HCA's criminal plea sets stage for resolution of Medicare "cost report" fraud cases under the False Claims Act law, its largest civil liability

Damages alleged in two whistleblower lawsuits total more than $1 billion

Dec. 14, 2000 — Today's announcement that HCA-The Healthcare Co. will pay $95.3 million to settle criminal charges of Medicare fraud clears the way to finalize its previously announced $745 million partial civil settlement. That settlement does not cover substantial civil claims for which the company has now admitted criminal liability.

The Justice Department announced that an HCA subsidiary, Columbia Management Companies Inc., will plead guilty to eight counts of making false statements to the government in connection with the submission of false cost reports to Medicare.

What remains to be resolved is potentially the largest financial liability faced by the company: Two qui tam lawsuits, which the government joined in 1998, allege the company and its corporate predecessors submitted fraudulent "cost reports" to Medicare, defrauding the government of more than $1 billion.

John Schilling, the whistleblower in one of those cases, was the key witness and provided essential documents in a criminal trial that resulted in prison sentences for two HCA executives in Florida. James Alderson, the whistleblower in the other case, was the first person to file a False Claims Act lawsuit exposing HCA's broad-based cost reporting fraud.

"HCA's pleas are an important step in resolving the company's ultimate liability to the government," said Stephen Meagher, a San Francisco attorney with Phillips & Cohen LLP, which represents the whistleblowers in the cost report fraud cases and another qui tam case against HCA. "The company's acknowledgment of criminal responsibility hopefully signals a desire to wrap up the largest and most contentious issues."

Cost reporting fraud is an increasingly prominent area of federal enforcement. Last week, the Justice Department joined a whistleblower lawsuit, filed by Schilling, against accounting firm giant KPMG for its role in facilitating the fraud at some HCA facilities. In October, the Justice Department and Quorum Health Group, the nation's largest hospital management company (formerly known as HCA Management), agreed to a $77.5 million settlement to resolve a whistleblower case filed by Alderson for cost report fraud.

A portion of the whistleblower lawsuits that is covered in the company's pleas today is the allegation that HCA and its predecessor companies often reported their costs in a way that caused Medicare unwittingly to pick up part of the costs of corporate acquisitions.

For example, when then-Columbia/HCA acquired Olsten Corp.'s home health business in 1994, it paid Olsten wildly inflated management fees instead of a realistic purchase price. The cost of management fees can be passed on to Medicare through cost reports; the costs of purchasing the good will of an existing business cannot.

By disguising such purchase costs as management fees, Columbia unlawfully deceived Medicare into subsidizing the cost of its business expansion. Moreover, once in the home health business, Columbia shifted marketing and other hospital expenses into the home health agencies so that they could be reimbursed, again through the cost reports, at a higher rate.

"HCA's agreement today to pay $95 million and the conviction of the HCA executives makes clear there was criminal conduct by the company," said Peter W. Chatfield, a Washington, D.C., attorney with Phillips & Cohen. "Companies do not enter criminal pleas and pay penalties and damages in excess of $840 million where there is any genuine dispute that they knowingly engaged in fraud."

Phillips & Cohen also represents two Utah doctors who brought a separate whistleblower lawsuit that will be completely resolved as part of the $745 million initial settlement. They alleged that Columbia hospitals routinely billed Medicare for blood tests that were not requested by doctors and were not medically necessary.

There are also other qui tam lawsuits involving HCA, all consolidated in Washington D.C., in a proceeding that has been under seal.