Hospital Chain to Pay $745 Million in Medicare Fraud

In the largest such financial penalty ever imposed on a health care company, the nation’s biggest hospital chain tentatively agreed Thursday to pay the government $745 million to settle civil charges that it systematically defrauded the Medicare program for years.

But the settlement does not end the federal investigation of--or the potential financial liability for--Columbia/HCA Healthcare Corp., which operates 220 facilities in 22 states, including eight hospitals in California. The company still faces a federal criminal investigation that could result in hundreds of millions of dollars more in fines and penalties.

Many health care experts and others involved in the company’s web of legal travails expect the financial toll to eventually come to more than $1 billion. Observers say that several former officers of the company may yet be subject to criminal indictments as a result of the investigation, first unveiled in 1997. Two middle-level executives were convicted of fraud in related cases last year.

Among the allegations were that Columbia exaggerated patient diagnoses to reap higher Medicare reimbursements and charged the program for expenses it was not entitled to by disguising their actual nature.

“This is the beginning of the end, not the end,” said Steven L. Meagher, a San Francisco lawyer representing two whistle-blowers who disclosed some of Columbia’s misdeeds to federal authorities.

Columbia said the financial settlement would result in a $498-million after-tax charge against its earnings. It also said it would continue to cooperate with the government.

“Obviously, we are pleased to have reached this understanding, and we’re continuing to work with the government,” said Jeff Prescott, a spokesman for the Nashville-based company. “But this doesn’t resolve it all, that’s for sure.”

The tentative settlement, which is subject to court approval and a review by supervisory officials at the Justice Department, was announced after the close of the stock market. As rumors of the pact began surfacing, however, shares of Columbia/HCA surged on the New York Stock Exchange. Trading was halted about an hour before the exchange closed for the day, but nevertheless the stock ended at $30.50, up $2.25.

The settlement appears to indicate that Columbia/HCA is on the verge of putting its problems with the government behind it.

“It’s good for Columbia,” said Tom Scully, president and chief executive of the Federation of American Health Systems, which represents for-profit hospitals in Washington, “because it clears the decks and lets them get back to running hospitals.”

All in all, the government’s investigation of Columbia/HCA is likely to stand as a symbol of Washington’s determination to stamp out Medicare fraud, which by some estimates costs the government more than $100 billion a year. Thursday’s tentative settlement alone handily outstrips the $524 million in judgments and penalties the government won in similar fraud cases in all of 1999.

“Health care is the largest single area of fraud inquiry by the government,” said Stuart Gerson, the former head of the civil division of the Department of Justice, which reached Thursday’s settlement with Columbia. Not only does the government spend more on health care than any other service, but anti-fraud programs are easy to sell to politicians of both parties.

“Everybody agrees there’s too much being paid for health care, and a significant amount is fraud, waste and abuse,” Gerson said. “So if costs can be restrained by attacking fraud, everybody is for that.”

The proposed settlement did not win unanimous praise, however. It was denounced as “gentle” by Rep. Pete Stark (D-Hayward), ranking minority member of the House Ways and Means subcommittee on health. Stark is a longtime critic of the health care industry.

“I absolutely feel somebody has to go to jail,” Stark said. “There’s no question there was wanton criminal activity at the highest level, and I see no reason they should continue to treat Medicare patients.”

As it happens, Thursday’s tentative settlement requires the company to implement a “corporate integrity agreement” designed to avert further fraud; in return the government agreed not to bar the company from participating in the Medicare program.

The financial penalty, meanwhile, will not be paid until all outstanding criminal investigations are settled, probably by Dec. 31. But it will accrue interest at 6.5% a year, a provision that gives the company added incentive to reach a settlement quickly.

The civil settlement covers three of five categories of fraud the government alleged that Columbia committed over a period that stretches to the mid-1980s.

These are claims of fraudulent laboratory billing, including billing the government for unnecessary tests on patients; improper diagnoses that tended to make patients seem sicker than they were, leading to higher Medicare payments; and the disguising of unreimbursable expenses as reimbursable ones. The latter included designating marketing personnel, whose salaries cannot be charged to Medicare, as “community educators” engaged in familiarizing residents with available Medicare services.

Columbia/HCA was also allegedly able to charge Medicare for the acquisition expenses it incurred in purchasing numerous home health care agencies by paying the sellers unrealistically low prices but then hiring them at inflated but reimbursable fees as “management consultants” to help run those agencies. Some former owners of those agencies settled related federal charges earlier.

Still subject to the criminal investigation are even more serious allegations against Columbia. These are that many Columbia facilities kept separate sets of records of Medicare-related costs: conservative ones that the company kept confidential and exaggerated records it submitted to the government in claiming reimbursements. The company is also under investigation for allegedly paying kickbacks to physicians for referring patients to company facilities.

The government’s investigation has transformed Columbia/HCA. Once the operator of more than 300 hospitals and other health facilities, it came close to bankruptcy in the wake of the probe. The company has shrunk by about one-third and ousted many of the executives on whose watch the alleged violations took place.

These included Richard Scott, who presided over Columbia/HCA’s development into a $20-billion health care empire but whose aggressive business practices are blamed for the company’s fall. He was replaced shortly after the investigations were revealed in July 1997 by Thomas F. Frist Jr., who had been chairman and chief executive of Hospital Corp. of America, which merged with Columbia in 1994.

Since then Columbia has had generally high marks for ethical standards and anti-fraud compliance.

“They’ve certainly improved,” said one expert in health care ethics, observing that its management housecleaning clearly had a positive effect.

“It’s not like you have a management there now that have circled the wagons and are intent on protecting their own to the detriment of shareholders,” he said.

Hiltzik reported from Los Angeles and Rubin from Washington.