bounty: Incentive Awards for
Plaintiffs in Class Litigation, 78 ILL. B.J. 286 (1990) (discussing the merits of qui
tam actions). The qui tam doctrine is an English invention that permitted a private
individual to bring charges against those who committed a fraud on the Crown.
See Ryan supra, at 127.
130. See Ryan, supra note 129, at 128 for a brief discussion of the history of the
131. See Ryan, supra note 129, at 128; see also False Claims Act, 31 U.S.C. §§
3729-30 (1988) (setting forth the penalties available under the FCA).
132. 31 U.S.C. §§ 3730(b)-(f).
133. Qui tam relators initiated the following cases against Medicare participants:
United States ex rel. Wagner v. Allied Clinical Labs., Medicare & Medicaid Guide
(CCH) 43,142 (S.D. Ohio 1995); United States ex rel. Public Integrity v.
Therapeutic Technology Inc., 895 F. Supp. 294 (S.D. Ala. 1995); United States ex rel.
Burns v. Family Practice Assoc., 162 F.R.D. 624 (S.D. Cal. 1995); Mikes v. Strauss,
889 F. Supp. 746 (S.D. N.Y. 1995); United States ex rel. Roy v. Anthony, [1994-2
Transfer Binder] Medicare & Medicaid Guide (CCH) 42,625 (S.D. Ohio 1994). But
see United States ex rel. State of Wis. v. Dean, 729 F.2d 1100 (7th Cir. 1984)
(discussing the limitations over parties eligible to maintain qui tam actions).
134. See False Claims Act, 31 U.S.C. § 3729(c). A claim against the government
"includes any request or demand.., for money or property which is made to a
contractor, grantee, or other recipient if the United States Government provides ...
or... will reimburse.., any portion of [that] money or property." Id.
135. See, e.g., Wagner, Medicare & Medicaid Guide (CCH) $ 43,142; Therapeutic
Technology, 895 F. Supp. at 294; FamilyPracticeAssoc., 162 F.R.D. at 624; Mikes,
889 F. Supp. at 746; Anthony, [1994-2 Transfer Binder] Medicare & Medicaid
Guide (CCH) T 42,625.
136. See supra notes 23-25 and accompanying text for cases dealing with both
types of fraud. The categories of billings and cost reports each fit within the
definition of a claim against the federal government. See also Federal Claims Act, 31
U.S.C. § 3729 (defining conduct actionable under the FCA). Thus, a false statement
within either type of claim would trigger a legitimate cause of action under the
Several classifications of conduct are actionable under the
FCA, any number of which have potential applicability to health
care fraud.137 These classes of conduct are further stratified into
two categories of false claimants. The first category ("conspiracy
theory" parties) consists of those who "knowingly" commit the act
of making a false claim against the federal government.'38 The
second category ("causation theory" parties) includes those who
"knowingly" cause another party to commit the act of making a
false claim against the federal government.' 39
The conspiracy theory requires an agreement between two or
more parties to obtain payment from the government on a
fraudulent or false claim, coupled with an overt act made in furtherance
of that agreement." ° The success of these claims varies since
FCA. Id. §§ 3729-30.
137. See False Claims Act, 31 U.S.C. § 3729(a). Specifically, the FCA provides
who(1) knowingly presents, or causes to be presented, to an officer or employee
of the United States Government... a false or fraudulent claim for payment
) knowingly makes, uses, or causes to be make or used, a false record or
statement to get a false or fraudulent claim paid or approved by the
) conspires to defraud the Government by getting a false or fraudulent
claim allowed or paid;
(7) knowingly makes, uses, or causes to be made or used, a false record or
statement to conceal, avoid, or decrease an obligation to pay or transmit
money or property to the Government, is liable to the United States
138. See id. The Act does not explicitly use the terms "conspiracy theory" and
.causation theory" party. Instead, the FCA enumerates conspiracies and causation
among several types of conduct that constitute violations. Id.
139. See supra notes 34-35 and accompanying text for a discussion of classes of
conduct actionable under FCA.
