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The False Claims Act lets whistleblowers sue private firms on behalf of the federal government. In exchange for uncovering fraud and bringing the case, whistleblowers can receive up to 30% of any recovered funds. My work on bounty hunters made me appreciate the idea of private incentives in the service of public goals but a recent paper by Jetson Leder-Luis quantifies the value of the False Claims Act.
Leder-Luis looks at Medicare fraud. Because the government depends heavily on medical providers to accurately report the services they deliver, Medicare is vulnerable to misbilling. It helps, therefore, to have an insider willing to spill the beans. Moreover, the amounts involved are very large giving whistleblowers strong incentives. One notable case, for example, involved manipulating cost reports in order to receive extra payments for “outliers,” unusually expensive patients.
On November 4, 2002, Tenet Healthcare, a large investor-owned hospital company, was sued under the False Claims Act for manipulating its cost reports in order to illicitly receive additional outlier payments. This lawsuit was settled in June 2006, with Tenet paying $788 million to resolve these allegations without admission of guilt.
The savings from the defendants alone were significant but Leder-Luis looks for the deterrent effect—the reduction in fraud beyond the firms directly penalized. He finds that after the Tenet case, outlier payments fell sharply relative to comparable categories, even at hospitals that were never sued.
Tenet settled the outlier case for $788 million, but outlier payments were around $500 million per month at the time of the lawsuit and declined by more than half following litigation. This indicates that outlier payment manipulation was widespread… for controls, I consider the other broad types of payments made by Medicare that are of comparable scale, including durable medical equipment, home health care, hospice care, nursing care, and disproportionate share payments for hospitals that serve many low-income patients.
…the five-year discounted deterrence measurement for the outlier payments computed is $17.46 billion, which is roughly nineten times the total settlement value of the outlier whistleblowing lawsuits of $923 million.
[Overall]…I analyze four case studies for which whistleblowers recovered $1.9 billion in federal funds. I estimate that these lawsuits generated $18.9 billion in specific deterrence effects. In contrast, public costs for all lawsuits filed in 2018 amounted to less than $108.5 million, and total whistleblower payouts for all cases since 1986 have totaled $4.29 billion. Just the few large whistleblowing cases I analyze have more than paid for the public costs of the entire whistleblowing program over its life span, indicating a very high return on investment to the FCA.
As an aside, Leder-Luis uses synthetic control but allows the controls to come from different time periods. I’m less enthused by the method because it introduces another free parameter but given the large gains at small cost from the False Claims Act, I don’t doubt the conclusion:
The results of this analysis suggest that privatization is a highly effective way to combat fraud. Whistleblowing and private enforcement have strong deterrence effects and relatively low costs, overcoming the limited incentives for government-conducted antifraud enforcement. A major benefit of the False Claims Act is not just the information provided by the whistleblower but also the profit motive it provides for whistleblowers to root out fraud.
