Government says HCA received more than $400 million in Medicare reimbursement through systematic fraud scheme

HCA liability under federal fraud (False Claims Act) law could exceed $1 billion

March 15, 2001 — The Justice Department filed in federal court today a document of more than 1,000 pages detailing a vast and broad scheme by HCA-The Healthcare Co. (formerly Columbia/HCA Healthcare Corp.) to defraud the Medicare system of more than $400 million by making false claims in its annual "cost reports."

The amended complaint — filed by the government today to meet a court deadline — is the latest salvo in a eight-year government investigation of Medicare cost reporting fraud by HCA and its related companies that was sparked by two "qui tam" (whistleblower) lawsuits. HCA is the nation's largest hospital company.

The government also filed today separate complaints pursuing its longstanding investigation of the other outstanding civil issue confronting HCA: kickbacks and improper physician investment arrangements.

If the cost report case results in a victory at trial, HCA's liability could be more than $1 billion plus an undetermined amount in penalties, because the lawsuits were brought under the False Claims Act. That federal fraud law provides that liable companies may be required to pay up to three times damages plus penalties of $5,000 to $10,000 for each false claim made to the government.

The complaint also includes allegations of HCA cost report fraud schemes for which the government has not yet determined its monetary losses.

A former HCA management subsidiary pleaded guilty last December to criminal charges related to many of the schemes alleged in today's complaints. HCA paid $95.3 million to settle the criminal charges, but has not yet resolved its civil liability for cost report and kickback issues. HCA's cost reporting liability will be separate from and in addition to the $745 million civil settlement reached last year on other claims.

"The breadth of the allegations and the detailed calculations of Medicare's losses are a clear signal that HCA's problems with the government are far from over," said Stephen Meagher, a San Francisco attorney with Phillips & Cohen LLP, which represents the two whistleblowers.

The government's analysis of HCA's cost reports finds that the company set aside reserves totaling more than $400 million from 1987 to 1997 to cover claims that it knew were not allowed under Medicare reimbursement regulations. Nearly 400 past and present HCA facilities made thousands of false claims, the government found.

"The scope of the fraud alleged in the government's complaint is unprecedented," said Peter W. Chatfield, a Washington, D.C., attorney with Phillips & Cohen. "But it is in many ways a very conservative estimate of the fraud. The Justice Department has given HCA the benefit of any possible doubt on tens of millions of dollars in highly dubious claims submitted, and reserved for, by HCA."

The government charges that HCA:

  • Filed claims and received reimbursement for nonallowable costs such as for marketing, advertising and unrelated investments by mischaracterizing them.
  • Billed Medicare for idle space in hospitals by claiming it was being used for patient care.
  • Concealed overcharges and Medicare auditing errors that favored HCA facilities.
  • Failed to implement Medicare audit adjustments in cost reports in subsequent years — continuing to claim costs that Medicare auditors previously had disallowed for reimbursement.
  • Shifted costs to home health rehabilitation and other facilities that Medicare reimbursed at higher rates.

The government's amended complaint also reveals for the first time details of HCA's spin off of 104 hospitals in 1987 to form HealthTrust Inc. The complaint alleges that Medicare unwittingly paid more than $100 million of the cost of that business deal. The chairman, CEO and president of HCA at that time was its current chairman, Thomas Frist.

"The details provided by this complaint expose cost report fraud to be an endemic HCA problem going back into the 1980s and not solely a product of the Columbia era," said attorney Meagher. Columbia Healthcare Corp. merged with HCA-Hospital Corp. of America in 1994 to become the largest for-profit hospital chain in the country. HealthTrust Inc. was reacquired by Columbia/HCA in 1995.

The two whistleblower lawsuits were brought separately by James Alderson, a former director of fiscal services with a small hospital in Montana, and John Schilling, a former reimbursement manager for Columbia in Florida. Alderson was the first person to file a False Claims Act lawsuit exposing HCA's broad-based cost reporting fraud. Schilling was the key witness and provided essential documents in a criminal trial that resulted in prison sentences for two HCA executives in Florida.

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.

Schilling also has filed a qui tam lawsuit against accounting firm giant KPMG for its role in facilitating the fraud at some HCA facilities. The Justice Department joined that lawsuit in December.

Both HCA and Quorum routinely prepared two sets of cost reports, according to the whistleblower lawsuits and the government: 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.

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.

Cases referred to above are:

  • U.S. ex rel. John Schilling v. Columbia/HCA, case no. 99-3289 (RCL), part of 01-MS-50 (RCL) (District of Columbia)
  • U.S. ex rel. James F. Alderson v. Columbia/HCA, case no. 99-3290 (RCL), part of 01-MS-50 (RCL) (District of Columbia)
  • U.S. ex rel. James F. Alderson v. Quorum Health Group Inc. et al., 99-0413-CIV-T-23B (Middle District of Florida)
  • U.S. ex rel. John Schilling v. KPMG Peat Marwick LLP, case no. 98-901-CIV-T-17F (Middle District of Florida)

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

  • "HCA faces new U.S. filings on Medicare," Lucette Lagnado, The Wall Street Journal, 3/19/01.
  • "Government joins in suits against hospital giant," Kurt Eichenwald, The New York Times," 3/17/01.
  • "HCA faces new fraud charges; U.S. says Virginia hospitals involved in Medicare fraud scam," Bill Brubaker, The Washington Post, 3/17/01.
  • "US. accuses HCA of Medicare fraud," Glenn Singer, Sun-Sentinel, 3/17/01.
  • "Justice Department says HCA owes 'hundreds of millions' in fraud case," Keith Russell, Tennessean, 3/17/01.
  • "HCA-Healthcare may be facing another charge," Los Angeles Times, 3/16/01.
  • "HCA lawsuit raises issues dating back to 1987," Keith Russell, Tennessean, 3/16/01.