The False Claims Act: A Tool Healthcare Industry Plaintiffs Shouldn’t Ignore

A recent federal court decision coming out of New Jersey demonstrates the viability of an unusual kind of whistleblower: a privately defrauded party.

The most common prototype of a whistleblower under the False Claims Act (FCA) is a corporate insider who sees fraud committed against the government by their employer or a company they work with, and generally after many, many attempts at internal reporting, sues the company under the law and is eligible to share in the recovery. 

But there’s little restriction on who can be a whistleblower, and many individuals and entities besides employees of an unscrupulous contractor have occasion to uncover fraud. A recent case brought by Allstate, the large national insurance company, demonstrates an interesting way healthcare companies can utilize the FCA.

In that case, United States ex re. Allstate Insurance Comp. v. Phoenix Toxicology, No. 22-6303 (D.N.J.), Allstate accused a toxicology lab of billing the government for medically unnecessary urinary drug tests – or for types of tests that were more complicated (and expensive) than what was warranted. According to publicly available data analyzed by Allstate, the lab billed the government roughly $4 million for these tests.

Allstate is, of course, not an insider to or an employee of Phoenix Toxicology. Instead, the insurer had its own litigation with the lab, alleging that it paid for medically unnecessary urinary drug tests, and then filed this FCA case because of what it learned in that commercial case. Allstate’s commercial litigation concerned an extremely similar fraud scheme, but with Allstate as the allegedly defrauded payor, instead of the government. That case settled in 2021.

Allstate used knowledge gained from allegedly being a fraud victim and facts gained from litigating that suit to file this case in the name of the government. Phoenix, in fact, filed a motion to dismiss wherein it argued that Allstate “impermissibly extrapolate[d]” the fraud from its commercial case and did not make a plausible inference that Phoenix defrauded the United States.

The court disagreed with Phoenix. In denying its motion, the Court acknowledged the genesis of the FCA case, but still found that Allstate brought forward nonpublic allegations that formed a “reliable indicia” of fraud against the government.

Commercial litigation in the healthcare industry is incredibly common, with thousands of suits filed annually. This decision highlights an alternative path to recovery for plaintiffs who may know of fraud in the healthcare industry against a private payor and then use knowledge of it to assess whether there may have been fraud against the government – and the basis for an FCA suit.

Plaintiffs in commercial disputes can learn all sorts of information relevant to an FCA scheme, like a provider’s coding and billing practices, the software applications they use, and the state of mind of decision-makers at the company.

All of that can potentially become evidence in an FCA suit. It will be interesting to see if other commercial plaintiffs are buoyed by this decision and file similar suits; it could create an interesting trend, and perhaps change what we think of as a prototypical whistleblower.