On a sunny, spring Monday in 1989, five weeks into his job as president and chief executive officer at Simi Valley (Calif.) Community Hospital, Alan Rice was jolted out of his morning calm.
"As I started that morning, two badged and holstered government agents walked into my office and confronted me with a subpoena and litany of accusations dating back 10 years," Rice recalls.
Rice, 53, says the visit from HHS investigators was a traumatic event.
"They were polite gentlemen," he remembers. "It was a collaborative and cooperative process. But it wasn't pleasant."
In 1992, despite confidence in the legality of their position, officials of the 223-bed hospital settled kickback and false claims charges with HHS' inspector general's office for $50,000, without admitting to violating any laws.
Rice says avoiding the disruption to hospital operations, the extensive data collection and the unfavorable publicity were prime motivators to settle, but the exorbitant penalties that could be imposed under the federal False Claims Act always weighed heavily on his mind.
"The threat of exclusion from Medicare and the big fines were some of the variables we considered," Rice says. "Every trial is fraught with risks that no one likes to plan for if they can avoid."
Simi Valley became only the second hospital since 1983 to settle charges that it violated federal anti-kickback laws. And its experience highlights the power of a recent trend in federal healthcare fraud enforcement. The government, armed with more fraud-fighting personnel and bigger budgets, is pairing beefed-up kickback laws with the Civil War-era False Claims Act to hit providers with a one-two legal punch that few can overcome.
Getting tough. In 1987, Congress revised the federal Medicare and Medicaid anti-kickback laws, adding civil violations to what was previously a criminal offense. Federal prosecutors had not enforced the 1972 statutes, and frustrated congressional leaders hoped the new amendment would make it easier for fraud fighters to punish providers who improperly steered patients to a service or facility for financial gain.
Yet in the eight years after passage of the amendment, only four hospitals or hospital systems settled civil anti-kickback charges.
Since 1996, however, another 11 hospitals and healthcare systems resolved charges that they had engaged in illegal referrals-for-cash schemes.
Two major factors behind the mushrooming number of kickback cases are whistleblowers and use of the False Claims Act.
The increased numbers of qui tam, or whistleblower, lawsuits filed under the act are giving federal prosecutors more information about fraud to take to court. And experts agree that whistleblowers are driving the increased number of settlements.
D. McCarty "Mac" Thornton, chief counsel to the inspector general, says whistleblowers serve a valuable role because "they bring our attention to unlawful practices that we would not have otherwise found out about."
He says that 282 healthcare whistleblower suits were filed in fiscal 1998; 44 of those contained kickback allegations.
Making it simple. Another factor is that kickback allegations filed under the False Claims Act are simpler to prosecute than those filed under anti-kickback statutes. Lawyers say the standards of proof aren't as high, and the opportunities for large civil recoveries are huge. Negotiating settlements under the threat of exclusion from Medicare and Medicaid is powerful, legal experts agree.
In addition, money and staffing have increased at the U.S. Justice Department and HHS' inspector general's office. James Sheehan, who heads the civil division of the U.S. attorney's office in Philadelphia, says government agents and prosecutors have been trained in healthcare fraud kickback schemes.
"A lot of people who prosecuted financial fraud in the '80s moved to healthcare fraud in the '90s," explains Sheehan. "In the last few years we've seen growing numbers of agents with greater sophistication to handle these cases."
He says some of the investigators and prosecutors who had been tied up for several years pursuing clinical laboratory kickback cases are now freed up and fortified with the specialized expertise to pursue kickback schemes in other areas.
The new approach. Prosecutors and whistleblower lawyers view the old False Claims Act as a new way of bringing kickback charges.
"The kickback statute had criminal fines, but no possibility for civil recoveries until 1997 (under the federal Balanced Budget Act)," explains Thornton. "So the False Claims Act was brought in. The legal basis for all of these was the argument that claims generated by virtue of illegal referrals were the fruit of a poison tree and are, as such, false, even if the service was actually rendered and done so competently. When a service is generated by an illegal kickback scheme, it is false because it is not generated according to federal law."