140. False Claims Act, 31 U.S.C. § 3729(a)(
). Although the FCA does not itself
define conspiracy, the American Law Institute's MODEL PENAL CODE is instructive:
(1) Definition of Conspiracy. A person is guilty of conspiracy with another
person or persons to commit a crime if with the purpose of promoting or
facilitating its commission he:
(a) agrees with such other person or persons that they or one or more of
them will engage in conduct which constitutes such crime or an attempt or
solicitation to commit such crime; or
(b) agrees to aid such other person or persons in the planning or commission
of such crime or of an attempt or solicitation to commit such crime.
(5) Overt Act. No person may be convicted of conspiracy to commit a crime,
other than felony of the first or second degree, unless an overt act in
pursuance of such conspiracy is alleged and proved to have been done by him or
by a person with whom he conspired.
MODEL PENAL CODE § 5.03 (1995). Mens rea, frequently the element that makes an
conspiracies are difficult to prove.' 4' Moreover, the conspiracy
theory under the FCA does not benefit from the liberal definitions
given to "knowing" and "knowingly" as applicable to the causation
manifestations of FCA violations.'" While the conspiracy theory
may be a difficult avenue to pursue fraud, the FCA provides an
easier course via the causation theory."
The causation theory under the FCA has two branches: direct
and indirect causation.'" Direct causation of a violation of the
FCA is exemplified by a single actor who knowingly and
personally makes a false claim against the government.'" Indirect
causation involves a party knowingly causing an instrumentality to
make a false claim, even where the instrumentality is not aware
of the fraud.'"
The government may pursue Medicare fraud under the FCA
using either the conspiracy or the causation theories." The
conspiracy theory, while not as widely successful as the causation
theory, has resulted in many prosecutions.'" In a conspiracy
action involving a consultant and a fraudulent Medicare cost report,
both the consultant and another party, presumably the Medicare
otherwise legal activity criminal, often must be proved from circumstantial
evidence alone. Sandstrom v. Montana, 442 U.S. 510, 525-27 (1979).
141. See MODEL PENAL CODE § 2.02 (1995); see also Sandstrom,442 U.S. at
142. See False Claims Act, § 3729(b). The FCA defines these terms as follows:
(b) Knowing and knowingly defined.-For purposes of this section, the terms
'knowing' and 'knowingly' mean that a person, with respect to
information(1) has actual knowledge of the information;
) acts in deliberate ignorance of the truth or falsity of the information; or
) acts in reckless disregard of the truth or falsity of the information,
and no proof of specific intent to defraud in required.
Id. Note that the conspiracy theory language of the FCA does not include the
words "knowing" or "knowingly." False Claims Act, § 3729(a)(
143. See False Claims Act, 31 U.S.C. § 3730(b).
144. See id. at § 3729(a).
145. See id.
146. See id. For example, A, an employer, instructs B, a billing clerk and
employee of A, to submit a claim to Medicare for payment. A, knowing the claim to be
false, is liable under the FCA for indirectly causing B to submit the false or
fraudulent claim. Presuming that B had neither knowledge of the falsity of the claim
nor reason to doubt its validity, B is an innocent instrumentality of A, shielded
from liability under the Act. See id. at § 3729(a)(1).
147. See supra notes 34-35 and accompanying text for a discussion of classes of
conduct actionable under the FCA.
148. See, e.g., United States v. Alemany Rivera, 781 F.2d 229 (1st Cir. 1985)
(conspiring with related organizations); Klein v. Heckler, 761 F.2d 1304 (9th Cir.
1985) (conspiring among members of physicians' group); Mikes v. Strauss, 889 F.
Supp. 746 (S.D.N.Y. 1995) (conspiring with related organizations); United States ex
rel. McCoy v. California Medical Review, Inc., 723 F. Supp. 1363 (N.D. Cal. 1989)
(conspiring with peer review organization); Peterson, D.O. v. Richardson, 370 F.
