When U.S. District Judge John Lungstrum last month opened the federal criminal trial of seven Kansas City hospital executives, physicians and lawyers charged with running an illegal patients-for-cash scam, more than the defendants' fate was at issue.
What's also on trial in Kansas City, Kan., is the nature of the business relationships the hospital industry has formed since the early 1980s, when the federal government began making massive changes in the way Medicare and Medicaid pay providers for care.
Was the patient referral scheme that the defendants came up with a reasonable response to those changes or a novel way to make money? And what does the case say about the strategies that providers have come up with since?
The alleged conspiracy these defendants are accused of dreaming up started in 1984. The anti-kickback law and Medicare's prospective payment system were new, and regulations to guide providers were evolving. These defendants kept doing the same thing for 10 years until the government lowered the boom and the arrangement collapsed.
The prosecution presents the seven defendants as fully aware that what they were doing violated the law. It alleges that three executives at Baptist Medical Center-Dan Anderson, Ronald Keel and Dennis McClatchey-conspired with two doctors, Robert LaHue, D.O., and Ronald LaHue, D.O., to pay for referrals of nursing home patients.
The LaHues ran a practice called the Blue Valley Medical Group that specialized in geriatric care. Under an arrangement with Baptist, the LaHues referred nursing home patients to the hospital for care. The hospital paid each brother $75,000 a year for consulting services. Whether the money was for legitimate medical work or solely for patient referrals is the crux of the case (See defendants box and chronology of the case).
The trial is expected to last until mid-March.
The hospital executives and the doctors say they consulted lawyers Ruth Lehr and Mark Thompson to help them stay within the kickback laws. They say they followed the lawyers' advice.
Four other hospitals eventually joined the patient-care system.
Strategy or scam? The defendants describe their system of dealings among doctors, nursing homes and hospitals as a new model of patient care.
The government describes it as bribery, pure and simple, which had nothing to do with patients' best interests.
But even if the prosecution has evidence that makes this a slam-dunk case, as some suspect, many people in healthcare remember the era as a time of genuine confusion and anxiety.
With one hand, the federal government was introducing fixed payments through DRGs. With the other, it was passing new fraud-and-abuse statutes that few people knew how to interpret.
Under the new Medicare PPS, providers across the country-assisted by creative consultants and attorneys-sought ways to replace patients and revenues that would be lost.
"Looking back in retrospect, that was the turning point in volume increases," said Steve Hatch, a partner in Arista Associates, a consulting firm in Northbrook, Ill.
Both admissions and lengths of stay started to decline, an unprecedented change. "So you had an emptying out of hospitals and a frantic rush to find ways to maintain census," Hatch said. Unfortunately, that turned out to be the wrong strategy, he added. Instead, they should have shifted resources to ambulatory care.
At the same time, the fraud-and-abuse statutes were new. "Depending on which attorney you talked to, you got very different opinions as to what the import of these statutes were," Hatch said.
John Russell, now retired as president of the Pennsylvania hospital association, recalled: "It seemed like it was unique every year. They changed the rules; we put on educational programs; we tried to get people to comply."
But if you got into a tough situation, he said, "you got a fair hearing. You might have to pay back some money. We didn't have a lot of people going to court. It didn't seem to be a punitive time."
On advice of counsel. The defendants in the Kansas City case say all those involved in the deal were relying on their attorneys to keep them within the law.
But one reason this case is attracting attention nationally is that the government has put the attorneys on the hook for their advice.
Said healthcare attorney Margaret Manning, of McDermott Will & Emory in Los Angeles: "If what happened was, those attorneys took their best guess at what the rules were and what kind of business could be conducted within them, and then 10 years later, the government prosecutes them under a dramatically different view of what the law means, and under a different enforcement philosophy-and it's dogged-then that's not fair."
The case will hinge on whether the 14 jurors believe the hospital was simply following a sensible business strategy that appeared legal at the time, say outside lawyers who've been following it closely. That, in turn, could depend on whether the evidence proves the two doctors delivered the services they promised.
In her opening statement, Assistant U.S. Attorney Tanya Treadway called the LaHues' patient-care system "a good idea derailed by greed." The doctors didn't do anything for their annual payments except deliver patients, she said.
Baptist and the other four hospitals that contracted with the LaHues sought to disguise the payments for patients as consulting fees, according to the government. The LaHues netted $2.1 million over the 10-year life of the scheme, she said. Baptist received $42 million in Medicare reimbursements over that time for Blue Valley's patients.
