The Whistleblowing Industry
It's a growth sector that's dragging us down.


Stephen Moore

By Stephen Moore and Phil Kerpen

The Office of Management and Budget recently found that the Medicare program made $21.7 billion in improper payments to doctors, hospitals, and insurers in 2004. Medicaid, with its overlapping state and federal roles, also has rampant fraudulent claims. Unfortunately, the government’s efforts at combating erroneous payments are pitifully ineffective, thus encouraging more fraud, fueling medical inflation, and ripping off tens of billions of dollars from taxpayers.

The primary vehicle for attacking fraud in government contracting is the False Claims Act, legislation that dates back to the Civil War, when it was used to prevent defense contractors from selling the government bad gunpowder. The law, substantially beefed up in 1986, authorizes workers, i.e., whistleblowers, to file lawsuits against their employers on behalf of the government. The Department of Justice may then join in the lawsuit and initiate a fraud investigation.

This is all well and good except for the fact that now the law allows whistleblowers to reap mountainous windfall rewards of 15 to 30 percent of the eventual financial penalty or settlement. This allows whistleblowers to enrich themselves with tens of millions in reward money. Two of the most famous jackpot award winners in recent years were David Franklin, who was paid $24.6 million for blowing the whistle on Pfizer, and Doug Durand, recently profiled in Forbes, who has received a whopping $173 million for doing the same to two different medical companies.

Whistleblowing has now become a rapid growth industry in America, with employees, enticed by the quick route to fabulous wealth, becoming parasitic on-site snoopers against their employers. Worse yet, these super-jackpot rewards are in many cases having the exact opposite effect than the one hoped for: They are preventing companies from early detection and correction of erroneous billing practices.

Here’s why: There’s a powerful incentive for an employee who uncovers improprieties, which may be inadvertent or unknown to upper management, to secretly collect evidence and then go to a lawyer, rather than stopping the fraud early and inside the company. Whistleblowers often quietly collect evidence for months while fraud continues.

Lawyers are also getting rich off the whistleblower awards and can walk away with tens of millions of dollars for each successful case. The U.S. attorneys make money for the Department of Justice with successful prosecutions and fines, so they doggedly pursue the charges, fair or not. And since contractors are essentially barred from any further federal grants or contracts if they are found guilty of a fraud charge, even innocent firms often rush to settle–writing the settlement penalty off as a cost of doing business with Uncle Sam–rather than face even the remote prospect of a judgment that puts them out of business. The scales of justice have become heavily weighted against the accused, rather than the accuser.

The Bush administration has tried to curb some of the excesses of the False Claims Act by requiring whistleblowers to agree to moderate curbs on their awards; not surprisingly that effort has failed.

We believe there are a number of steps that should be taken by Congress to reform the False Claims Act to protect the accused, lower the huge legal bills, and avoid fraud before it happens. First, to be eligible for an award, a whistleblower should be required to have made documented efforts to remedy rather than perpetuate fraud within the company. Second, legal fees should be capped at $1 million. And finally, when money is recovered, it should go to the agency that was defrauded–usually Medicare and Medicaid–and not to the Justice Department.

In many ways the federal government is plagued with worse financial mismanagement than Enron or WorldCom ever exhibited. Financial fraud, which is a form of theft from taxpayers, must be swiftly and severely penalized. Whistleblowers should be rewarded for exposing these financial scams. But Congress should realize that ultimately the jackpot justice of eight- and even nine-figure dollar awards come out of the pockets of taxpayers–precisely the people the whistleblowers are supposed to be protecting.

Stephen Moore is president of the Free Enterprise Fund and a senior fellow at the Cato Institute. Phil Kerpen is policy director of the Free Enterprise Fund.