Supp. 1259 (N.D. Tex. 1973) (conspiring with related organizations).
provider, must agree to submit a false claim for payment by filing
a cost report.49
If a consultant signs the certification page of the cost report
on behalf of the client and submits the cost report to the
government knowing the cost report to contain false statements within
the meaning of the FCA, the government could prosecute the
consultant under the direct causation theory." By contrast,
where a consultant prepares the Medicare cost report knowing it
to contain false statements within the meaning of the FCA, and
then merely hands it over for the unwitting client to sign, the
government could prosecute the consultant under the indirect
causation theory. 1 ' Either theory presents an opportunity for
the federal government to hold consultants accountable for
consultant-induced fraud.5" 2
V. THE FEDERAL GOVERNMENT SHOULD PURSUE CONSULTANTS
DIRECTLY FOR THE FRAUD OF THEIR CLIENTS
This Note proposes that the federal government must adopt
the means necessary to pursue third party consultants to reduce
Medicare fraud.' This proposal deals with the fair application
of existing law, not with the creation and retroactive application
of new law, and thus, the proposal does not violate consultants'
due process rights."5 ' Adding burdens to the consultants'
function, however, may perturb providers that require professional
assistance to participate in the Medicare program.' This
Section will discuss the benefits of holding third party consultants
liable, especially in consideration of these concerns, under the
various theories described above.
This Note has explored three general theories of culpability
applicable to consultants who operate in the Medicare cost
reporting arena: 1) the Reliance Theory," a third party negligence
ac149. See supra notes 140-42 and accompanying text for a discussion of the
definition of conspiracy under the Model Penal Code.
150. See supra note 47 and accompanying text for a discussion of the
certification page of the Medicare cost report.
151. See supra note 146 for an example of the instrumentality concept. In the
hypothetical example, replace A with the consultant, and B with the client. The
instrumentality concept remains valid under either construction.
152. See supra notes 144-46 and accompanying text for a discussion of the two
branches of the causation theory.
153. See supra note 29-32 and accompanying text for a discussion of the
essential nature of Medicare cost reporting experts in the health care industry.
154. See supra notes 63-81 and accompanying text for a discussion of various
theories of third party liability and the FCA.
155. See infra notes 164-75 for a discussion of the burden created by the
recognition of reimbursement consultants' liability.
156. See supra notes 51-60 and accompanying text for a discussion of third party
tion; 2) the Criminal Conspiracy Theory,157 actionable under the
FCA; and 3) the Causation Theories, also founded on the
FCA.' 5 To date, the government has had its share of victories
against parties who defraud the Medicare and Medicaid systems,
but the government triumphs most often by employing the potent
False Claims Act as a weapon. 159 So far, the federal government
has not directly confronted consultants that provide the methods
to commit, or otherwise cause, an unknown quantity of health
care fraud.' 60 It is time the government takes action against
medicare consultants for their negligent or criminal acts.
The government cannot pursue consultants liable for the
fraud of their clients until such consultants are known. Therefore,
the first step is to require the mandatory disclosure of the identity
of paid preparers of Medicare cost reports. When their names are
attached to the cost report, perhaps some of the deceitful
consultants will be less eager to manipulate information that would land
their clients, if not themselves, in jail.
Where consultants cause their uninformed clients to incur
losses due to the negligent or fraudulent performance of the
consultants' duties, then the government should pursue the
consultants under one of the three third party negligence
theories.161 Justice Cardozo could have imagined this class of
litigation fitting into his near privity test.'62 Either of the other two
more expansive tests likewise would apply to hold the consultants
accountable for their own negligence or intentional fraud."e
Additionally, the federal government should use the False
157. See supra notes 140-43 and accompanying text for a discussion of the
criminal conspiracy theory under the FCA.
158. See supranotes 144-46 and accompanying text for a discussion of the
causation theory under the FCA.
159. See supra notes 12-13 and accompanying text for a discussion of several
FCA victories for the federal government). In addition to the FCA, other federal
statutes have proven useful against health care fraud. See, e.g., United States v.
