Qui tam lawsuit charges KPMG helped Columbia commit Medicare fraud

Case is first to hold outside accountants liable for part in Columbia's scheme

May 28, 1999 -- Accounting firm KPMG LLP is being sued for allegedly helping Columbia/HCA Healthcare Corp. perpetrate a massive Medicare fraud scheme that led to the indictment of four Columbia executives.

Basic American Medical Inc. (BAMI) — which owned several Florida hospitals — and later Columbia retained KPMG (formerly KPMG Peat Marwick LLP) to help prepare their annual "cost reports" that were submitted to Medicare. Columbia acquired BAMI in 1992.

A "qui tam" (whistleblower) lawsuit unsealed today in federal court in Tampa, Fla., charges that KPMG knew the cost reports contained false information yet assisted in preparing them nonetheless.

"This case is the first seeking to hold outside accountants responsible for their role in Columbia's submission of false cost reporting claims to Medicare," said Stephen Meagher, a San Francisco attorney with Phillips & Cohen, which is representing the whistleblower both in the KPMG case and in two qui tam lawsuits against Columbia. "Outside accountants or consultants of any kind cannot knowingly assist their clients in submitting improper Medicare claims."

The qui tam lawsuit unsealed today was filed on behalf of John W. Schilling, a former Columbia employee in Florida. Last December, the Justice Department joined a case brought by Schilling against Columbia arising from similar charges of cost reporting fraud. Schilling is testifying this week for the prosecution at the criminal trial of the Columbia officials in Tampa. He revealed the existence of the lawsuit in testimony yesterday.

The Justice Department last year joined a separate whistleblower lawsuit against Columbia and Quorum Health Group brought in 1993 by James F. Alderson, who is represented by Phillips & Cohen as well. The lawsuits sparked the largest federal investigation into Medicare fraud ever.

Both qui tam lawsuits against Columbia revealed that the company prepared two sets of cost reports: one with "aggressive" claims to file with the government; the other with conservative, proper claims that was used to calculate "reserves" the company kept in case Medicare disallowed certain reimbursement claims. Confidential documents Columbia kept in connection with those conservative reports have provided the government critical evidence in its fraud investigation.

Several examples of confidential records explaining the difference between the cost reports Columbia filed with the government and the reports created for reserve purposes are attached as exhibits to the lawsuit against KPMG. The records, some of which are expected to be used in the criminal trial, provide the first public documentation that Columbia and KPMG knew which reimbursement claims were likely to be ruled improper.

"This is not about setting aside reserves in case Medicare disagrees about legitimate gray areas," said Peter W. Chatfield, a Washington, D.C., attorney with Phillips & Cohen. "KPMG documents show that it knew improper claims were being filed."

Hospitals and other health care providers file cost reports with Medicare annually to get reimbursement for costs related to patient care, such as new medical equipment, the construction of 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 and the largest health care provider in the world, has received more Medicare reimbursement than any other health care provider.

The government has not announced yet whether it will join the lawsuit against KPMG. It asked the judge to unseal the lawsuit with the understanding that information in the lawsuit and the attached exhibits may be used in the criminal trial against the Columbia executives. The judge granted the government an extension to announce its decision on whether to intervene in the KPMG case until after the criminal trial ends.

The lawsuit was filed last year under the False Claims Act, which allows private individuals to sue companies that are defrauding the government and recover money on the government's behalf. The law also holds individuals and companies liable if they help or conspire with another to seek government payment that is unwarranted.

Liable companies may be required to pay up to three times the government's losses and $5,000 to $10,000 for each false claim. The "relators," as the whistleblowers are called, are entitled to a share of the recoveries.

The lawsuits are filed under seal, meaning they are not publicly available, to give the government time to investigate the allegations and determine whether it wants to intervene in the case.

Cases referred to above are:

  • U.S. ex rel. John Schilling v. KPMG Peat Marwick LLP, case no. 98-901-CIV-T-17F
  • U.S. ex rel. John Schilling v. Columbia/HCA, case no. 96-1264-CIV-T-23B
  • U.S. ex rel. James F. Alderson v. Columbia/HCA, case no. 97-2035-CIV-T-23E

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

  • "Accounting firm is named in Medicare fraud lawsuit," Kurt Eichenwald, The New York Times, 5/29/99.
  • "KPMG is accused by whistle-blower of aiding Columbia/HCA in fraud," Lucette Lagnado, The Wall Street Journal, 6/1/99.