Senate Staffers Report Abuses in Health-Care Audits

Abuses by auditing firms that bill insurance companies for hospital undercharges but ignore or play down overcharges add substantially to the nation’s soaring medical costs, Senate investigators concluded Tuesday.

“The practice by some unscrupulous revenue recovery firms of ripping off health insurance companies is just another means of ripping off the American consumer,” said Sen. William V. Roth Jr. (R-Del.), ranking minority member of the Senate Governmental Affairs Committee’s permanent subcommittee on investigations.

Officials of two firms headquartered in Southern California will be questioned today as the subcommittee opens hearings. The firms--Manns Co. and Kapner, Wolfberg & Associates--are considered among the “more prominent and successful” in the burgeoning revenue recovery field.

Officials of Manns Co., based in Rolling Hills Estates, denied in interviews any wrongdoing or unethical practices, contending that they are targets of insurance companies that fail to audit for undercharges in hospital bills. Officials of Van Nuys-based Kapner, Wolfberg & Associates did not respond to calls for comment.

Revenue recovery firms contract with hospitals to review patients’ accounts to recover money owed the hospital, working primarily on bills paid by indemnity insurance plans that reimburse on a fee-for-service basis. Such private insurers pay $75 billion annually in hospital insurance claims, according to a subcommittee staff statement.

The staff statement, a copy of which was made available to The Times, criticized what it described as the predominant industry practice of charging a contingency fee--or percentage of the fees recovered--of between 40% to 50%.

“They will tell the hospital, ‘This will cost you nothing,’ ” a subcommittee investigator said.

“There is an unhealthy incentive inherent in auditing, which is compensated based on a percentage of revenue recovered,” subcommittee investigators concluded. “The inherent pressures under this system lead to skewed audits which do not result in clean or fair bills.”

Barring such contingency fee auditing “would take the profit motive out of the urge to cheat,” the staff statement said.

Subcommittee investigators were particularly critical of the practice of “some revenue recovery firms” of submitting supplemental or late bills to an insurer without noting the overcharges that the audit discovered.

“Some revenue recovery firms do not deny the audit bias,” the staff statement said. “The president of Kapner, Wolfberg & Associates told us that ‘we are an undercharge firm.’

“Although Manns Co. claims to report overcharges, one former Manns Co. auditor was told by the president of Manns, ‘We are an undercharge company. We are not here to clean up the bill,’ ” the staff statement said.

However, Dan O’Callaghan, Manns vice president of finance, contended that the company has called the attention of its hospital clients to $7 million in overcharges over the past two years. He said that the company does not credit the insurance companies directly for the overcharges, leaving that to the hospital.

Asked how Manns is certain the overcharges are credited to the bill, O’Callaghan said: “We trust the integrity of the hospitals. Our only interest is in a fair and accurate bill.”

The staff statement concluded: “It appears clear that there is a heavy bias toward identification and reporting of undercharges and in ignoring overcharges by some revenue recovery firms.”

Subcommittee investigators cited a General Accounting Office review of accounts that Manns Co. audited at four randomly selected hospitals during a two-year period. The firm identified overcharges in 15% of the cases audited, but a reaudit by outside auditors pinpointed overcharges in 99% of the cases, the investigators reported.

Citing an internal memorandum from Kapner, Wolfberg & Associates, the staff statement said that revenue recovery firms use quotas in auditor exams that pressure auditors “to focus on undercharges and either avoid or ignore bills with obvious overcharges.”

The internal memo said an auditor fails if he or she analyzes less than $30,000 in claims daily or finds less than $1,225 in omitted charges.

The subcommittee staff said that at least 35 revenue recovery firms operate in the United States, with the largest of them generating income of $15 million to $23 million annually.

O’Callaghan, while declining for competitive reasons to disclose Manns Co.’s annual income, said it is nowhere near the range estimated by the Senate panel’s staff.

Unethical revenue recovery practices add to rising costs of health care by leading insurance companies to raise their premiums to cover added costs, the staff statement said.

Higher costs also are incurred when the revenue recovery firms battle with third-party auditors for insurance companies over medical bills, the staff found.

“Uniform standards for auditing agreed upon by hospitals and insurance industry would likely reduce costs to consumers,” the staff statement said.