Quorum agrees to pay $95.5 million to settle whistleblower cases

One lawsuit alleged systematic Medicare fraud through "cost reports"

Oct. 2, 2000 — Quorum Health Group Inc., the nation's largest hospital management company, has agreed to pay the federal government $95.5 million to settle two whistleblower lawsuits involving Medicare fraud.

The largest payment — $77.5 million — will be made to settle a whistleblower lawsuit that charged the company systematically defrauded Medicare for years by filing fraudulent "cost reports."

Quorum will pay the remaining amount, $18 million, to settle a second whistleblower case involving the misallocation of costs from an Alabama hospital to a home health services agency, the company announced today.

The whistleblower in the cost report case, James F. Alderson, filed his "qui tam" (whistleblower) lawsuit in January 1993 and provided the government with substantial evidence of the fraud. Alderson, formerly chief financial officer for a Quorum-managed hospital in Whitefish, Montana, was fired from his job 10 years ago after refusing to go along with the cost-report scheme.

"This has been a long and difficult time for me and my family," said Alderson, who now lives outside of Portland, Oregon. "It's satisfying that my case has helped clean up fraud against Medicare."

"James Alderson's lawsuit exposed a practice in the hospital industry that was draining Medicare of hundreds of millions of dollars a year," said Peter W. Chatfield, a Washington, D.C., attorney with Phillips & Cohen LLP, which represents Alderson. "The government doesn't have the resources to audit every cost report a hospital files, so it has to rely on the good faith of cost-report preparers."

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.

Quorum included costs that were not reimbursable in its annual cost reports. It routinely kept a secret set of cost report reserves that specifically identified the improper claims filed with Medicare so that funds were available in case Medicare auditors ever caught a false claim and demanded the payment back, Alderson's lawsuit charged.

Alderson also named Columbia/HCA Healthcare Corp. — now HCA-the Healthcare Co. — in his original lawsuit, alleging that it engaged in a similar practice. The lawsuit against Quorum was severed from the case against HCA in January 1999 and advanced to active litigation, while the HCA case has been in settlement negotiations.

The government launched a massive investigation into HCA's Medicare billing practices as a result of Alderson's qui tam lawsuit and a separate qui tam lawsuit brought by John Schilling, a former manager for HCA in Florida.

"The Quorum settlement shows that nationwide cost-reporting fraud cases against large providers can be resolved," said attorney John R. Phillips of Phillips & Cohen, which also represents Schilling. "Perhaps HCA will get that message."

One difference between Quorum's and HCA's fraud is that HCA kept all the profits from the cost-report scheme, said Chatfield. In addition, Quorum's questionable reserves were just a small fraction of those that were maintained by HCA, he said.

"For the most part, Quorum doesn't own the hospitals it manages, so it didn't directly profit from the false claims it prepared and filed on behalf of its client hospitals," Chatfield said. "Quorum had to pay the government back because it was their actions that caused the government's loss."

Alderson learned of the cost-report scheme when Quorum took over the management of a hospital in Whitefish, Montana, where he was chief financial officer. Until 1989, Quorum, then known as the HCA Management Co., operated as a wholly owned subsidiary of HCA. After it became a separate company, it continued to follow the billing and accounting practices of the HCA chain. Today's settlement covers false claims filed before and after Quorum spun off from HCA.

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 prepare a second cost report or submit to Medicare more "aggressive"claims that he believed were highly questionable or improper, he was fired.

The federal government intervened in Alderson's case in October 1998 in federal district court in Tampa. The lawsuit was filed under the False Claims Act, which allows private individuals to sue companies that are defrauding the federal government.

Quorum, the Justice Department and Phillips & Cohen — as Alderson's counsel — met with a mediator several times to work out a settlement. The current agreement sets the financial terms and a four-month time frame to resolve all remaining settlement details, including the terms of a corporate integrity agreement. Interest will accrue at 7.25 percent until final terms of the agreement are negotiated and payment is actually made.