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A preview of the effects that a provision in the Bipartisan Budget Act of 2015 will have on healthcare providers came to light this week when the Railroad Retirement Board (Board) published an interim final rule implementing the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015 (Act). The Act requires federal agencies to make cost-of-living adjustments to civil monetary penalty (CMP) amounts based on increases in the Consumer Price Index (CPI). The Board, which has jurisdiction over certain False Claims Act (FCA) violations, is the first agency to issue a regulation implementing the Act. The adjusted penalties for FCA violations calculated by the Board are staggering: the minimum penalty will be increased from $5,500 to $10,781 and the maximum penalty will be increased from $11,000 to $21,563.

The significant increase is due to the Act’s requirement for agencies to make an initial “catch-up adjustment” through an interim final rule effective by August 1, 2016. Specifically, the catch-up adjustment is the difference between the CPI in October of the calendar year in which the penalties were last adjusted and the CPI in October 2015. The Board determined that for purposes of the Act, the FCA penalties were last updated in 1986, and it applied a CPI increase of approximately 215 percent to the 1986 penalty amounts.

An agency may adjust a CMP by less than the formula dictates only if (1) it publishes a proposed rule and determines that increasing the CMP by the required amount will have a negative economic impact or the social costs of increasing the CMP would outweigh its benefits, and (2) the director of the Office of Management and Budget concurs with the determination. No agencies have published such a proposed rule. Going forward, the CMP amounts will be adjusted without notice and comment rulemaking each January based on changes in the CPI.

The U.S. Department of Justice (DOJ) is also required to update its CMP regulations related to the FCA. Because the formula for the initial catch-up adjustment is set by the Act, we expect the DOJ amounts to match the Board’s calculations. The Act mandates that the adjusted amounts will be applicable to all CMP assessments occurring after August 1, 2016, even if the violation occurred before such date.

FCA penalties in the context of healthcare services rack up quickly because each line item separately billed in violation of the FCA is subject to the per-claim penalty. For example, if 2,000 claims for a $50 lab test are found to be inappropriate under the FCA, the treble damages would be $300,000 and under the Act’s formula, penalties could reach a staggering $43,126,000. The extreme penalty amount in this example illustrates why a defendant in an FCA case might assert that penalties are excessive in violation of the U.S. Constitution. Indeed, the argument was raised in many cases with the existing penalty amounts. The adjusted penalty amounts only reinforce the importance of undertaking effective, proactive compliance efforts.

Caution: False Claims Act Penalties Poised to Double