A federal whistleblower lawsuit unsealed last week alleges widespread Medicare fraud at two of the nation's largest for-profit hospital companies-both relatives of the granddaddy of them all, Hospital Corporation of America.
The case is significant because it dates back to 1984, which marked the start of Medicare's prospective payment system and the use of DRGs to reimburse hospitals for inpatient care. That, in turn, sparked efforts by hospitals nationwide to figure out ways to maximize their reimbursements from the new payment system.
The lawsuit's accusations suggest that a core group of for-profit hospital chains may have gone too far.
Thomas Scully, president of the Federation of American Health Systems, which represents investor-owned hospitals, declined to comment on whether the lawsuit tarnishes the reputation of for-profit healthcare.
Richard Wade, the American Hospital Association's senior vice president for communications, said the lawsuit does cast a shadow over for-profit healthcare. "The government is using the complexity of the Medicare system and measuring for-profits up against that. All of that negative publicity definitely hurts," Wade said.
The U.S. Justice Department announced last week it had joined the civil lawsuit against HCA successors Columbia/HCA Healthcare Corp. and Quorum Health Group, both based in Nashville.
The sweeping lawsuit also names another HCA spinoff, HealthTrust-The Hospital Company, along with all hospitals the companies have owned or managed since January 1984. Columbia purchased HealthTrust in 1995.
In a press release, the Justice Department said more than 200 hospitals in at least 37 states are named as defendants in the lawsuit, but at deadline a list of those hospitals had not been released.
The hospital companies are accused of bilking Medicare of "many millions of dollars" over 14 years by inflating reimbursable costs and including unallowable claims on their annual Medicare cost reports.
Besides Medicare, the lawsuit also accuses the companies of defrauding Medicaid and the Civilian Health and Medical Program of the Uniformed Services, the federal insurance program covering members of the military and their dependents.
The whistleblower lawsuit was first filed under seal in 1993 in Montana, although it was later moved to federal court in Tampa, Fla. The government filed its first criminal indictments in 1997 against Columbia executives in federal court in Fort Myers, Fla., as part of its ongoing criminal fraud investigation of the company.
However, the lawsuit didn't become public until last week, when the Justice Department joined the case as a plaintiff and a federal judge lifted the seal of confidentiality.
The lawsuit centers around allegations that the companies prepared "reserve cost reports" and kept internal documents that identified the sham claims on the padded cost reports the companies filed with fiscal intermediaries. The suit charges that the reserve cost reports were a second, more conservative set of books the companies could use in the event of an audit.
The lawsuit is a particular blow to Quorum, which over the years has tried to fashion itself as a less-aggressive alternative to Columbia.
"We've been described as kinder, gentler and values-based, and that image hasn't changed," said James Dalton Jr., Quorum's president and chief executive officer. "We are exactly the same company we were two weeks ago, two months ago and two years ago. We're saddened that the name of the company may be damaged, but we're more strongly committed to going forward (with our business)."
Quorum owns 18 hospitals and manages 238 others.
Columbia spokesman Jeff Prescott said the company was not surprised that Quorum was also a subject of the lawsuit.
"We're not alone (in our accounting practices), and we've known that for a long time," Prescott said.
Dalton stressed that while both Quorum and Columbia were named in the civil whistleblower lawsuit, Quorum is not involved in the sweeping criminal investigation of Columbia and is not the target of a separate criminal investigation.
Last year, a series of federal raids on Columbia hospitals precipitated the resignation of Richard Scott as the company's chairman, CEO and director. Scott was replaced by Vice Chairman Thomas Frist Jr., one of HCA's founders-and an architect of HCA's corporate culture.
"I'm so proud that I came out of the HCA culture," Dalton said. "We rolled that forward through the years to form the Quorum culture with strong values. That's why we're so disappointed with this lawsuit and the allegations in there.
"We don't think they will find any evidence of wrongdoing."
Dalton did not address the specific allegations of the lawsuit, saying Quorum was still reviewing them with company attorneys.
Both Gerald Feffer, a Washington attorney representing Scott, and James Neal, a Nashville attorney representing David Vandewater, Columbia's former president, declined to comment on the unsealing of the whistleblower lawsuit.
The whistleblower, a former chief financial officer at a Quorum-managed hospital in Montana, contends Quorum used aggressive accounting methods it learned from parent HCA, now part of Columbia, said Stephen Meagher, an attorney with Phillips & Cohen in San Francisco who is representing the whistleblower.
"You've got to wonder . . . did (Columbia) sort of throw out the wrong management?" said Sheryl Skolnick, senior healthcare analyst at BancBoston Robertson Stephens in New York.
Columbia's Frist was not available for comment, a Columbia spokesman said. The company owns 313 hospitals in 32 states.
Since Frist replaced Scott at the helm of Columbia, he has publicly emphasized the importance of ethics and compliance. He also has repeatedly expressed a desire to settle with the government out of court.
An internal audit of the company disclosed no evidence of a companywide fraud scheme, Frist has said, but Columbia has moved quickly to eliminated any appearance of impropriety.
In March, company President Jack Bovender demanded collection of overdue rent payments from physicians who were leasing office space from the company (March 30, p. 8). Federal anti-kickback statutes prohibit hospitals from using any financial incentives, such as free rent, to induce patient referrals.