And pursuing kickbacks under the False Claims Act is more lucrative than pursuing them under the anti-kickback laws alone, both for the government and the whistleblowers, known as relators. The False Claims Act entitles the government to seek the much higher civil monetary penalties of $5,000 to $10,000 per alleged false claim and to triple the amount of total damages. But the ultimate weapon wielded against accused providers is the threat of exclusion from Medicare and Medicaid.
Michael Ruggio, a former Justice Department lawyer now practicing healthcare fraud law with the Washington firm Jenkens & Gilchrist, says the False Claims Act/anti-kickback laws provide a formidable combination.
"They pack a lot of punch," Ruggio says. "You attach it (the anti-kickback law) to the False Claims Act because it augments what you've got."
David Matyas, a health lawyer specializing in fraud and abuse with the Washington firm Epstein, Becker & Green, says the impact on providers' lives, careers and futures can be overwhelming.
Matyas, who co-authored the American Health Lawyers Association textbook Legal Issues in Healthcare Fraud and Abuse: Navigating the Uncertainties, says: "You can go to jail. You can pay big monetary penalties, and you can be excluded from federal healthcare programs. With those threats hanging over your head from such a confusing statute, anyone would be concerned."
Matyas says hospitals accused of kickback violations must think seriously about what it will take to fight a combination False Claims Act/kickback charge. That is why most settle.
The fear factor. Hospital executives, knowing that the feds and whistleblowers are coupling the false claims and kickback laws-and seeing a doubling in the number of settlements and the adverse publicity stirred by high-profile cases-are reassessing the structure of their financial arrangements with physicians.
Few hospital executives who signed kickback settlement agreements with the government would return phone calls to discuss the experience, let alone comment on the allegations or the process.
Mary Grealy, chief Washington counsel at the American Hospital Association, says that while the kickback laws might trouble hospital executives, the False Claims Act terrifies them.
"It's a giant, giant hammer," Grealy says. "The penalties are extraordinary." Referring to the criminal conviction of two executives from Baptist Health Care System in Kansas City, Kan., she says, "Obviously the Kansas City case concerns them. They're wondering what they need to be looking at and are re-examining transactions with physicians."
Anne Murphy, vice president of health law for the American Medical Association, says deals are getting more scrutiny for potential anti-kickback violations.
"I think that among most physicians there is a very clear sense that the anti-kickback laws, the enforcement associated with those laws, and the potential penalties attached are increasing their exposure."
Murky laws. From their inception, anti-kickback laws have been problematic, both to prosecutors and defense attorneys.
Grealy says the anti-kickback statutes remain vague and broad, which serves the government's interest, allowing it to cast as wide an enforcement net as possible. But providers, she says, live and do business in the real world and seek narrow, practical laws with simple, easy-to-follow rules.
The anti-kickback laws and even the definition of kickbacks have evolved since the laws' introduction to the healthcare industry in 1972. The intent was to bar hospitals, physicians and other healthcare providers from paying for patient referrals and passing those costs on to government insurance programs.
But the original statute did not define kickback, although it categorized it as a criminal misdemeanor punishable by a maximum one-year prison sentence and a $10,000 fine. Nor did it require prosecutors to prove intent for a kickback to constitute a crime.
A 1977 revision prohibited "any remuneration, directly or indirectly, overtly or covertly, in cash or in kind," tightening the definition and elevating the offense to a felony with a maximum prison sentence of five years and fines of up to $25,000.
In 1980 the concept of intent, "knowingly or willfully" violating the law, was added. And in 1987 the law added a civil component, bringing in the HHS inspector general. In an attempt to clarify legal behavior, in 1991 the inspector general issued 11 "safe harbor" regulations. And in 1998 the inspector general's office began issuing advisory opinions on specific transaction questions, simplifying what to some is still a murky area.
Case law on kickbacks isn't much clearer, experts say.
Kickbacks have been variously defined by different courts in different jurisdictions. In United States vs. Greber, the 3rd U.S. Circuit Court of Appeals in Philadelphia established a "one purpose" test, holding that if one purpose of payments was to seek referrals, that constituted a violation. That broad test was upheld by the 9th Circuit Court of Appeals, San Francisco, in United States vs. Kats, which defined kickback payments as offenses when they were not a bona fide part of delivering goods and services. In another case, Hanlester Network vs. Shalala, the 9th Circuit ruled that for a violation to constitute an offense, defendants must know they violated the law.
