What the Federal COVID-19 Fraud Crackdown Means for Labs

That rumbling you hear in the background? It’s the sound of federal enforcers gearing up for what might be the biggest fraud crackdown in a generation. And if your lab received federal relief funds from the US government during the COVID-19 pandemic, the crackdown train might be rumbling in your direction. There may also be liability implications under the False Claims Act (FCA) that you need to recognize.

The COVID-19 Fraud Crackdown

The federal government has spent $5 trillion on relief programs designed to protect businesses from the economic devastation of the COVID-19 pandemic. And as inevitably happens when Uncle Sam doles out big gobs of money, many of those COVID-19 relief proceeds ended up in the pockets of fraudsters. Now the government is going after the scammers and seeking to reclaim what they stole.

Since taking office, the Biden administration has made cracking down on COVID-19 relief program fraud and abuse a major priority. It began in earnest on May 17, 2021, when Attorney General Merrick Garland established a task force comprised of the U.S. Department of Justice (DOJ), FBI, U.S. Department of Health and Human Services (HHS), Small Business Administration (SBA), and other partner agencies dedicated to combating COVID-19 fraud. In March 2022, Associate Deputy Attorney General Kevin Chambers was appointed special prosecutor to lead the DOJ’s pandemic fraud efforts.

By the time it ends, the crackdown will likely be the most extensive and fully equipped ever undertaken by the federal government. In December 2021, the White House issued an internal memo instructing government agencies to work with the 73 different inspectors general (IGs) across the federal government, including the HHS Office of Inspector General (OIG), to root out COVID-19 fraud. “In recent years, there have been concerns that executive branch agencies have not consistently provided their IGs with the full cooperation and access to which they are entitled under the law,” wrote Shalanda Young and Jason Miller, acting director and deputy director for management, respectively, for the Office of Management and Budget (OMB).

PRAC & Inspectors General

Another major player is the Pandemic Response Accountability Committee (PRAC) made up of 21 inspectors general across the federal government, including the HHS OIG. PRAC has created a Pandemic Analytics Center of Excellence (PACE) to furnish analytic, audit, and investigative support to the effort. As part of its strategy of using “data analytics” to catch COVID-19 fraudsters, PRAC has hired data scientists to use artificial intelligence to identify fraud trends, patterns, and anomalies across 17 different data sets and 150 million public, non-public, and commercial data sources. PRAC and other inspector generals have already accounted for 1,272 indictments, 949 arrests, and 455 convictions. And those statistics are only through March 2022.

Meanwhile, PRAC is pushing for even wider powers. Under current rules, the committee’s authority to prosecute for COVID-19 relief program fraud is limited to scams of $150,000 and less. PRAC head, DOJ inspector general Michael Horowitz, says the $150,000 threshold is far too low and asked Congress to raise it to $1 million. Out of more than $5 trillion in pandemic relief spending, more than 1 million awards under $1 million have been given out, according to PRAC. Republican Senator Chuck Grassley of Iowa and Democratic Senator Dick Durbin of Illinois are co-sponsoring a bill that would make the change.

Impact on Labs—the PPP & Risk of FCA Liability

While those who deliberately gamed the system and used COVID-19 relief funds to purchase sports cars, opulent mansions, and luxury vacations deserve what they’ll eventually get, the concern is that well-meaning businesses who mistakenly failed to comply with relief program rules will get swept up in the enforcement tsunami. Moreover, to the extent they billed Medicare, Medicaid, and other federal programs while certifying compliance with federal program requirements, these labs and other businesses could be subject to liability for false billing under the FCA.

One of the primary targets for federal enforcement will be recipients of Paycheck Protection Program (PPP) loans that were supposed to go to small businesses, sole-proprietors, nonprofits, and the self-employed subject to regulation by the SBA. To receive the loans, recipients had to certify that they needed the money to withstand COVID-19 economic uncertainty and keep operations going. Within weeks of the program’s launch in spring 2020, it was revealed that dozens of large and medium companies had pocketed PPP loans. In May of that year, then Treasury Secretary Steven Mnuchin promised a “full review” to ensure that PPP borrowers of $2 million or more really met program conditions, while promising amnesty to those who fully refunded the improper PPP loans they had received by May 14, 2020.

All of this begs a question: Can recipients that certified need and then failed to provide a full refund by May 14 and subsequently billed Medicare violate the FCA, which imposes liability for knowingly presenting a false or fraudulent claim or making a false record or statement material to a false or fraudulent claim? There’s also the prospect of FCA liability for what’s known as a “reverse false claim” for knowingly making or using a false record or statement for the purpose of avoiding or decreasing an “obligation” owed to the federal government. The definition of “obligation” includes “the retention of an overpayment,” i.e., the receipt or retention of funds to which the person isn’t entitled.

Of course, FCA risks involve not just direct investigation and prosecution but also private qui tam whistleblower lawsuits.  

Assessing Your Lab’s Reverse False Claims Liability Risks

Liability under the FCA arises only if you act “knowingly,” meaning with “actual knowledge of the information” or in “deliberate ignorance” or “reckless disregard” of the “truth or falsity of the information.” You should be okay if your conduct is based on a reasonable interpretation of an ambiguous requirement for which there’s no official government guidance. As a result, you can minimize your FCA liability risks by reviewing program rules with your attorney, monitoring official government guidance, and developing a reasonable rationale for their interpretation of any ambiguous funding requirements. In the context of assessing risks of liability for reverse false claims for accepting or retaining a PPP loan, you need to consider the SBA’s criteria for program eligibility. Specifically, to be eligible, the SBA states that:

• “All borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act”—that is, the Coronavirus Aid, Relief, and Economic Security Act legislation that created the PPP—“and PPP regulations at the time of the loan application”;
• Borrowers “must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that ‘current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant"; and
• “Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business;”

It’s “unlikely” that a public company with substantial market value and access to capital markets would be able to make the required certification in good faith, the SBA adds.