They used to call the state "hanging Kansas." Anybody who stole a few head of cattle was strung up forthwith.
In 150 years, the state hasn't changed much. On April 5, a jury of 12 Kansans handed the healthcare equivalent of a noose to four defendants, including two hospital executives, accused of paying and taking kickbacks for referrals of Medicare patients.
The jury's guilty verdict ended one of the largest, most complicated and longest investigations of Medicare fraud in the country. The case has sent shock waves throughout the hospital industry and the healthcare legal community.
As a result of the case and its outcome, many hospital executives are expected to review their contractual relationships with referring physicians. And hospital trade groups are cautioning hospitals to avoid a similar fate by instituting sufficient legal safeguards.
Richard Wade, the American Hospital Association's senior adviser for communications, said the verdict will produce "newspaper clippings (that) will go to boards and executive staffs and legal counsel to show that all the time and money they spend on legal counsel for negotiating arrangements between doctors and hospitals is worth it."
Many observers have viewed the investigation, prosecution and convictions as a legal referendum on the healthcare industry's response to the financial incentives created by Medicare's prospective payment system (Feb. 15, p. 2).
"This is one of the most significant fraud verdicts in a long time," said Jackie Williams, U.S. attorney for Kansas. "All the hospitals in the country will and should take a look at what happened in Kansas City, Kan. We intend to go forward on all healthcare fraud cases that come to our attention."
The government's lawsuit ended with the convictions of two former executives at 315-bed Baptist Medical Center in Kansas City, Mo.-Chief Executive Officer Dan Anderson and Chief Operating Officer Dennis McClatchey. They were found guilty on both charges against them: participating in a conspiracy to defraud the federal government and paying remunerations for Medicare patients in violation of the anti-kickback act.
The verdict marks the first time a hospital CEO has been convicted of criminally violating the federal anti-kickback statutes.
Two other defendants, Robert LaHue, D.O., and his brother Ronald LaHue, D.O., were convicted of the same conspiracy and bribery charges plus other counts of soliciting and receiving bribes.
Robert LaHue was convicted of soliciting payments from five hospitals: Baptist; Alexian Brothers Hospital in St. Louis; Bethany Medical Center in Kansas City, Kan.; Deaconess Medical Center, now called Deaconess West Hospital, in St. Louis; Liberty (Mo.) Hospital and St. Joseph Hospital in Wichita, Kan.
Baptist and Bethany previously paid fines totaling nearly $20 million to settle their involvement in the kickback scheme (See chronology). The other three hospitals are under investigation.
Ronald LaHue was found not guilty of soliciting bribes from Deaconess and St. Joseph.
The defendants will try to get the verdict set aside, their lawyers said. If that fails, they will appeal.
Ronald Keel, a former Baptist vice president, was the only one of five defendants who was not convicted, but he did not emerge untarnished. The jury found that he was part of the conspiracy but withdrew from it when he changed jobs in 1991, long enough ago that the statute of limitations on the offense had expired.
Two former defendants, Ruth Lehr and Mark Thompson, lawyers who advised Baptist on the relationship with the LaHues, were acquitted March 9 by U.S. District Judge John Lungstrum when the prosecution ended its case. Lungstrum found that the government's evidence did not support the indictments.
Although the four convicted defendants haven't been sentenced, if their convictions stand, they are expected to spend substantial time in prison and pay large fines.
Anderson and McClatchey face a maximum five years in prison without the possibility of parole for each of the two counts. Robert LaHue faces a total of 40 years in prison, and Ronald LaHue, 25 years, according to the U.S. Justice Department. Sentencing is scheduled for Aug. 16.
U.S. Attorney Williams praised prosecuting attorneys Tanya Treadway and William Bowne, and FBI agents for providing a "textbook example of how to run a complex investigation and prosecution."
Williams said he believes that most healthcare providers are honest and do not engage in healthcare fraud. "It's our duty to seek out the small percentage that are motivated by greed," he said.
The LaHues, who ran a geriatric-care practice called the Blue Valley Medical Group, and the Baptist executives first discussed doing business in 1984, just as the Medicare PPS was introduced. The PPS, which for the first time fixed Medicare payments in advance of treatment, prompted hospitals to find ways to replace revenues they anticipated losing.
Baptist said it partnered with Blue Valley because it wanted to create a specialty in geriatric care, and it found a natural business and clinical partner in the two nursing home medical directors. Together, they created what they called a "continuum of care" for a class of patients that had trouble getting medical attention. The defendants argued that the hospital's payments to the LaHues were proper compensation for an integrated program of care, not bribes for patients.