The company also fired Robert Bauer, the CEO of Indian Path Medical Center in Kingsport, Tenn., for allegedly inflating costs at the hospital. Bauer has filed a defamation suit against Columbia
The whistleblower in the case is James Alderson, who worked at 99-bed North Valley Hospital in Whitefish, Mont.
Alderson contends he was fired by Quorum, which took over management of the hospital in 1990, because he refused to include aggressive claims on a cost report. Alderson had worked at North Valley since 1984.
"Before Alderson came forward, the government had no idea that large for-profit hospital corporations . . . were routinely keeping two sets of cost reports and . . . work papers that explained the difference," said Meagher, his attorney.
Under the federal False Claims Act, whistleblowers like Alderson may receive between 15% and 25% of the settlement amount as a reward for tipping off the government.
Analysts have said Columbia could face the possibility of a fine as high as $1 billion. That means Alderson could collect a reward of as much as $250 million.
"He certainly knew there was a potential for financial reward, but he genuinely felt it was something the government should know about," Meagher said.
After he was fired, Alderson filed a wrongful termination lawsuit against Quorum in 1991, which was settled in 1993. Because of a confidentiality agreement, settlement details can't be disclosed, Meagher said.
Alderson, 52, now lives in Washington state and works as a financial consultant to hospitals, said Meagher, whose firm took over Alderson's lawsuit in 1995. He said Alderson once had been head of Montana's chapter of the Healthcare Financial Management Association.
Alderson, through Meagher, declined to be interviewed for this story.
Meagher said the lawsuit is buttressed by hundreds of supporting work documents supplied by Alderson and other sources.
In his lawsuit, Alderson alleges an elaborate scheme by the companies to exaggerate their annual Medicare cost reports because they knew government intermediaries didn't have the resources to audit each report.
Medicare cost reports must be filed by all facilities serving Medicare patients. The report is the provider's final claim for services provided during a year.
Alderson also alleges that the companies inflated their cost reports by improperly claiming a litany of expenses. They include:
Physician recruitment, dues and membership costs.
Telephone and television costs for patients.
Advertising and marketing costs not associated with patient care.
In case the overcharges were discovered, the companies set aside money to repay the federal government. According to the lawsuit, the companies forbade their employees and consultants from disclosing to fiscal intermediary auditors the existence of these reserve cost reports.
Columbia's Prescott acknowledged the company keeps two sets of books, but he reiterated the company's longstanding stance that it is a common industry practice to do so.
One set allows the hospitals to track all the costs for which they believe they should be reimbursed, Prescott said. The other set is an "extremely conservative" estimate of what the government will pay in reimbursements, he said.
However, not everyone keeps two sets of books. Jessica Etz, a spokeswoman for Baptist Hospital in Nashville, a local not-for-profit competitor of Columbia, said her hospital has never kept dual records.
Richard Clarke, president of the Westchester, Ill.-based Healthcare Financial Management Association, took issue with Columbia's view that many hospitals keep dual Medicare cost reports: "It's hard to even imagine where somebody would go through the effort of doing two different costs reports."
Quorum said it didn't keep two sets of books, as alleged in the lawsuit.
However, the company does follow a "required accounting practice" to create reserve accounts until the cost reports were settled. That way, if Medicare chose not to reimburse a hospital for something, the reserve account would cover the cost, Dalton said.
Meanwhile, Columbia is trying to work through another issue with the federal government involving reserve accounts.
After a routine audit completed in September 1997, the Internal Revenue Service demanded $267 million in back taxes for 1993 and 1994, saying that, among other tax issues, Columbia took improper deductions on two reserve accounts to be used in the event Medicare challenged its billing practices.
The IRS said one account, for $84 million, was held by HCA, while a second account, for $168 million, was held by Galen Health Care. Columbia acquired Galen in 1993.
In December 1997, Columbia filed a protest against the IRS' claims in U.S. Tax Court in Washington. At the time, Columbia said the deductions taken for the reserve accounts were legitimate and that keeping these accounts are routine for many healthcare companies (Jan. 5, p. 6).
No court date has been set. Columbia is trying to settle the issue before it goes to trial.
Quorum officials are eager to put the lawsuit behind them. "We'd like to settle and move on to our business," Dalton said.
Medicare cost reports are not an exact science, said Dennis Barry, an attorney with Vinson & Elkins in Washington. "There are tons of situations where the appropriate cost reporting treatment is not clear," he said. But some things are clear: "It is wrong to make claims for costs that are clearly not allowable."
Skolnick said it's typical for hospitals to keep a record of what they billed for on their cost reports and maintain a worse-case scenario accounting of what they might expect to receive.
"If you don't ask, you don't get," Skolnick said. "The law doesn't say that you can't maximize your reimbursement, it just says you can't bill illegally or commit fraud."
Dalton said that Quorum, because of the way its management fees are structured, has no financial incentive that would cause its managed hospitals to get more reimbursements than they are entitled to receive.
As part of the government's criminal investigation into the company, four Columbia executives have been charged with conspiracy to submit false cost reports to federal insurance programs, including Medicare, for 249-bed Fawcett Memorial Hospital in Port Charlotte, Fla.
Dalton doesn't expect the lawsuit to put a damper on Quorum's business. Its stock price, however, fell to $12.38 at week-end, down from its 52-week high of $33.44 reached on April 17.
-With Patricia B. Limbacher