Understanding the Fraud and Abuse Laws: Guidance for Internists

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This paper explains the fraud and abuse laws as they are being enforced in December 1997.The American College of Physicians recognizes the onerous burden that these laws and their enforcement have on practicing internists. These laws have created an atmosphere in which physicians feel that almost all of their behavior is suspect. In particular, many physicians believe that inadvertent billing and coding errors made in the context of a complex system are being treated as fraud. For this reason, the College will work with the American Society of Internal Medicine, the American Medical Association, and other medical organizations to develop legislative and regulatory proposals that will 1) reduce unnecessary burdens for physicians who do not engage in illegal activities and 2) prevent and punish fraud.

Fraud and abuse is an umbrella term that applies to a series of statutes and regulations designed to prevent government health programs from paying excessive and inappropriate claims.In recent years, federal and state enforcement activities have been strengthened as governments have increasingly seen reduction of health care fraud as a way to rein in spending and an opportunity to reduce "waste" in government programs. A 1997 report from the Department of Health and Human Services Office of the Inspector General concluded that in fiscal year 1996, net overpayments by Medicare totaled about $23.2 billion. Although the Office of the Inspector General could not identify how much of the overpayment was due to fraud, the report has been used to justify increased scrutiny of health care providers. This trend will continue, and enforcement of the fraud and abuse laws will increase, leaving physicians vulnerable to various charges and investigations.

This paper seeks only to explain the current rules and provide general guidance for internists.It does not explain all of the details of each fraud and abuse statute or regulation, and it should not be considered legal advice. Rather, it uses both narrative and case examples to highlight important issues and educate physicians about potential problems. Because this area of law is in flux and physicians need the most up-to-date information available, physicians should contact their own attorneys before participating in activities that may be governed by the fraud and abuse laws. Updated information about fraud and abuse will appear in ACP Observer and on the American College of Physicians World Wide Web site.

Unlawful Kickbacks

It is illegal to "solicit, pay, offer, or receive any remuneration, in cash or in kind, for the referral or to induce the referral of a patient, or for ordering, providing, recommending or arranging for the provision of any service" payable by federal health care programs. Examples of prohibited physician behavior are routinely waiving deductibles and copayments for Medicare patients and obtaining free office space or equipment at a hospital where the physician has admitting privileges.

The statute and regulations provide exceptions to the general prohibitions that govern in many situations, including risk-sharing arrangements. Physicians can request advisory opinions from federal regulators to determine the legality of their activities. Information on obtaining advisory opinions can be found at the Office of the Inspector General's Web site.

Self-Referral Prohibitions: The law establishes two fundamental prohibitions on referral behavior. A physician may not refer a Medicare patient for a "designated service" to an entity with which he or she has a financial relationship, and the referred-to entity may not submit a claim for the service unless the transaction meets one of the statute's exceptions. The term "financial relationship" is unlimited and includes compensation, investment, and direct and indirect relationships.

The law describes two sets of exceptions:relationships that generally require investment at fair market value and relationships that involve members of group practices. Physicians can seek advisory opinions from the Health Care Financing Administration (HCFA) about their particular circumstances. Information on obtaining an advisory opinion is available from the HCFA web site.

False Claims

Physicians are vulnerable to criminal charges and civil penalties if they engage in a pattern or practice of presenting claims that they know or should know will lead to greater payments than are appropriate or if they engage in a pattern or practice of submitting claims that they know or should know are for services that were not medically necessary. Reckless disregard for the accuracy of claims filed or an attempt to remain ignorant of billing requirements will be considered a violation. In addition, physicians who have been audited by the Office of the Inspector General report that even good faith errors are viewed with suspicion by the enforcement agencies and can lead to sanctions. Behaviors likely to raise concern include reporting improper diagnosis or procedure codes to maximize reimbursement, double billing, claiming costs for noncovered services, providing questionable documentation for the medical necessity of professional services, and misrepresenting information to obtain payments.

Because the penalties for fraud and abuse violations are so onerous, physicians should develop a process for internal review to ensure compliance with the law and proper billing.This will enable physicians to identify problems and determine appropriate strategies for correction. It will also help persuade the government that any identified problems are isolated and inadvertent errors rather than evidence of fraud. Guidance on billing is available from the HCFA Web site.


The stakes are high for physicians involved in fraud and abuse investigations. Government prosecutors can seek to exclude physicians from Medicare, Medicaid, or other federal health programs, can seek criminal sanctions, or can try to impose large civil monetary penalties.

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