The defendants realized that the FBI was investigating them in 1992. They were indicted in 1997 and 1998. The trial began Jan. 25 and lasted almost nine weeks in U.S. District Court in Kansas City, Kan. The investigation, prosecution and defense easily cost more than the $1.2 million the LaHues are accused of pocketing from Baptist from 1985 to 1995.
Prosecutors focused like a rifle barrel on their central allegation: Baptist Medical Center and other hospitals paid the LaHues to refer nursing home patients in their care to those hospitals. Those payments violated the anti-kickback provisions of Medicare and Medicaid fraud and abuse statutes, which bar any form of remuneration to induce the referral of Medicare or Medicaid patients. Such violations can be found to be civil or criminal.
The case hinged on whether Baptist's payments of $75,000 per year to each LaHue brother were for legitimate consulting services or were out-and-out bribes. The defense argued that Baptist paid the doctors to set up a genuine outpatient-care program under the auspices of the LaHues' Blue Valley Medical Group.
Altogether, the five hospitals collected more than $60 million in Medicare reimbursements for treating patients referred through the Blue Valley Medical Group, the government said. Baptist received $42 million.
The defendants and their lawyers were visibly stunned when the verdicts were read, courtroom witnesses said. In addition to professing their innocence, the defendants had publicly expressed confidence that they would be found not guilty.
Reacting to the verdict, Margaret McClatchey, Dennis McClatchey's wife, said, "We're just devastated."
Anderson released this statement through his lawyer: "Although I certainly respect the jury's service, I disagree with their finding that I am guilty. The Blue Valley program was innovative (and) unique and benefited to a high degree nursing home patients, Medicare, Medicaid and Baptist Medical Center."
But in her closing argument, Treadway had hammered home that the law isn't interested in whether the program was well run, benefited patients or saved Medicare money. She noted that the law clearly states that providers cannot pay for patient referrals. The jury apparently found that documents and testimony contained enough evidence to support the government's conclusion.
The verdict also surprised observers in the Kansas City healthcare community. Terry Myers, chairman of the board of North Kansas City Hospital, which is affiliated with Health Midwest and shares equity ownership in a health plan, said, "Knowing those individuals, knowing Health Midwest, it's hard for me to believe they would knowingly enter into a criminal activity."
Health Midwest is a 14-hospital system started in 1991 by the merger of Baptist with 491-bed Research Medical Center in Kansas City, Mo.
Health Midwest paid Anderson's and McClatchey's legal costs, which it has not disclosed, and has the option to require repayment. The system has not determined whether it will do so, representatives said.
Health Midwest said the system was "extremely saddened for the individuals and their families."
"I'm conflicted right now," Keel said the day after he received his not-guilty verdict. "I feel like a soldier in the war. His platoon is shot up, and he's the only one who comes back."
Keel resigned from his development job at Hillcrest HealthCare System in Tulsa, Okla., in July 1998, just before being indicted. He said he anticipates re-entering the work force and will consider his options.
When told of the verdict, Lehr, the onetime defendant, said: "I am absolutely staggered. I thought they would be found not guilty. I feel terrible."
Anderson said he has instructed his lawyers "to use all available legal means to overturn this verdict, including the filing of a motion for a new trial, for judgment of acquittal and any appeals if necessary."
Anderson's lawyer, James Wyrsch, said he will file a motion to set aside the verdict and request a new trial. "Insufficiency of the evidence would be one ground, as to intent," Wyrsch said. "Initially it would go to the trial court. If we're not successful there, we'll go to the court of appeals, the 10th Circuit in Denver."
Ronald LaHue's lawyer, James Eisenbrandt, said he will challenge one jury instruction, called the one-purpose test. The judge told the jury that if any remuneration was made for the purpose of eliciting patient referrals, even if other purposes were involved in the referrals, the anti-kickback law was broken. However, another federal appeals court has ruled that the law is broken only when remuneration was made for the sole or predominant purpose of eliciting patient referrals, Eisenbrandt said. The defendants think the second legal interpretation should have been used.
Robert LaHue's lawyer, Bruce Houdek, said he will file post-trial motions by May 12. "We will renew our motion for judgment of acquittal," he said. "We will also have arguments that the instructions were defective and that the judge made errors in admission of evidence, and request a new trial."
The AHA wasn't surprised by the jury's decision, Wade said. "The view of our counsel was the hospital had not done enough on the front end setting this thing up. The law is vague. There are all kinds of traps in the Medicare anti-kickback statutes. The real burden falls on boards of trustees to make sure this is all proper."
A prosecution like this one, Wade added, won't encourage hospitals and doctors to develop the "seamless web of care" the government says it wants.