The plan to root out false claims was defeated by one vote with no debate in the Senate, after an extensive behind-the-scenes lobbying effort that aligned many of the state's most powerful health care interests.
The bill, modeled on laws passed in nearly half the states, would have given Maryland officials and whistle-blowers greater latitude to pursue Medicaid fraud and collect damages.
Opponents contended that the measure would have prompted frivolous lawsuits and would have added to administrative costs for health care providers, including physician practices and nursing homes. Those costs would then have been passed on to patients when rising medical costs have become a national crisis.
Senate President Thomas V. Mike Miller, who supported the bill, said board chairmen at two hospitals in his district urged him to reject the legislation. "It's a huge lobbying contingent - the doctors, the hospitals, the drug companies - all fighting vigorously to keep this from becoming law," he said after the vote.
O'Malley put his weight behind the legislation this year and crafted his budget proposal to include $22 million in additional collections from providers who defraud Medicaid, a state-federal program that provides health care to lower-income residents.
"We are obviously disappointed," said O'Malley spokesman Shaun Adamec. "In this economy, we would expect there would be more support for eliminating fraud and waste."
But critics said that establishing such targets would encourage prosecutors to bring marginal cases to achieve a financial goal.
"If we're having trouble chasing Medicaid fraud ... this is not the solution," said Jonathan Diesenhaus, an attorney representing Pharmaceutical Research and Manufacturers of America, an industry group. The Maryland proposal, he said, would "cost money and create improper incentives for prosecutors."
Miller said his chamber might reconsider if the governor lines up the votes needed for passage. The administration was scrambling late Tuesday to persuade several senators to switch their votes. Among those likely to be lobbied is Sen. C. Anthony Muse, a Prince George's County Democrat who voted for the bill in committee but against it on the floor.
Muse said he changed his mind after receiving several dozen phone calls from hospital workers in his district who raised concerns about the economic impact of the legislation. "It may be a good bill for a different day," he said. "When they are saying this could lead to massive layoffs, that's something people don't want to hear right now."
The House of Delegates has yet to consider the measure. A similar proposal died last year in the Senate.
O'Malley's administration had argued that this is the year that lawmakers should approve the proposal, considering the state's financial straits. By some estimates, 10 percent of Medicaid dollars are lost to fraud, and state officials note that since the federal government enacted similar legislation in 1986, it has recouped more than $16 billion.
But state officials say the federal act is limited and the government can pursue only the largest violators. They note that there is a 10-year backlog of cases. The bill would have enabled state officials to pursue smaller cases that would otherwise fall by the wayside; they point to a $650 million national settlement with Merck & Co. in a case that had languished on the federal level until it was revived by Nevada officials.
"States that have this have been able to put taxpayer money back into the budget as a result of unscrupulous entities taking advantage of the Medicaid program," said Thomas Russell, inspector general with the Maryland Department of Health and Mental Hygiene.
Under the bill, Maryland officials would have been able to collect civil penalties of up to $10,000 and triple damages; now they can penalize perpetrators only for the amount of the fraud. The bill also would have allowed whistle-blowers to file suit on behalf of the state.
Sen. Alex X. Mooney, a Frederick County Republican who voted against the bill, said he worried about creating an opening for disgruntled employees to file unwarranted lawsuits against doctors and hospitals.
Sen. John C. Astle, an Anne Arundel County Democrat, said he voted against the bill because he believes the state already has the tools to pursue Medicaid fraud. "There was a lot of lobbying," he acknowledged.
A number of groups lined up in opposition, including the Maryland Chamber of Commerce, the Maryland Hospital Association and MedChi, the state medical society.
Nancy Fiedler of the hospital association that the bill could have made it harder for hospitals to keep physicians in Maryland and would have added litigation costs to a health care system already straining financially. Sixty percent of Maryland hospitals lost money in the fourth quarter of 2008, she said.
Fiedler said her group doesn't believe that projected savings would have materialized.
James Brochin (D); Joan Carter Conway (D); Ulysses Currie (D); George Della Jr.(D); Roy Dyson (D); Jennie Forehand (D); Brian Frosh (D); Rob Garagiola (D); Lisa Gladden (D); David Harrington (D); Verna Jones (D); Delores Kelley (D); Nancy King (D); Kathy Klausmeier (D); Mike Lenett (D); Richard Madaleno (D); Thomas V. Mike Miller (D); Thomas "Mac" Middleton (D); Paul Pinsky (D); Jamie Raskin (D); James Robey (D); James Rosapepe (D); Norman Stone (D)
John Astle (D); David Brinkley (R); Richard Colburn (R); James E DeGrange Sr. (D); George Edwards (R); Nathaniel Exum (D); Barry Glassman (R); Janet Greenip (R); Larry Haines (R); Andy Harris (R); Nancy Jacobs (R); Ed Kasemeyer (D); Allan Kittleman (R); Rona Kramer (D); Nathaniel McFadden (D); Alex Mooney (R); Don Munson (R); C. Anthony Muse (D); Douglas J.J. Peters (D); E.J. Pipkin (R); Catherine Pugh (D); Bryan Simonaire (R); J. Lowell Stoltzfus (R); Bobby A. Zirkin (D)