Retained Overpayments Change the FCA Ball Game


False Claims Act defense attorneys have been warning government contractors, particularly Medicare and Medicaid providers, of increased risks and a reduced ability to defend against whistleblower complaints since the passage of the Fraud Enforcement Recovery Act of 2009 (“FERA”). The greatest risk comes from FERA’s addition of a new kind of reverse false claim: the “retained overpayment.” 1 The predictions came true recently in a Wisconsin qui tam case. US ex rel. Keltner v. Lakeshore Medical Clinic, Ltd. 2 should serve as a warning to all government contractors. It can also, more constructively, offer guidelines for how health care providers should proceed in the future.

Old Rule

Prior to the passage of FERA, there was a simple baseline rule in FCA cases: the sine qua non of a False Claims Act case is a claim that is false. 3 Since FERA, though, a new type of claimless FCA case exists: the retained-overpayment false claim. Once a government contractor “knows” of an overpayment, as “knowledge” is defined in the FCA, it must repay the money within 60 days. On the 61st day the retained overpayment becomes a false claim, even if the error that originally led to the overpayment was perfectly innocent.


“Knowledge” is defined in the FCA as “actual knowledge . . . deliberate ignorance of the truth [or] reckless disregard of the truth.” 4 When exactly an overpayment is known for purposes of a retained-overpayment FCA case is an issue that may be hotly litigated for years to come. A whistleblower, usually a former employee, will argue the overpayment is known the first time he/she brought it to the attention of the defendant, even with as innocuous a comment as, “I think we might be billing this incorrectly.” A defendant, on the other hand, will argue it could not know of an overpayment until it got credible and detailed reports of an error, and then determined the error actually led to an overpayment after consulting with its auditors and attorneys.

Qui Tam

The real risk arises when these allegations are brought in qui tam cases.  These are cases filed by whistleblowers, on behalf of the government, seeking a bounty out of the recovery. The FCA has substantial penalties, $5,500 to $11,000 per claim, plus treble the amount of the claim. Penalties mount up quickly. In a case with a large number of small claims at issue (e.g., a hospital with thousands of $5.00 lab tests), the risk of being penalized $11,000 for every $5.00 test is overwhelming. In a case with a smaller number of large claims (e.g., defense contractors with million-dollar weapon systems) the treble damages are astronomical. The upshot of these penalties is that most FCA defendants fight their cases at the motion to dismiss and summary judgment phases of litigation. Faced with a trial, in almost every case, they choose settlement over risk, even when they have a strong defense.

Where a whistleblower alleges a retained overpayment, the preliminary question will be: when did the defendant know of the overpayment? It is in the whistleblower’s interest to allege the defendant knew for more than 60 days before money was repaid, making it a violation of the FCA. It is in the defendant’s interest to argue it  never knew, or that it did not know until immediately before repayment. Absent a clear and indisputable set of facts, though, the issue is one that is not easily determined at the dismissal or summary-judgment phase of a case, meaning it is destined for trial or, more likely, a very expensive settlement.

Health care and FCA attorneys have been warning providers of these risks since the passage of FERA. Until very recently, though, the risks have been mostly hypothetical, not enough to convince clients that the risks justify a hard look at how they do business, and perhaps even costly changes to avoid these lawsuits. A recent case in Wisconsin, though, shows just how these risks can play out, to the detriment of the contractor.

U.S. ex rel. Keltner v. Lakeshore Medical Clinic, Ltd.

Lakeshore Medical Clinic, Ltd. (“Lakeshore”) is a multi-specialty medical group based in Milwaukee that employs over 100 physicians.  Elizabeth Keltner worked in its billing department. Ms. Keltner, after being fired, brought a qui tam case against Lakeshore, alleging multiple violations of the FCA.

Ms. Keltner alleged that Lakeshore did annual audits of its doctors’ billing from 2002 through 2010, reviewing samples of their claims. For two doctors, the audits identified an overpayment rate of more than 10%, where the doctors billed office visits at a higher intensity 5 than justified in a patient’s chart, leading to a higher reimbursement from Medicare or Medicaid. The practice repaid the specific overpayments identified in the sample audits, but it did not go back and review all those doctors’ other claims to identify and repay any other upcoded claims.  Ms. Keltner also alleged the audits stopped altogether in 2011 without changing how those physicians practiced, leading to another year of upcoded claims.

Lakeshore moved to dismiss Ms. Keltner’s complaint, arguing it failed to state a claim and failed to plead fraud with the requisite particularity.  Although Keltner did not allege Lakeshore knew the specific claims were false, the trial court found she adequately pleaded her case because she “plausibly suggest[ed] that [Lakeshore] acted with reckless disregard for the truth and submitted some false claims.” The Court separately determined Keltner adequately pleaded a retained-overpayment false claim for the same claims because, in failing to review 100% of the claims after the negative audit and in terminating the audits in 2011, Lakeshore “intentionally refused to investigate the possibility that it was overpaid,” and therefore “it may have unlawfully avoided an obligation to pay money to the government.”

