Government charges that KPMG helped HCA commit Medicare fraud; joins whistleblower lawsuit

Dec. 4, 2000 — The Justice Department today joined a whistleblower lawsuit against accounting firm KPMG LLP for allegedly helping Columbia/HCA Healthcare Corp. — now called HCA-the Healthcare Co. — perpetrate a massive Medicare fraud scheme that defrauded the program of millions of dollars.

This is the first time that the federal government has used a whistleblower law known as the False Claims Act to hold an outside accounting firm liable for aiding and facilitating Medicare fraud committed by a client. A company found liable under the law would have to pay as much as three times damages and $5,000 to $10,000 for each false claim.

"The government's decision to join our case puts outside accountants and consultants on notice that they may be held liable if they knowingly assist their clients in submitting false claims," 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 HCA. "Although outside accountants and consultants are not legally obligated to turn their clients in, when they see indications of fraud they should withdraw or refuse to participate."

The lawsuit charges that KPMG (formerly KPMG Peat Marwick LLP) knew that annual "cost reports" that HCA submitted to Medicare contained false information. Yet it helped HCA prepare the reports and endorsed the false cost reports nonetheless.

HCA, 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. Earlier this year HCA tentatively agreed to pay the government $745 million to settle part of the Medicare fraud claims against it. That tentative settlement does not include any amount for cost report claims involving KPMG.

The "qui tam" (whistleblower) lawsuit against KPMG was filed under seal in 1998 in federal court in Tampa, Fla. Its existence was revealed during the criminal trial of four mid-level HCA executives for Medicare fraud last year. Two of the defendants were found guilty and sentenced to prison. KPMG documents were central to the government's case.

The lawsuit was filed on behalf of John W. Schilling, a former HCA employee in Florida who was a key witness at the criminal trial. The Justice Department joined in 1998 a qui tam case brought by Schilling against HCA arising from similar charges of cost reporting fraud. That case remains unresolved.

The Justice Department also joined a separate whistleblower lawsuit against HCA 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. Quorum agreed in October to pay $77.5 million to settle Alderson's and the government's claims against it.

Both HCA and Quorum included costs that were not reimbursable in its annual cost reports, the whistleblowers charged. The companies routinely prepared two sets of cost reports: One contained "aggressive" claims to file with the government; the other--marked "Confidential" and never shared with Medicare auditors-- was used to calculate funds to be held in reserve in case Medicare auditors ever caught a false claim and demanded the payment back, according to the qui tam lawsuits.

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 — such as 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.

"As a company with well-advertised expertise in cost reporting, KPMG should be held to a high standard of honesty and integrity when advising clients on cost reporting matters," said Peter W. Chatfield, a Washington, D.C., attorney with Phillips & Cohen.

The whistleblower lawsuits were filed 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.

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:

  • "Justice Department joining in lawsuit against KPMG," Kurt Eichenwald, The New York Times, 12/5/00.