Secret Witness to Detail Medicare Billing Fraud

A secret star witness, his identity cloaked by a black hood, is scheduled to be spirited Wednesday 3through the marble halls of the historic Dirksen Senate Office Building to an ornate hearing room jammed with corporate attorneys and powerful lobbyists anticipating the worst.

In years past, Congress has reserved such high drama for Mafia snitches and union racketeers who had blown the whistle on corruption or mismanagement. Wednesday’s masked witness, by contrast, is expected to disclose a pattern of payoffs, influence peddling and fraudulent billing practices in one of the nation’s most admired applications of high technology: hospital use of lifesaving medical devices.

A probe of 131 of the nation’s most prominent hospitals by federal agents at the Health and Human Services Department has uncovered evidence that illegal billings for experimental medical devices over the past decade may reach $1 billion.

Hospitals around the nation--often with the encouragement of medical-device manufacturers--routinely billed Medicare for pacemakers, cardiac catheters and other high-tech devices while they were still undergoing clinical trials, according to documents obtained by federal investigators.

There was only one hitch: Medicare did not cover the cost of experimental devices. And many of the hospitals knew it.

“The federal agencies responsible for preventing these abuses were asleep at the switch,” said Sen. William V. Roth (R-Del.), chairman of the Senate Permanent Subcommittee on Investigations, which is in charge of Wednesday’s hearing. “It is such a major problem, and so complex.”

The practice had continued for roughly a decade until a lone employee of a major institution came to the conclusion that the whole arrangement was a potential fraud and filed a sealed whistle-blower suit under the federal False Claims Act in 1994. He is the one who will be the cloaked witness.

The high-profile hearing is but one measure of the increasing federal scrutiny of Medicare fraud at a time when the program is coming under heavy pressure from congressional budget-cutters. The General Accounting Office estimates that fraud amounts to 10% of Medicare’s entire budget: about $17 billion in illegal payments this year.

The FBI has more than tripled the number of agents assigned to police Medicare fraud, and Justice Department officials have ranked it as one of their top priorities.

The dragnet is finally yielding some big fish. A week ago, a federal jury in Georgia convicted Robert “Jack” Mills, owner of the nation’s largest network of home health care firms, of improperly billing Medicare for country club dues, gourmet popcorn and personal travel on corporate jets.

The probe into medical devices touches on institutions that might have been regarded as far above any suspicion of criminal activity until only a few years ago.

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The medical-devices industry ranks among the most promising and fastest growing sectors of U.S. high technology. It reports annual sales of $57 billion, making it bigger than the steel industry. Silicon Valley has 100 device manufacturers, followed by about 50 in Southern California. The next biggest centers, Massachusetts and Minnesota, have 25 each.

The most technologically intensive firms are growing by 50% annually, said Montgomery Securities analyst Kurt Kruger, adding, “I don’t see any end to it.”

For federal investigators, the hospital and device industries are proving to be politically well-connected and powerful opponents. Until Roth blocked them, they nearly pushed through legislation last year that would have essentially absolved them of any past wrongdoing.

In recent weeks, Roth’s staff and private attorneys representing the whistle-blower have collected compelling new evidence that hospitals have violated Medicare regulations. The subcommittee has subpoenaed a number of prominent cardiologists from major university hospitals, including the University of Washington.

“Our case focuses on the hospital, but we are talking about an entire underground of people making bad decisions . . . for enormous sums of money,” said Phillip Benson, a Newport Beach attorney who, along with Donald R. Warren of San Diego, represents the still-secret whistle-blower. “It is outright fraud.”

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The hearing is also expected to show evidence that medical-device makers paid kickbacks to major hospitals that performed the clinical trials on their devices. And it is scheduled to unveil memorandums showing explicitly that hospitals sought to hide illegal billings from federal regulators.

“There were some hospitals that not only violated Medicare rules, but they did so knowingly,” Roth said in an interview. “I want to know why this problem was not known earlier and why nothing was done for such a long time.”

Indeed, federal investigators have turned up a few memos that leave little doubt about what hospitals were doing. For example, federal agents obtained a document showing that Sutter Hospital in Sacramento had implanted several dozen cardiac defibrillators and pacemakers that were not covered by Medicare.

In a bizarre April 1994 memo, a Sutter administrator, Mark W. Rieger, remarked that the hospital faced a “conundrum” because it was clearly billing Medicare for experimental procedures. The administrator went on to say that the hospital “could potentially be audited” and that “by the letter of the law we are at risk.”

