Even throughout the COVID-19 pandemic, the federal False Claims Act (FCA) has remained one of the federal government’s top tools to investigate and punish alleged fraud, waste, and abuse in relation to federal programs, particularly federal healthcare programs.  In fiscal year 2019 alone, the Department of Justice (DOJ) collected over $3 billion in settlements and judgments under the FCA, the majority of which was from companies and individuals within the healthcare industry.  While the DOJ may have recently temporarily shifted priorities to address pandemic-related fraud, large FCA settlements have kept on coming.  In April, for example, a laboratory and associated pain clinic, along with two former executives, agreed to pay $41 million to resolve FCA allegations that they engaged in unnecessary urine drug testing.  Later that month, another laboratory agreed to pay $43 million to resolve allegations that it billed for medically unnecessary lab tests.  In June, a hospital system based in Atlanta agreed to pay $16 million to resolve allegations that it improperly submitted claims for inpatient stays, and that it overpaid to acquire a cardiology physician group.  

In large part due to the tremendous damages and penalties that an FCA defendant faces if found liable, in addition to the cost of defending an FCA case, the vast majority of FCA cases resolve by way of settlement.  Many times, the FCA defendant argues that it is unable to pay the amount that the DOJ is seeking. Enter the “inability to pay” process.  In sum, if an FCA defendant claims that it cannot pay the amount the DOJ is seeking to resolve an FCA case, that defendant can complete a detailed financial packet (there’s one packet for companies and one for individuals) and submit that form under penalty of perjury, along with supporting documents like bank statements, balance sheets, and other financial documents, to the DOJ.  A financial analyst from the DOJ then reviews that information and determines either that the defendant can, in fact, pay what the DOJ is seeking or, if not, how much the defendant can pay in satisfaction of the claim.  While the inability to pay process has been around for a while, the ongoing COVID-19 pandemic has brought the process to the forefront, as many businesses and individuals who find themselves on the wrong side of an FCA investigation, particularly in industries like healthcare, have been financially affected by the pandemic, therefore affecting their ability to pay a settlement or judgment.

The inability to pay process is outlined in the Justice Manual (formerly the United States Attorney’s Manual), which is the DOJ’s main policy manual.  Specifically, the Justice Manual states that the Attorney General and the Attorney General’s delegates have the authority to compromise civil monetary claims on behalf of the United States, and then goes on to discuss the bases for compromising such claims.  Section 4-3.200 of the Justice Manual provides that the DOJ can compromise a claim if it believes “that the full amount of a claim of the United States cannot be collected in full due to the financial condition of the debtor.”  The Justice Manual also states that “[t]here must be a real doubt as to the government’s ability to collect in full” and that “[h]ardship, which does not involve inability to pay, is not a proper basis for settlement.” 

Defendants (and defense counsel) who have gone through the DOJ’s inability to pay process have often expressed frustration with a lack of information as to how the DOJ actually determines a company’s or individual’s ability or inability to pay.  On September 4, 2020, Ethan Davis, the Acting Assistant Attorney General for the DOJ’s Civil Division, issued a memo to all DOJ civil employees entitled “Assessing an Entity’s Assertion of an Inability to Pay.”  That memo reiterates that the DOJ will consider an entity’s assertion that it is unable to pay “an otherwise appropriate amount to resolve an alleged claim or violation of the law because it lacks sufficient assets required to pay the government and meet its ordinary and necessary business and/or living expenses.”  The memo goes on to state that the entity “bears the burden of establishing its inability to pay, and why a higher payment amount would constitute an undue financial hardship, including by providing all information requested by the [Civil] Division.”  The memo then lays out certain factors that the DOJ will consider in evaluating an entity’s assertion of an inability to pay:

  • Background on current financial condition:  “The review considers the entity’s current financial condition, what gave rise to it, and projected financial earnings and expenses.”
  • Alternative sources of capital:  “The review considers an entity’s ability to borrow funds . . . or to raise capital.  . . . The Division also considers whether an entity has any claim under an insurance or indemnification agreement, or has any other type of enforceable monetary claim against a third party.”
  • Timing of payments:  “The review considers the amount that an entity can afford to pay immediately and over time, typically for a period not to exceed three to five years.”
  • Tax deductibility:  “The review takes into account the tax deductibility of any monetary payments.”
  • Contingency arrangements:  “The review considers, in certain circumstances, acceleration or escalation contingency arrangements.  Such circumstances include but are not limited to forecasts of a future sale of significant assets, a new product launch or contract, other new earnings, or growth opportunity.”
  • Collateral consequences:  “The review considers any significant adverse collateral consequences of a monetary resolution that exceeds an entity’s financial inability.  For example, the Division evaluates potential disproportionate impacts on an entity’s ability to provide support to other family members, or an entity’s operations and obligations. . . . Collateral consequences that generally are not relevant include adverse impacts on growth, future opportunities, planned or future product lines, future dividends, unvested or future executive compensation or bonuses, and planned or future hiring or retention.”
  • Third party liability:  “In appropriate cases, the Division considers whether additional entities, including family members or related parties, may be liable for the debt as a result of a fraudulent transfer, successor liability, or the Federal Priority Statute.”

While the inability to pay process can offer an opportunity for an FCA defendant to resolve a matter on favorable financial terms under the right circumstances, it is certainly not appropriate in every case, and is not a process that anyone should undergo without first carefully considering the options.  If an FCA defendant does decide to go through the inability to pay process, it is crucial that they seek the guidance of attorneys and accountants before submitting the required information to the DOJ for analysis.\

The attorneys at Chilivis Grubman represent clients of all types and sizes in connection with government investigations and False Claims litigation.  If you need assistance with such a matter, please contact us today.