Ms. Keltner also alleged Lakeshore submitted false claims by misrepresenting that a physician’s assistant was supervised by a physician. The trial court rejected that claim by Keltner, finding she failed to provide sufficient details to plead fraud with particularity, as required by Rule 9(b) of the Federal Rules of Civil Procedure. Curiously, the Court said those same allegations, combined with Keltner’s statement that she notified Lakeshore of the error, were sufficient to plead a retained-overpayment false claim. Even though the Court determined the claims themselves were so poorly pleaded they could not meet the Rule 9(b) requirement, it found the very same claims were sufficiently pleaded to state a retained-overpayment false claim. The apparent distinction for the Court was that Keltner failed to plead who submitted the allegedly false claims, but did plead who was informed of the alleged overpayments.

The Keltner case is still in its earliest stages. Lakeshore may still prevail on a motion for summary judgment. It is clear, though, that Lakeshore faces a far greater risk of being forced to trial or settlement because of the new retained-overpayment false claim.

Practical Takeaways

What lessons can health care providers take from the Keltner case?

First, the retained-overpayment false claim places a far greater affirmative burden on providers to follow through on any hints of billing errors. Any indication of an overpayment should be treated as an immediate call to action, for a determination and repayment must be completed within 60 days. The contractor may not enjoy the luxury of taking its time to “know” if there was actually an overpayment, lest it be accused of reckless disregard for the truth and unlawfully avoiding an obligation to repay the government within 60 days.

Second, providers should train their employees and supervisors on the importance of acting quickly in response to any questions about billing errors. They should also have a procedure in place to immediately involve necessary professional assistance, from auditors to attorneys, to triage the accusations and deal with the problematic ones within the limited time permitted for repayment.

Third, part of the affirmative burden should include working with the accusing employee, who must always be considered a potential whistleblower, to assure her that the matter has been properly handled. Sometimes this can be done by showing that the accusations have been taken seriously and the claims repaid. Other times, the employee might need to be shown that the accusations are erroneous and the billing proper. Outside professionals can be of assistance here, too, as they are often able to work with the accusing employee to explain to them how the bills were correct. Most of these whistleblowers are former employees saying, “I said they were doing it wrong, and nobody listened to me.” Paying attention to the allegations and assuring the employee that their concerns have been taken seriously is one of the most important actions in preventing the filing of a False Claims Act lawsuit.

Fourth, another way to avoid retained-overpayment risk is to delay the 60-day clock from starting to run until the provider is fully satisfied that there were actual overpayments. This can be done by involiving outside counsel and reviewing these matters under the attorney-client privilege. The goal is not to prevent the contractor from ever identifying an overpayment. That, in its own right, might be considered falsity through willful ignorance or reckless disregard for the truth. Rather, it is to ensure that the provider gets the full 60 days to conclusively identify and reimburse an overpayment, rather than having to frantically chase down every question from every auditor and billing clerk.

Auditing functions can be moved from the provider to a protected relationship. In such a relationship, the provider would retain counsel to conduct audits and review them for overpayments and legal risks. Counsel would subcontract the work under its own work-product privilege. The auditor would identity risks to counsel, counsel would do a legal analysis of the client’s repayment obligations, and the first time the client “knows” of the obligation, it already has a fully completed review of the issue and a plan for repayment. The 60-day repayment requirement creates lower risk.  Further, potential whistleblowers, usually disgruntled or fired employees, understand that the provider is taking the matter seriously.

Other Considerations

Keltner also suggests that one remedy considered by some contractors, cutting back on audits as much as possible to avoid “knowing” of overpayments, also creates new risk. In the Keltner case, the Court found that audit termination, perhaps done to avoid the retained-overpayment risk, in itself was reckless disregard of false claims when it was done with knowledge of prior billing errors and without first correcting existing problems.

Another issue arises for hospitals, which are required to conduct peer review. Much as the Court in Keltner found a false claim where Lakeshore failed to follow up on a sample audit, a hospital identifying individual cases of a physician providing care of a substandard quality that Medicare might find nonpayable may have a duty to review all the physician’s cases for similar failures.

The retained overpayment amendment to the False Claims Act is opening additional avenues for potential qui tam lawsuits by whistleblowers. Keltner is an early case that gives hints of how courts will treat these actions. Health care providers are well-advised to learn its lessons now, rather than after they get served with their own FCA suit.

Should you have any questions, please contact David B. Honig at or 317-977-1447.

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  1. 31 U.S.C. § 3729(b)(3).
  2. US ex rel. Keltner v. Lakeshore Medical Clinic Ltd.
  3. U.S. ex rel. Aflatooni v. Kitsap Physician Services, 314 F.3d. 995, 1002 (9th Cir. 2002).
  4. Billing E/M codes as level five rather than level four.
  5. U.S. ex rel. Aflatooni v. Kitsap Physician Services, 314 F.3d. 995, 1002 (9th Cir. 2002).