In the wake of Columbia/HCA Healthcare Corp.'s announcement last week that it had reached a tentative $745 million agreement with the U.S. Justice Department to settle fraud allegations, company officials were somber, whistleblowers appeared pleased and investors seemed relatively nonchalant.
Left unanswered is how the Nashville-based investor-owned company will deal with portions of the government investigation the agreement did not address and the broader implications of the settlement on the hospital industry and on other outstanding fraud investigations.
The deal, if carried to fruition, would be the largest healthcare fraud settlement ever. It marks a first step in resolving an investigation made public three years ago that shook the nation's largest hospital chain to its foundation and led to an increased emphasis on ethics throughout the hospital industry.
"I would say it's the first step in removing a cloud that's been over the company for the past few years," said A.J. Rice, a healthcare analyst with Merrill Lynch & Co. in New York.
Columbia officials, who are set to gather later this week in Nashville for an annual shareholders' meeting, are also expected to announce a long-awaited name change for the company, which past media reports have linked to a settlement deal.
Soon after the government fraud investigation was made public in March 1997, Columbia founder and Chief Executive Officer Richard Scott and President David Vandewater resigned under pressure. Thomas Frist Jr., M.D., took over as CEO and chairman and soon articulated a shift in strategy that would transform the hospital chain from an aggressive acquirer of hospitals to a much smaller, more focused company. At its high point in 1996, Columbia had 341 hospitals; today it has about 200.
The deal, which the government calls a "tentative agreement" and the company calls an "understanding," resolves many of the civil fraud allegations against the healthcare giant, including home health fraud, DRG upcoding and illegal billing for laboratory services.
Still unsettled are critical issues related to Medicare cost reporting and physician referral/kickback charges, which the company has acknowledged are the most difficult issues to resolve. Last week's deal is not contingent on settling those issues.
However, the deal is contingent on a 4-year-old criminal investigation of the company, which has yet to be resolved.
"We are pleased to have reached an understanding on these issues, and today's announcement signals that a significant step in this process is complete," Frist said in a written statement last week.
The Justice Department would not elaborate on the Columbia announcement beyond a brief statement issued by spokesman Charles Miller acknowledging the tentative agreement.
Miller said the agreement is dependent on a number of future events but declined to name them.
"We have no further comment on ongoing discussions between the department and Columbia," he said. "But this is not finished."
A press release from Columbia indicates the settlement is contingent on a number of issues, time triggers and incentives designed to speed resolution of the outstanding criminal charges by Dec. 31 of this year.
If the criminal investigation is not resolved by year-end, Columbia can withdraw from the settlement and could face a costly trial. The government, meanwhile, could lose three-quarters of a billion dollars, most of which would go to repay the Medicare trust fund.
The agreement is also subject to approvals by Justice Department higher-ups, execution of a corporate integrity agreement with HHS' inspector general's office and court approval. The company said it has reached an understanding with the inspector general on terms of the integrity agreement, which would assure the government of the company's overall Medicare compliance. That understanding covers the issues within the tentative settlement.
Columbia officials, although pleased to announce progress, appeared sobered by the amount of money and the issues left outstanding. A reflection of those outstanding issues may have been the 7.6% drop in Columbia's stock last Friday. Shares closed at $28.19, down by $2.31 in heavy trading.
"It's a sizable settlement; there's no question about that," said Senior Vice President Victor Campbell.
He also acknowledged that the most daunting issues remain to be negotiated.
"The cost-report issues and the physician relation issues are what I'd consider some of the more complex issues of Medicare regulations, and what you really find in cost reports and physician relations is that any of the issues really are unique to a particular hospital at a particular time," he said. "The analysis of all of those just is a time-consuming process."
Campbell said he could not estimate the additional cost the company might incur in resolving these issues or the time it might take to do so.