Khan, 53 F.3d 507 (2d Cir. 1995); United States v. Neufeld, D.O., 908 F. Supp. 491
(S.D. Ohio 1995); United States v. El-Difrawi, 898 F. Supp. 3 (D.D.C. 1995).
However, such actions are usually premised on a FCA claim. See, e.g., United States v.
Shah, 44 F.3d 285 (5th Cir. 1995); but see United States v. Halper, 490 U.S. 435,
452 (1989) (holding that FCA treble damages constitute double jeopardy where
such damages produce a punitive result).
160. See supra notes 12-13 and accompanying text for a discussion of cases
involving Medicare fraud.
161. See supra notes 51-84 and accompanying text for a discussion of the
negligence theories in tort law.
162. See supra notes 55-59 and accompanying text for a discussion of the
Ultramares doctrine requiring privity and near privity for third party negligence
163. See supra notes 69-81 and accompanying text discussing the foreseeability
tests for third party liability.
Claims Act to prosecute consultants under the causation and
conspiracy theories of criminal liability.16' Such criminal theories
apply where the consultants' acts exceed mere negligence, rising
to the level of criminal conspiracies or falling under the FCA's
umbrella of reckless or knowing acts.1" 5 The federal government
has already applied these criminal theories to the prosecution of
providers themselves.' The next logical step is to hold
accountable the party responsible for the fraudulent representations. In
cases such as the introductory hypothetical, this is the consultant.
While it is true that the government already has a party that
it may hold liable for losses in such cases, namely the provider,
taking the easy route will only treat a symptom, not the cause, of
this class of fraud loss.167 Where the provider does not have the
means to pay the penalties and forfeitures or has declared
bankruptcy, the government may win the fight but lose the battle: a
six- or seven-figure settlement becomes much less valuable when
written off as an uncollectible judgment from a financially
The services rendered by the provider are essential to the
community. Thus, another provider will almost certainly come
along to care for the patients of a provider driven out of business
due to bankruptcy or to losing a fraud case to the government.
The new providers may just as easily contract with the previous
consultant, oblivious to the fact that the consultant was the root
of the problem. Thus, a symptom has been treated, but the
parasite continues to destroy its host.
Applying third party liability and FCA concepts to Medicare
consultants is arguably problematic because of the potential
burden added to Medicare participation by small health care
providers."M Additional exposure to liability for Medicare consultants
164. See supra notes 137-40 and accompanying text for a discussion of the
available FCA actions.
165. See supra notes 137-39 and accompanying text for a discussion of the
conduct that violates the FCA.
166. See supra note 12-13 and accompanying text for a discussion of FCA cases
167. See 42 C.F.R. § 413.24(f)(4Xiii). A party who signs the certification page of
the Medicare cost report becomes responsible for any fraud within the document.
168. See Ryan, supra note 129, at 141 (discussing the Draconian nature of fines
under the FCA); see also United States v. Halper, 490 U.S. 435, 452 (1989) (holding
that FCA damages amounted to double jeopardy). An argument may be made that
the FCA's fines and penalties may have a coercive effect upon a party charged with
false claims violations. Ryan, supra note 129, at 127. For example, in theory a
party might prefer to settle a FCA lawsuit, rather than fight it, because their
Medicare revenues can be suspended during the litigation. Id. However, where the
cost reporting consultant is involved, no such duress may be exerted because no
transactions occur between intermediaries and consultants.