In her remarks, Treadway painted a portrait of loathsome dealings between the doctors and the hospitals. "We (will) establish that the hospitals get the patients by being highest bidder," she said. Her allegations included:
* The patient's choice was being totally ignored.
* Doctors and hospitals were motivated more by money than by the patients' needs.
* Hospitals paid off the LaHues "to guarantee an income stream from sick, elderly, frail Medicare patients."
* The lawyers helped "a significant client cover up dirty deals."
However, a flock of expert witnesses are expected to testify that what Baptist and the LaHues created was entirely on the up-and-up. They're expected to portray the system as a forward-looking way to move medical care down the pipeline to nursing home patients.
One expert, John Paul Blank, M.D., president and chief executive officer of Provider Services Group in Minneapolis, will testify that what Baptist and Blue Valley had set up was "essentially the same as other programs approved under Medicare today," according to the list of expert witnesses, which summarizes what experts will say. Blank will say that contemporary business structures in the medical industry, such as hiring consulting firms, employing doctors, acquiring medical practices, or forming joint ventures, are substantively similar to the contracts in the Kansas City case.
An expert in family medicine, Larry Johnson, M.D., of the University of Cincinnati, plans to testify that most of the services Blue Valley provided "above and beyond the scope of nursing home medical director duties, and exceeded the levels of services provided by other geriatricians in the normal course of care."
In pretrial filings, Johnson calls the Blue Valley system "a very innovative geriatric program that provided high quality of care to frail and elderly patients while avoiding and minimizing hospital stays."
Cynthia Polich, a consultant on geriatric issues and former president of InterStudy in Minnesota, is expected to talk about how hospitals responded to the introduction of Medicare PPS "and why . . . hospitals looked for ways to manage care for the geriatric patient population."
Congress amended the Medicare and Medicaid fraud-and-abuse statutes in 1977 by making it illegal to pay or solicit any form of remuneration to induce the referral of Medicare or Medicaid business. In 1987, the government made violating the kickback provisions a civil offense as well as a criminal one.
And from the beginning, according to Manning, the kickback provisions were difficult to interpret.
"The real problem with anti-kickback (law) is, on its face, it prohibits every kind of relationship between a provider, a hospital and a physician," she said. "You can't offer, you can't solicit, you can't pay."
Since then, the government has published a series of "safe harbor" regulations that say what isn't a kickback. And over the same period, various courts have offered varying definitions of what constitutes an illegal kickback.
The Kansas City defendants are unified in their claims that the LaHues' system delivered excellent care, and at a savings to Medicare. Charles German, McClatchey's attorney, said in opening statements that "what the LaHues did for this program was provide expertise and leadership, over and above a typical doctor. They weren't being paid for referring patients to the hospital. They were required to be there as a resource, and they were."
The defense says that by working with the LaHues, Baptist was carrying out a strategic plan commissioned in 1983 that recommended focusing on elderly patients.
Following the logic of the defense, that, too, could be seen as a valid business strategy ahead of its time. Today, Regina Herzlinger, a professor at the Harvard Business School, argues that facilities that specialize can achieve better results at a lower cost. She calls them "focused factories."
But the case has gone forward for good reasons-reasons which, from a layman's perspective, look very damaging.
* Thomas Eckerd, a former Baptist employee, is expected to testify for the prosecution that the LaHues' operation was a scam. In exchange for his cooperation, Eckerd got a reduced sentence in federal prison. He has already served his five-month term.
* Baptist Medical Center settled the government's allegations by paying a $17.5 million fine in September 1997. It did not dispute the government's case.
* Bethany Medical Center in Kansas City, Kan., also paid a fine of $1.2 million to settle its involvement in the patient-referral program.
And then there is Sarah Grim, who was director of alternative-care services at Baptist in 1984 and 1985.
Grim called Modern Healthcare, saying: "Everyone was aware it was a scam at the time. I put the long-range plan together for that hospital, and the LaHues were no part of it."
Grim, who now heads Missouri's peer review organization, has been testifying for the government. Baptist hired her to implement the strategic plan that called for concentrating on geriatric patients.
But the strategic plan was a little different from how it's been characterized, she said. The plan called for concentrating on the "healthy, wealthy elderly, who had discretionary income-hearts, hips, strokes-who needed episodic care," she remembered, not the frail elderly likely to have poor outcomes.
"In the two years I was there (at Baptist), nobody talked to me about higher (quality) patient care," she said. "People talked only about patient numbers and revenues."