The Moral Hazard Problem with Privatizing Public Enforcement: The Case of Pharmaceutical Fraud

60 Pages Posted: 7 Aug 2007

Abstract

This Article takes a law and economics approach to exploring some of the costs that arise when governments rely on private enforcement to accomplish the goals of public law. The focus is on qui tam enforcement under the Civil False Claims Act, because of a remarkable body of empirical data that demonstrates the expansive role private relators are playing in enforcing Medicare and Medicaid fraud and abuse laws, especially within the pharmaceutical industry. This focus is enlightening because the government, as well as private enforcers has recently targeted this industry so that emerging legal trends in private enforcement are readily evident here. Professor Matthew applies the economic concept of moral hazard - a well-recognized theory positing that one takes greater risks and exercises less care when insured than when uninsured - to re-conceptualize the costs and benefits of private enforcement. These costs are most dramatic when, the government overwhelmingly cedes control of anti-fraud enforcement to private enforcers, thereby delegating its responsibility to protect the social good. This phenomenon is called the "privatization" of public enforcement. The analysis demonstrates a fundamental divergence between private and public incentives in False Claims Act prosecutions. The availability of private enforcers creates significant opportunities for public prosecutors to over-enforce. Moreover, the reduction in short term risk causes government prosecutors to reduce the care that typically controls their exercise of prosecutorial discretion. The explanatory power of the moral hazard analysis is borne out by a review of case law that demonstrates private enforcement patterns that significantly depart from the public goals of federal anti-fraud law. The article concludes by proposing legislative language that would reform the qui tam statute, and bring public and private enforcement goals into alignment.

Keywords: qui tam, Medicare fraud, False Claims Act, pharmaceutical fraud

JEL Classification: K32, I10

Suggested Citation

Matthew, Dayna Bowen, The Moral Hazard Problem with Privatizing Public Enforcement: The Case of Pharmaceutical Fraud. University of Michigan Journal of Law Reform, Vol. 40, 2007; U of Colorado Law Legal Studies Research Paper No. 07-20. Available at SSRN: https://ssrn.com/abstract=1005207

Dayna Bowen Matthew (Contact Author)

University of Virginia School of Law ( email )

580 Massie Road
Charlottesville, VA 22903
United States

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