169. See supra notes 35-37 and accompanying text for a brief discussion of cost
may theoretically translate into additional costs for services
because Medicare consultants may choose to purchase additional
malpractice insurance to protect themselves. 170 However, of the
three general categories of culpability for Medicare
consultants,17 1 two are criminal in nature. 172 Thus, malpractice
liability insurance affords no protection to defendants in such
cases.173 Furthermore, Medicare consultants are already exposed to
liability to their clients, so the costs of services should already
reflect the malpractice insurance cost. 74 Finally, the massive
economic impact due to Medicare fraud far outweighs the minor
cost increases to individual providers for additional malpractice
Heightening consultants' exposure to lawsuits will neither
excessively inflate the cost of Medicare consultants' services nor
economically impinge on small providers' ability to participate in
Medicare. 176 One must wonder, then, why the federal
government does not choose to pursue the Medicare consultants for the
fraud of their clients. No federal policy supplies an acceptable
rationale. 177 Whatever the reason, if the federal government is
indeed serious about preventing Medicare fraud, it must
reevalureporting burdens and special problems of small providers.
170. See Julie Faussie, Limiting Liabilityin PublicAccounting Suits: A Desperate
Appeal from a Beleaguered Profession, 28 VAL. U. L. REV. 1041, 1051 (1994)
(discussing how professionals pass malpractice insurance cost along to ultimate
consumers of the professionals' services).
171. See supra notes 61-62 and accompanying text for a discussion of the three
categories of culpability.
172. See supra notes 127-52 for a discussion of the FCA actions.
173. Faussie, supra note 170, at 1052.
175. See supra notes 5-7 and accompanying text for a discussion of estimated
Medicare losses due to fraud.
176. See supra notes 169-74 and accompanying text for an examination of the
economic impact of consultants' liability.
177. Perhaps the government does not hold Medicare consultants accountable as
a matter of litigation strategy: the government has a known party who signed their
name to the cost report. 42 C.F.R. § 413.24(f)(
)(iii). Small providers are also less
likely to have a legal defense fund due to their small size. See supra notes 29-32
and accompanying text for a discussion of the economic necessity of Medicare cost
reporting consultants for smaller providers. The owner or operator of a small
provider arguably presents a less-threatening opponent in a court of law than does a
more cash-ready consulting firm. However, while pursuing a Medicare provider
may result in an easier victory to the federal government, the victory rings hollow
when a bankrupt provider cannot pay the judgment. See supra notes 167-68 and
accompanying text for a discussion of liquidity concerns for judgments 'against
small providers. It is true that consultants typically have larger war chests than
providers to defend against these types of suits, but they also have deeper pockets
to pay the judgments against them. Id. In short, a defendant that is actually able
to pay the judgment against it is a more efficient party to pursue than a defendant
ate its approach to Medicare fraud where consultants are
involved, and should force these individuals to pay for their
Medicare consultants are the suppliers of information to
providers, and ultimately to the federal government. Many times,
their services are indispensable to smaller organizations. If that
information is tainted, providers themselves are not solely
responsible for the repercussions. Consultants are viewed by many
providers as their only source of Medicare reporting information.
Consultants who prey on the unsophisticated with promises of
riches spread this taint without remorse. The government must
use all the tools in its power to curb the spread of fraud loss in
the health care industry. The federal government has not yet
chosen to attack reimbursement consultants with the resources
available in tort law and the federal statutes as it should.17
Until the government brings all of its devices to bear upon all parties
who perpetrate the huge levels of fraud in the Medicare system,
the Hillary and Newt Doles of this country will continue to carry
the full burden on behalf of all of the culprits.179
Neal A. Cooper
178. See supra notes 112-26 for a discussion of the applicability of tort law to
Medicare cost report consultants; see also supra note 131 for a description of the
remedies available under the FCA.
179. See supra notes 1-2 describing the hypothetical case of United States v.
2. See infra notes 12-13 , 21 - 23 , 50 and accompanying text for a description of the magnitude of liabilities for Medicare fraud .
3. See as recent examples of Mediare Fraud litigation, United States v . Erickson , 75 F.3d 470 ( 9th Cir . 1996 ); United States v . Henry, [ 1994 -1 Transfer Binder] Medicare & Medicaid Guide (CCH) 41 , 995 (6th Cir. Nov. 29 , 1993 ); United States v . Calhoon , 859 F. Supp . 1496 (M.D. Ga . 1994 ); United States v . Mickman, No. CIV.A. 89 - 7826 , 1993 WL 541683 (E.D. Pa. Dec. 22 , 1993 ), affd, 52 F.3d 318 ( 3d Cir . 1995 ).
