The nation's largest medical transcription company said last week that it plans to review its billing claims with as many as 3,000 hospital clients after a class-action lawsuit alleged the company engaged in widespread billing fraud.
Memorial Healthcare System, a 1,111-bed, three-hospital public system owned by the South Broward Hospital District in Hollywood, Fla., alleged in its 34-page lawsuit against MedQuist, Mount Laurel, N.J., that the company systematically overbilled it and several thousand other hospitals by millions of dollars for decades.
Washington lawyer Mark Hogge of Greenberg Traurig, who is leading the class-action litigation against MedQuist and four of its current and former officers, said his firm believes that at least 25% and as much as half of Memorial's payments to MedQuist may have been based on fraudulent billing.
Hogge said the lawsuit was filed in September in U.S. District Court in Los Angeles, instead of Florida or New Jersey, partly to meet class-action legal obligations and partly because the state has "very favorable class-action laws and some of the toughest consumer fraud statutes in the country."
The class-action lawsuit is the latest in a series of scandals facing the 30-year-old company, which controls about 20% of the country's medical transcription services market. In April, the Nasdaq exchange delisted the company for failure to file appropriate financial forms. In March, the company ordered outside reviews by law firm Debevoise & Plimpton and accounting firm PricewaterhouseCoopers, whose reports MedQuist's board released in July. The reviews found that MedQuist may have wrongfully billed transcription clients. The firms found that instead of billing based on the number of characters transcribed, MedQuist employed ratios and formulas that may have pumped up the amount of actual work performed to inflate billings, in essence, charging for work not performed, without disclosing that billing formula to clients.
Earlier this year, MedQuist disclosed that the Securities and Exchange Commission also had launched an investigation into the company. Former MedQuist Chief Financial Officer Brian Kerns and former Chief Legal Officer John Suender, both defendants in the class-action lawsuit and alleged by South Broward to be co-conspirators in the fraud scheme, resigned in July after the outside audits showed the company erred in its billings to hospitals and other transcription services clients. The reviews did not specify the amount of the overbilling.
"The use of ratios and formulas caused some clients to be billed more and some to be billed less than if the counting method provided for in the contracts had been used," MedQuist revealed in its public filings. "In addition, the ratios and formulas for certain client accounts were changed by the company, generally without disclosure to clients, in order to affect profit margins."
In July the board also named Howard Hoffmann as its interim CEO; Hoffmann had been a principal and partner at Nightingale Associates, Stamford, Conn. Hoffmann said MedQuist's priority is to work with customers to rectify problems, make the needed changes and reforms internally, and become current on the company's SEC filings.
Triple damages under RICO
The class-action lawsuit charges that the defendants "knowingly and fraudulently overcharged for transcription services." MedQuist intentionally misrepresented the terms of the contract pertaining to its fraudulent billing practices to convince plaintiffs to contract with MedQuist, according to the lawsuit. "Defendant MedQuist committed these fraudulent acts to engorge itself with improper profits at the expense of the class (hospital clients)."
Hogge said the plaintiffs would seek triple the amount of alleged damages under the Racketeer Influenced and Corrupt Organizations Act, or RICO, and state fraud laws, as well as punitive damages.
"The fraudulent practices date back to the beginning of the company," he said. "We've found one large health system alone that has paid MedQuist more than $80 million over the years and believes it was overbilled by more than $20 million."
He said other hospitals would be added to the plaintiff list. Hogge said he could not comment on whether a whistle-blower lawsuit has been filed against MedQuist. Those lawsuits are filed under seal in federal court. However, he confirmed that MedQuist offers transcription services to U.S. Army and Navy hospitals and to veterans' hospitals and clinics, which, because federal money is involved, could trigger the federal False Claims Act. In 2000, Royal Philips Electronics, the world's third-largest consumer electronics company, bought a 72% stake in the healthcare technology firm. MedQuist earned a profit of $30.3 million on revenue of $369.2 million through the first nine months of 2003, the most recent financial figures available. The company has not yet released its 2003 annual report, pending a financial audit by accounting firm KPMG.
In a news release, MedQuist said it has hired the law firm of Winston & Strawn to represent it.
"MedQuist has been proactively and responsibly working with its clients to address the questions raised regarding its billing practices, and we will continue to do so," Hoffmann said in a news release. "The company intends to respond to the suit appropriately, according to the best interests of our customers, employees and shareholders."
MedQuist spokesman Montieth Illingworth said the "vast majority" of the com-pany's clients are hospitals. MedQuist has not estimated the potential cost of the alleged overbillings, but "It's something we're working to determine," Illingworth said. He said the company is not aware of any pending whistle-blower lawsuit involving allegations concerning its billing practices.
In its promotional materials MedQuist says it services 3,000 clients with a network of more than 10,000 transcriptionists. That could change, according to stock analyst Paul Meeks of the firm of Meeks & York, who tracks MedQuist. Meeks said the transcription business, while profitable now, is changing. "The industry is maturing and margins are compressing," Meeks said. He said MedQuist plans to announce a joint venture deal in the coming months with an Indian partner to outsource much of its U.S. business, laying off employees and cutting costs, as well as a large acquisition to diversify its business.
"It's impossible now to quantify the hit that they would take from the class-action lawsuit or any potential whistle-blower suit," Meeks said. "But this is a strong business that generates a lot of cash flow. Most of the bad news is already reflected in the stock price, and any positive news will drive up the price."
In August 2003, MedQuist announced that R. Timothy Stack, then president and CEO of three-hospital Piedmont Medical Center in Atlanta and a MedQuist board member from 1997 to 2000, would become MedQuist president and CEO. But after serving only 69 days, Stack resigned and returned to his former hospital position, where he remains. Stack said he left MedQuist for "personal and professional reasons" and said he was unaware of the billing problems when he was a board member.
Asked whether he learned of the alleged fraud scheme during his stint as president, Stack said, "No comment," but pointed out that he was not named in the class-action lawsuit. He said Piedmont does not contract with MedQuist and will not be joining the litigation seeking reimbursement.
Stack was the second of four MedQuist presidents to lead the company during the past 14 months. Greg Sebasky, who was named president and chief operating officer in February, shares power with interim CEO Hoffmann.