But he determined that “there is obviously no communication” among government agencies that would disclose the practice. Therefore he concluded that “our overall risks are small.”

A federal grand jury in Sacramento is now investigating Sutter, and the hospital is reportedly discussing a multimillion-dollar settlement of civil and criminal charges.

A Sutter spokeswoman said the hospital charged Medicare for experimental devices only because it was unaware of the policy against doing so. She added that the memorandum was factually in error and did not represent hospital policy.

Although hospitals may have billed Medicare for $1 billion in procedures using experimental devices, any legal settlement is likely to be far less. Most of the patients treated with experimental devices would have received some other treatment that Medicare would have covered, according to one government official.

And while Roth blocked legislation that would have cleared hospitals of past fraud, the industry succeeded in persuading the Health and Human Services Department to reverse its policy for future billings. The industry may now legally bill Medicare for many clinical trials--those for devices that are modifications of already approved products.

Although critics contend that the new policy amounts to a research subsidy, the industry argues that Medicare patients deserve to have the newest and best medical technology available.

Susan Zagame, vice president at the Health Industry Manufacturers Assn., said the federal probe had added to the negative regulatory climate that is damaging an industry in which the United States enjoyed world leadership.

Moreover, the hospital industry has asserted that the entire investigation is without merit because the federal government’s rules were unclear and subject to different interpretations.

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Moreover, a group of national hospitals, led by Cedars-Sinai Medical Center in Los Angeles, filed suit against the Health and Human Services Department in Los Angeles federal court, asserting that the rule was invalid because the department had made administrative errors in promulgating it.

“If I intend to do wrong, but what I did is not wrong [because there is no rule], am I guilty of a crime?” asked Baltimore attorney Jonathan Foote, who represents the hospital group.

Foote predicted that the hospitals would ultimately whittle down the federal investigation and the whistle-blower suit to “a pretty thin argument that will not be much of a case for them.”

But HHS investigators, rather than backing off, are expanding the scope of their probe. Having begun by examining hospital billing practices as outlined in the whistle-blower lawsuit, the agents are now going after medical-device manufacturers and the prominent doctors who have played such a big role in the industry, a knowledgeable government official said.

In many cases, doctors and device makers have directly benefited from the hospital billing practices, according to Benson, the attorney representing the whistle-blower. Federal investigators have come to the same conclusion.

In Silicon Valley, the industry’s capital, perhaps no doctor has gained a wider reputation than John Simpson, who has earned a personal fortune by pioneering several important cardiac catheters. Simpson held a financial stake in the companies that made the catheters and he earned windfalls when the companies went public. In all, Simpson has been involved with about half a dozen start-up companies with revolutionary products.

One of those companies, Devices for Vascular Intervention, is cited in the sealed whistle-blower lawsuit.

DVI is not accused of any wrongdoing, but clinical trials for its most important product were conducted at Sequoia Hospital in Redwood City, Calif., and billed to Medicare, according to the suit and investigators. The hospital is a defendant in the suit.

DVI pioneered atherectomy, in which a tiny rotating cutter is fed into the heart at the end of a long wire and used to remove blockages from coronary arteries. DVI was ultimately sold to health care giant Eli Lilly & Co. for nearly $150 million, but was later spun off by Lilly. Simpson was both an investor in DVI and the principal investigator for the clinical trials of the atherectomy device at Sequoia.

Simpson said it is simply untrue that he ever violated any Medicare billing policies or that disputed billing practices to Medicare resulted in any benefit to him. He said all the procedures performed were proper, both medically and under Medicare billing policy.

“The allegations are not factual,” Simpson said. “It is not . . . a scam.”

One way to help get Medicare to pay for the clinical atherectomy trials, Selmon said, was to also do an angioplasty--an approved procedure in which a balloon is inflated inside an artery to crush a blockage. Selmon acknowledged that some angioplasty procedures were possibly not medically necessary.

“If you didn’t have a balloon in there, you couldn’t charge for the case,” Selmon said. “We weren’t doing anything that anybody else wasn’t doing.”

He added: “If the hospital couldn’t charge for the patient, we couldn’t get them into the hospital. We were charging for angioplasty, but doing the investigational work for free. We never felt we were cheating anybody.”

Inside the industry, the practice became known as a “reimbursement balloon.” The secret Senate witness is expected to say that reimbursement balloons made a mockery of Medicare regulations.