Columbia suit highlights hospital vulnerabilities

Earlier this month, the other shoe dropped for the embattled health care chain Columbia/HCA. A federal district court judge in Tampa unsealed a qui tam lawsuit, filed by a former hospital CFO and joined by the Department of Justice, that could result in one of the largest settlements in the history of organized health care.

Besides its massive scope, the suit is significant because it offers a detailed look at how the federal government may prosecute other hospitals and chains based on allegations of fraudulent cost reporting.

Until now, hospital cost reports represented an arcane field that no one paid much attention to. But experts say the Columbia suit could provide a map for whistle blowers hunting smaller prey. Any hospital that maintains reserves against cost reports, or makes any mistakes in allocating expenses among a menagerie of confusing cost centers, could be hit with a false claims suit.

"This is going to be a big wave," says Stephen Meagher, JD, with the law firm Phillips and Cohen in San Francisco. Meagher represents James Alderson, the former CFO of North Valley Hospital in Whitefish, MT, who blew the whistle in the Columbia suit.

Meagher declined to estimate the value of the false claims Columbia allegedly made. But he acknowledged that a settlement in the case could exceed $1 billion. The suit also targets Nashville-based Quorom Health Resources and Healthtrust Inc., which Columbia acquired in 1995.

Beyond false claims suits, cost reporting fraud could have criminal implications. The resemblance between the charges in Alderson’s suit and the indictments of Columbia executives last year for falsifying cost reports is no coincidence. Meagher admits that information he obtained working on Alderson’s suit was given to federal prosecutors.

In the suit, the government acknowledges that cost reporting basically works on the honor system — a system it claims Columbia exploited. "It is [well] known ... that fiscal intermediaries [FIs] have sufficient resources to perform full audits on fewer than 25% of the cost reports filed each year," it notes.

Columbia officials couldn’t be reached for comment. But Quorom CEO James Dalton says the company did its best to comply with Medicare rules, and was cooperating with the investigation. More significantly, Dalton says that standard accounting principles require hospitals to maintain reserves against cost reports. "Experience has demonstrated that there are numerous uncertainties and ambiguities, and in the review and auditing process some expenses might not be allowed," according to Dalton.

Alderson’s suit alleges that Medicare, Medicaid and CHAMPUS were defrauded because Columbia and the other companies:

- Submitted one set of improper cost reports to the government, but kept a second set that contained correct figures and explicitly identified the expenses that should never have been submitted. The defendants allegedly also maintained special reserves in case the cost reports were denied.

- Labeled some operating expenses as capital expenses to boost Medicare reimbursement.

- Improperly sought reimbursement for interest expenses and used a special depreciation system to fatten reimbursement.

- Charged Medicare for such unallowable costs as physician recruitment expenses, telephone and television services for patients, cafeteria operations, and marketing not related to patient care.

- Fudged statistics used for calculating reimbursement for laundry and housekeeping services and shifted costs from pharmacy and central supply to drugs and medical supplies charged to patients.

- Combined cost centers to boost reimbursement, such as merging day surgery with operating room costs.

- Undercounted interim payments in hopes that it could keep the money until the FIs could calculate the correct amount.

- Switched inpatient costs to the outpatient section of its cost reports.

- Shifted home health and skilled nursing facility costs to hospital-based services.