Columbia announced it will take a $498 million after-tax charge for the settlement in the current quarter ending June 30. The looming payment, however, should not interfere with the company's ability to make necessary capital investments in its hospitals, Campbell said. "The financial position of the company is sound," he said. "We don't want to downplay the amount of the payment, but we feel that both (obligations) can be met."
The company last year had arranged a $1 billion letter of credit agreement with the federal government to ensure that it would be able to meet settlement obligations. The announced agreement provides that the letter of credit will be reduced from $1 billion to $250 million when the company pays the $745 million plus 6.5% interest. Any payments beyond that related to the physician relations or cost-report portions of the investigation will reduce the remaining amount of the letter of credit dollar for dollar.
Deborah Lawson, healthcare analyst at Salomon Smith Barney in New York, said the fact that the Justice Department did not ask Columbia for proof that it could pay amounts greatly exceeding $1 billion was a "good indicator" for Columbia's outlook. Wall Street had already speculated that the company's total liability could approach $1 billion.
Although analysts are optimistic, consider that the July 1999 Medicare cost-reporting conviction of two Florida Columbia executives dealt with one cost-report item at a single Columbia facility, Fawcett Memorial Hospital in Port Charlotte, Fla. The government alleged $3 million in Medicare overpayments in that case. In the national probe federal investigators subpoenaed and copied 13,000 boxes of cost reports from 300 Columbia-owned hospitals covering a 10-year period--potentially hundreds of millions of dollars in alleged overpayments and penalties.
The criminal and civil cases against Columbia emanated from a 1993 whistleblower lawsuit filed by James Alderson, now 53, a former financial officer with North Valley Hospital in Whitefish, Mont., who was terminated in 1990 after refusing to produce dual sets of cost-accounting reports for the hospital, managed by Quorum Health Resources, Brentwood, Tenn.-based Quorum Health Group's hospital management subsidiary.
Alderson sued for wrongful termination in 1991, won a settlement in 1993 and filed a whistleblower suit under seal later in 1993 after he examined Quorum Health Resources corporate documents.
Quorum was created in 1989 when HCA Management Co. was spun off to a group of investors and employees by Hospital Corporation of America, which later merged with Columbia.
The criminal investigation, which was spearheaded by FBI Special Agent Joseph Ford, began in 1996 and culminated in 1997 raids on Columbia hospitals, home health agencies and offices in five states. The same month that Scott and Vandewater resigned, three Columbia executives in Florida were indicted on criminal Medicare fraud charges.
One year later a fourth defendant--and conspiracy charges--were added to the case. In July 1999, executives Jay Jarrell and Robert Whiteside were convicted on six counts of Medicare fraud. Executive Michael Neeb was acquitted, and the jury failed to reach a verdict on Carl Lynn Dick, who signed a plea agreement.
Stephen Meagher, the lawyer who represents at least two whistleblowers who have sued Columbia--Alderson and John Schilling--hailed the agreement. He said it should help settle the most serious remaining issue, the cost-report claims at the heart of the criminal investigation.
Still unclear is how many of 26 whistleblower suits are resolved by the agreement and who will be paid what amount. Also unclear is how the settlement announcement will affect ongoing mediation discussions between the Justice Department and Quorum Health Group, which faces four whistleblower lawsuits.
Quorum spokeswoman Shea Davis said the Columbia settlement changes nothing. "The parts they settled have no relationship to the suit we're involved in with the government," she said.
Meagher partially agreed, but added, "This tentative agreement sends a message that Columbia is making progress on getting these issues behind them, something that so far Quorum has been unable to demonstrate."
Industry observers said the ongoing Columbia investigation helped shape ethics initiatives at hospitals throughout the country, although last week's announcement is unlikely to have much of a ripple effect.
"I don't think there's any question that every hospital company, every insurance company, has been operating defensively and is very concerned about government investigations," said Thomas Scully, president and chief executive officer of the Federation of American Health Systems, the trade organization that represents many of the nation's for-profit hospitals. "The Columbia case was a giant flare."