New suit may mean broader focus on cost reporting

Two days before the beginning of the new year, the Justice Department announced it is joining a second lawsuit against Nashville, TN-based hospital giant Columbia/HCA. With cost reporting at the center of both suits, some experts are wondering if the government is gearing up for a general crackdown on cost reports in the hospital industry using whistle-blowers with expert knowledge of the hospital accounting process.

The new suit appears broadly similar to one DOJ joined in October, in which former Columbia manager James Alderson charged that Columbia hospitals in Florida had manipulated their cost reports to get improper reimbursement from Medicare.

The latest suit was filed by John Schilling, a former reimbursement supervisor for Columbia's West Florida division. He alleges that Columbia deliberately maintained reserve cost reports that would be used only if Medicare disallowed improper costs in the reports the company submitted to fiscal intermediaries. The allegations encompass 100 hospitals in 12 states, a huge chunk of Columbia's approximately 300 hospitals in 32 states. The hospitals are or were owned by Columbia prior to its 1994 merger with HCA and include five hospitals owned by Basic American Medical Inc. (BAMI), which allegedly fudged cost reports even after BAMI was acquired by Columbia in 1992. Schilling's suit focuses on hospitals owned by Columbia prior to its buyout of HCA and Healthtrust, while Alderson's suit focuses on HCA and Healthtrust facilities.

The crux of Schilling's allegations is that Columbia used a kind of shell game to get Medicare to pick up the tab for the hospital chain’s acquisition of hospital-based home health agencies. He claims Columbia paid bargain prices for those agencies, then retained the original owners as management consultants for which they were paid inflated management fees. Those fees could be included on the hospitals’ cost reports.

For example, the company's Southwest Florida Regional Medical Center in Fort Myers bought a home health agency from ResCare in 1993 but retained ResCare to manage it. Able Care, which Columbia bought later that year, took over management from ResCare — but Columbia continued paying minimal fees to ResCare and put those fees on Southwest's cost reports. A similar scheme saw Columbia buy several hospital-based agencies from Olsten Kimberly at low prices and then pay inflated management fees that were passed on to Medicare, claims Schilling.

It wasn't that the management fees were excessive, says Steven Meagher, the attorney representing both Schilling and Alderson. Rather, Olsten and the other agencies had to do very little work to earn their fees, which gave them profits of as much as $7 to $8 per visit, according to Meagher, at Phillips and Cohen in San Francisco.

Schilling was a whistle-blower who kept on blowing. After voluntarily leaving Columbia, he filed the suit (which was kept under seal at the time) and later returned to the company as a consultant and then a hospital executive, Meagher says. From that mole hole, Schilling was able to assist the FBI in its investigation, and he will testify in the criminal trial of Columbia executives in Florida who were indicted by the Justice Department in 1997.

Meagher describes Schilling as a perfect whistle-blower, a "very low-key" person who did not naturally attract a lot of attention. Schilling is the "Confidential Witness #2" described in an FBI search warrant used in the investigation, according to Meagher. He wouldn't estimate the potential liability of Columbia under the triple damages of the False Claims Act, but he did cite the oft-quoted estimate of Wall Street analysts that an eventual settlement may top $1 billion.

Columbia spokesman Jeff Prescott says there's little in the Schilling case that wasn't in the earlier suit. "We know there are whistle-blowers out there, and we know there are more suits coming," he adds. He says Columbia has revamped its hospital cost reporting system, though he adds the changes were unconnected to the government's investigation. Regarding the settlement negotiations between Columbia and DOJ, Columbia would say only that talks are "ongoing."