Lawyer Ruggio says the kickback law on its own is flawed and difficult to prove.
"It (a kickback) is a discrete financial arrangement to make referrals occur. By its very nature there are few witnesses and may be no documents," says Ruggio, who prosecuted banking fraud in the 1980s before switching to healthcare fraud at the Justice Department.
The AMA's Murphy says the confusion surrounding court interpretations troubles doctors and other providers.
"They're trying to do the right thing, but often they are doing it with insufficient guidance in an aggressive enforcement environment," she says.
Broad interpretations of that law could lead to enforcement problems and prosecutorial overzealousness, she says.
Even the inspector general's Thornton is concerned about those conflicting interpretations.
"We'd like to see this issue go to the U.S. Supreme Court for review," he says. "I think the statute would be used more if we had a final decision and not this degree of uncertainty."
Old weapon. The False Claims Act, which dates back to the Civil War, enables private citizens with knowledge of fraud committed against the government to bring a whistleblower suit on behalf of the government, which, after investigating, can choose to intervene.
The act was amended in 1986 to include Medicare fraud. It had been used to prosecute crooked defense contractors and military purchasers, the producers and sellers of the "$800 hammer."
As large whistleblower cases against clinical laboratories such as SmithKline Beecham were settled, Justice Department attorneys and agents turned their energies and attention to hospitals and healthcare systems.
The difficulty of proving a kickback case was epitomized by the 1992 settlement of Kensington Hospital in Philadelphia. The government originally brought kickback charges, but a judge dismissed those. The false claims allegations stuck, however, and the hospital paid $400,000 without admitting guilt.
The most recent kickback case to be settled under the False Claims Act was that against Villaview Community Hospital in San Diego, which paid $51,000 in March without admitting legal guilt. The settlement agreement said that Villaview paid an unnamed third party for patient referrals. That case remains under seal pending further investigation and charges. Officials from the hospital declined to comment.
Compliance and prevention. Former Justice Department attorney Ruggio predicts the government will file more kickback/false claims cases. But, he says, compliance programs offer proven, positive ways to change organizational behavior.
"A good compliance program followed through provides a wonderful defense," says Ruggio.
Prosecutor Sheehan agrees.
"Those with compliance plans are trying to do the right thing," he says. "Those that still don't have compliance plans are a lot more obvious and stand out now."
Simi Valley's Rice says compliance is a religion, not only at his hospital, but throughout the 20-hospital Adventist Health System that owns Simi Valley.
"We now have a far more effective set of tools to work with in dealing with physicians in the marketplace," he says. "We've witnessed an evolution in the way we do business. The compliance process has been very helpful to hospitals."
But if history is any indication, in the highly competitive world of healthcare, the "sentinel," or "fright effect" highly touted by federal authorities, may be temporary.
Last year's annual physician recruitment practices survey conducted for MODERN HEALTHCARE by St. Louis-based Cejka & Co. offers an instructive prism for viewing hospital behavior.
Geoffrey Staub, Cejka's marketing manager, says the hospital industry's willingness to pursue legally risky practices ebbs and flows, and he conceded it is affected by big court cases against hospitals.
"After the (1994) Hermann Hospital settlement (in which the Houston hospital settled kickback charges for $1 million with the IRS), a lot of hospitals ran scared and didn't give out signing bonuses or other perks. But a few years passed and after they saw the IRS wasn't pursuing any cases, they began paying signing bonuses again," Staub says.
Hermann had institutionalized a number of suspect financial arrangements with its physicians, including signing bonuses, income guarantees, free or reduced office rentals and loan guarantees.
According to Cejka's 1998 survey, 36% of hospitals were still paying signing bonuses, nearly 30% still provided loan guarantees and loan forgiveness, and 69% offered compensation guarantees.
"If they believe they can do it and not get in trouble, they're willing to roll the dice," Staub says.