Federal fraud cases begun by private citizens against drugmakers, insurers and hospitals will probably surge past last year’s record numbers, driven by incentives in the new health law.

Last year, federal officials began investigations of 280 cases as a result of whistleblower allegations, contributing to a record $1.4 billion in judgments, according to the U.S. Justice Department. The overhaul, along with revisions to the whistleblower laws made in May 2009, adds new layers of risk for companies, said Christopher A. Myers, a health-care attorney with Holland & Knight LLP in McLean, Virginia.

The health overhaul makes it easier for citizens to be rewarded for uncovering swindles, cuts the time before medical providers can be accused of withholding overpayments from Medicare and Medicaid, and includes pages of complicated new rules that can be broken.

“If you didn’t have a strong compliance program before this, you were crazy,” Myers said in a telephone interview. “If you don’t have one now, you’re really crazy.”

Since 1999, the amount recovered as the result of health- care cases has more than tripled from $407 million, and 24 of the 25 largest judgments overall are linked to the industry, according to figures from Taxpayers Against Fraud, a Washington group funded by whistleblowers and plaintiffs’ lawyers.

These represent instances where the U.S. joined cases under the False Claims Act, the Civil War-era statute that arose from the sale of sick mules, spoiled food and defective weapons to the Union Army.

Pfizer’s Settlement

The figures supplied by the Justice Department don’t include the record $1 billion paid by Pfizer Inc., the world’s largest drugmaker, to settle an investigation into its promotion of the painkiller Bextra and three other medicines for uses not approved by the Food and Drug Administration. The agreement, though announced before the Sept. 30 close of the fiscal year, but didn’t count toward the 2009 figures. A related criminal settlement added $1.3 billion to the value of the case.

The second-largest judgment, for $900 million, was with the hospital chain Tenet Healthcare Corp. in 2006, after an investigation into its Medicare billing.

With new penalties of as much as $11,000 for each illegal transaction -- a single bogus bill to the government counts as one -- such liabilities can mount.

“Generally, the trend is up, up, up and more, more, more,” said Erika A. Kelton, a Washington-based attorney for Phillips & Cohen LLP. She represented John Kopchinski, a former Pfizer salesman, in a so-called qui tam, or whistleblower, lawsuit against the New York-based company that yielded the $1 billion settlement.

‘Lottery Mentality’

Business groups expect the incentives to spawn more whistleblower actions.

“You can’t stop someone from having that lottery mentality,” said Matthew Webb, senior vice president at the U.S. Chamber of Commerce’s Institute for Legal Reform, in a telephone interview. “This is definitely a cost of doing business if you’re doing anything related to government contracts.”

Ken Johnson, senior vice president for the Pharmaceutical Research and Manufacturers of America, a Washington trade group, said in a statement the industry will “continue to advocate for balance between appropriate enforcement and preventing unnecessary litigation that provides no new information to the government.”

The 2009 changes to the False Claims Act make companies liable if they ignored government overpayments. Amendments made subcontractors and grant recipients subject to the law, and provided agencies with more powers to share information with each other about secret investigations.

Changes in Legislation

The health-care overhaul, meanwhile, lets whistleblowers file lawsuits even if they weren’t the original source of information about false claims. That avoids limitations set by a U.S. Supreme Court decision issued in March.

Moreover, the legislation permits whistleblowers to file lawsuits based on public disclosures in state or local reports and sets a 60-day time limit for insurers, hospitals, drugmakers and other health-care providers to return payments. Failure to meet the deadline exposes them to whistleblower complaints.

Myers predicted the changes will increase costs even for companies that are cleared during investigations. He said Vangent Inc., a closely held Medicare contractor in Arlington, Virginia, spent $800,000 defending itself against an accusation of Medicare fraud.

The allegations against the company, owned by Veritas Capital Fund LP in New York, were made by a compliance officer who was later indicted on charges of lying about his criminal record, Myers said.

To contact the reporter on this story: Frank Bass in Washington at fbass1@bloomberg.net.

• Bloomberg News