Government's probe of Columbia/HCA prompted by qui tam lawsuit

Nation's largest hospital management company also implicated

Oct. 5, 1998 -- The Justice Department has joined a "qui tam" lawsuit charging that Columbia/HCA Healthcare Corp., the world's largest health care provider, engaged in a systematic nationwide scheme to defraud Medicare, court documents unsealed today in Florida reveal.

That qui tam (whistleblower) lawsuit — filed in 1993 but kept secret until today — has burgeoned into what looks likely to be the biggest case of Medicare fraud ever.

The alleged fraud involves false claims that Columbia hospitals throughout the United States made in annual "cost reports" filed with Medicare for more than the past 10 years. Analysts have estimated that Columbia could face billions of dollars in liability as a result of the government's investigation into its Medicare billing practices.

The qui tam lawsuit, filed by James F. Alderson, also alleges the same fraud was committed by the nation's largest hospital management company, Quorum Health Resources Inc.

Both Columbia and Quorum routinely kept a secret set of books that detailed reimbursement claims made on cost reports that the companies knew were improper but still filed with Medicare, says the lawsuit. The secret books often were stamped, "Confidential," and employees were instructed not to disclose their existence to Medicare auditors.

The so-called "reserve cost reports" are the central evidence against four Columbia executives awaiting trial in Florida. More than 35 search warrants were executed last year as part of the government's massive investigation into Columbia's Medicare billing practices.

Columbia's chairman, Dr. Thomas Frist, has consistently denied there is any "systemic fraud or abuse" and says the company has done a thorough internal investigation.

"The evidence we have seen absolutely establishes systemic wrongdoing at Columbia," said Stephen Meagher, a San Francisco attorney with Phillips & Cohen, which represents Alderson. "Although Columbia has known that its 'reserve cost reports' are central to the government's investigation, it has never explained why its reserves were kept secret nor revealed how much was reserved."

Alderson learned of the scheme when Quorum took over the management of a hospital in Whitefish, Montana, where he was chief financial officer. Quorum had been formerly owned by HCA — now Columbia/HCA — and continued to follow the billing and accounting practices of the HCA chain.

Alderson was told that Quorum and HCA filed cost reports with Medicare that contained "aggressive" claims the companies knew were not reimbursable. At the same time, the companies kept a second Medicare cost report that they called a "reserve" report. The "reserve" report contained accurate information relating to reimbursement claims. When Alderson, a certified public accountant, refused to include "aggressive"claims on a cost report, he was fired.

Hospitals and other health care providers file cost reports with Medicare annually to get reimbursement for costs related to patient care, including expenditures for capital improvements — like new medical equipment or bigger wards — and some general administrative costs. Medicare pays a percentage of those costs based on the number of Medicare patients a hospital treats.

Columbia, the nation's most profitable hospital chain, has received more Medicare reimbursement than any other health care provider.

"What Wall Street attributed to Columbia's sharp management techniques for cutting costs and increasing revenues were actually sharp techniques for cheating the taxpayers," said John Phillips of Phillips & Cohen.

Alderson filed his lawsuit under the False Claims Act in 1993 in Montana. The law allows individuals to file lawsuits, known as "qui tam" cases, against anyone defrauding the government and permits them to share in the money the government recovers. Liable companies may pay up to three times the government's losses and a $5,000 to $10,000 penalty for each false claims.

"Without the False Claims Act, the government may never have uncovered that Columbia and Quorum kept secret records for years detailing how much they were receiving through false cost reporting claims," Meagher said.

Alderson and his attorneys spent thousands of hours working on the case to prove to the Justice Department that his claims were valid. Phillips & Cohen also has spent a substantial amount on the case and worked with experts it retained to review tens of thousands of cost-reporting documents going back to 1987.

Columbia owns approximately 350 hospitals nationwide. Quorum manages some 250 hospitals and owns 17.

Cost report fraud is an industry-wide problem

"The government has very limited resources to audit Medicare cost reports, and Columbia and Quorum took advantage of that," Phillips said. "We believe many other hospitals and health care facilities have profited from cost reporting fraud, and they have little chance of being caught without insiders stepping forward."

Fewer than 20 percent of costs reports are audited in any given year. The Medicare program must depend on the good faith of hospitals to submit accurate claims. "Nothing less is required if the Medicare reimbursement system is not to be turned into a cat and mouse game in which clever providers could, with impunity, practice fraud on the government," a 1996 federal appeals court decision held.

Cost reports typically are not finalized by Medicare until more than two years after they are filed. In the rare instances when false cost reporting claims were uncovered in the past, hospitals usually were required only to pay the money back without interest.

"Hospitals knew there was little chance of being caught," said Peter W. Chatfield, a Phillips & Cohen attorney in Washington, D.C., who is working on the case. "They only had to repay the amount they took, so they benefitted by having what is effectively an interest-free loan."

False claims cases such as Alderson's are filed under seal while the government investigates the allegations. Alderson's lawsuit was unsealed in federal district court in Tampa, where it had been transferred.

For more information about this case, see the following news stories:

  • "U.S. suit charges fraud by two big hospital chains," Kurt Eichenwald, The New York Times, 10/6/98.
  • "Justice Department joins lawsuit against Columbia/HCA, Quorum," Lucette Lagnado, The Wall Street Journal, 10/6/98.
  • "Justice joins Columbia/HCA lawsuit," Tom Lowry, USA Today, 10/6/98.
  • "U.S. in suit against Columbia/HCA," Robert A. Rosenblatt, Los Angeles Times, 10/6/98.
  • "Justice Department joins civil lawsuit against Columbia, Quorum," Miami Herald, 10/6/98.
  • "Government joins Columbia civil lawsuit," Kris Hundley, St. Petersburg Times, 10/6/98.
  • "U.S. joins lawsuit against Columbia and Quorum hospital chains," Department of Justice press release, 10/5/98.