4. New government initiatives, as well as this Note, will focus on fraud and abuse problems in the health care industry . See infra notes 10-11 and accompa-
72. Rusch Factors , 284 F. Supp . at 86-87; see also RESTATEMENT (SECOND) OF TORTS § 552, supra note 70, illus. 7 for a discussion of auditor's liability to a client's creditors.
73. See Rusch Factors,284 F. Supp . at 92-93.
74. See Orlinski, supra note 53 , at 880 nn. 162 - 64 ( discussing states that have accepted actual foreseeability test).
75. Id . at 881 nn.165 -67 and accompanying text (discussing arguments supporting actual foreseeability approach ).
76. Id .
77. See , e.g., Shapiro v . UJB Fin. Corp., 964 F.2d 272 , 289 - 90 ( 3d Cir . 1992 ) (applying New Jersey law); Impex Agric . Commodities Div. Impex Overseas Corp. v. Parness Trucking Corp., 576 F. Supp . 587 , 591 (D.N .J. 1983 ) (hereinafter Impex Agric . Commodities) (discussing the merits of the broad "reasonably foreseeable" test).
78. See H. Rosenblum , Inc. v. Adler, 461 A.2d 138 , 153 (N.J . 1983 ); Citizens State Bank v . Timm, Schmidt & Co., 335 N.W.2d 361 , 365 (Wis. 1983 ).
79. See Rosenblum, 461 A.2d at 153; Timm, Schmidt & Co., 335 N.W.2d at 366.
80. See Rosenblum, 461 A.2d at 153; Timm, Schmidt & Co., 335 N.W.2d at 365.
81. See Orlinski, supra note 53 , at 863 nn.30 -35 for a discussion of subjective reasonableness; see also Impex Agric . Commodities, 576 F. Supp . at 591 (discussing "reasonably foreseeable" test).
90. See supra notes 38-40 and accompanying text for a description of Medicare cost reporting functions .
91. See supra notes 32 , 38 - 40 and accompanying text for a discussion of Medicare cost reporting forms, allowable costs, and the use of cost reports .
92. See supra notes 32 , 38 - 40 and accompanying text for a discussion of Medicare cost reporting forms, allowable costs, and use of cost reports .
93. Though providers may use the cost report for non-official purposes, the cost report is intended for official use only . See supra notes 32 , 38 - 40 and accompanying text for a discussion of Medicare cost reporting forms, allowable costs, and use of cost reports .
94. See RESTATEMENT ( SECOND) OF TORTS, supra note 69, § 552 (describing the appropriate class of parties protected under the "actual foreseeability" test).
95. See Rusch Factors , Inc. v. Levin, 284 F. Supp . 85 , 93 (D. R.I . 1968 ); H. Rosenblum , Inc. v. Adler, 461 A -2d 138 , 153 (N.J . 1983 ). Jurisdictions following the actual foreseeability approach will find the reliance element satisfied where an injured party relied on information, for example financial statements supplied by defendant accountants, for a known use of that information . Rusch Factors ,284 F. Supp . at 93. The reasonably foreseeable approach similarly requires that the injured party must have relied upon information in the context of "a proper business purpose . " Rosenblum, 461 A.2d at 153 . Both tests have their roots in the traditional negligence formula: 1) duty; 2) breach of that duty; 3) causation, both legal and proximate; and 4) damages . W. PAGE KEETON ET AL., PROSSER AND KEETON ON THE LAW OF TORTS § 30 , at 164- 65 (5th ed. 1984 ).
96. See Ultramares, 174 N.E. at 441. See also Orlinski, supra note 53 , at 872 nn.101 -03 (discussing the Ultramares decision and the class of parties protected under the "privity or near privity" test).
97. See , e.g., Credit Alliance Corp . v. Arthur Andersen & Co., 483 N.E.2d 110 ,