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

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 analysis focuses on qui tam enforcement under the Civil False Claims Act, because a remarkable body of empirical data demonstrates the expansive role private qui tam relators are playing in enforcing Medicare and Medicaid fraud and abuse laws. The Article further focuses on the application of these laws to the pharmaceutical industry. This focus is enlightening because the Government, as well as private enforcers, have recently targeted this industry so that emerging legal trends in private enforcement are readily evident. The economic concept of moral hazard-a well-recognized theory that a person takes more risks and exercises less care when insured than she would if uninsured-is applied to reconceptualize the costs and benefits of private enforcement. These costs are most dramatic when, as in the case of pharmaceutical fraud, the government overwhelmingly cedes to private enforcers 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 overenforce. 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.