Phillips & Cohen case results in record-setting Medicare fraud settlement by HCA

Dec. 18, 2002 — HCA Inc., the nation's largest for-profit healthcare provider, has agreed to pay a total of $881 million to the federal government to settle Medicare fraud charges, including those made by two whistleblowers who alleged in lawsuits that the company had inflated expenses for reimbursement claimed in annual Medicare "cost reports."

Phillips & Cohen LLP, which represented the whistleblowers in the cost-report lawsuits, put together a team of six top law firms two years ago to help the government pursue the case. The team was headed by Gerald M. Stern, a seasoned litigator working with Phillips & Cohen, and the firm's partners, Peter W. Chatfield and Stephen L. Meagher. The amount of resources invested and the size of the legal team was unprecedented for a whistleblower case.

More than 40 private attorneys put in over 75,000 hours and spent close to $30 million in legal and accounting resources to bring the case to a successful end for the government. Millions of pages of HCA documents were stored in repositories at three sites around the country.

The whistleblowers' legal team, along with government attorneys, have been taking depositions of HCA officials since August. They were preparing to depose former HCA Chairman Thomas F. Frist and current Chairman and Chief Executive Officer Jack O. Bovender in January and February.

"The more we dug into the records and the more we deposed current and former HCA employees, the more substantiation we found of ways HCA had defrauded Medicare," said Stern, who is known for his work as lead counsel for the victims of the Buffalo Creek mine disaster and as a former general counsel and former member of the board of directors of Occidental Petroleum Corp.

"It took a Herculean effort to recover this money for the government," Stern said. "We assume the lion's share of the settlement will be attributed to the cost-report fraud cases."

In addition, the two whistleblowers — James A. Alderson and John W. Schilling — worked tirelessly with their attorneys to develop the case.

Today's settlement brings the total that HCA would pay the government to settle Medicare fraud charges to more than $1.7 billion. The company paid $840 million in 2001 to settle other qui tam cases and pay criminal fines.

HCA has reported that it has spent hundreds of millions in legal fees related to the government's investigations.

"HCA's strategy was to outspend the government," said attorney John R. Phillips of Phillips & Cohen. "We weren't going to let that happen."

HCA's fraudulent claims for reimbursement ran the gamut from billing Medicare for Kentucky Derby tickets, to claiming pension contributions that were twice the actual amount paid, to passing on to Medicare more than $100 million in nonallowable costs associated with its corporate reorganizations.

Under the federal cost-reporting system, hospitals file Medicare cost reports annually to receive reimbursement for treatment of Medicare patients.

"HCA said the case was too complicated for a jury to understand, because it involved 14,000 Medicare claims," said attorney Brent N. Rushforth, a managing partner with Heller Ehrman White & McAuliffe, which also represented the whistleblowers. "We showed them how easy it was to prove that HCA had systematically defrauded the Medicare program for years."

In October, Sen. Charles Grassley, R-Iowa, sent Department of Health and Human Services Secretary Tommy G. Thompson a letter expressing concerns that Medicare officials might be willing to settle the HCA case for an amount that was too low.

Whistleblowers provided insider knowledge

The roots of the fraud originated in the 1980s at both the original HCA and Columbia companies before they merged. They kept what were essentially a secret set of books that detailed reimbursement claims made on cost reports that the companies knew were improper but still filed with Medicare, according to the whistleblowers' lawsuits. The secret books often were stamped, "confidential." Employees were instructed not to disclose their existence to Medicare auditors.

In 1990, Alderson was fired from his job as chief financial officer of a Montana hospital managed by Quorum Health Group Inc. after he refused to include "aggressive" claims on a cost report. Quorum had continued to follow the billing and accounting practices of its former corporate parent, HCA. Alderson, a certified public accountant, filed a qui tam lawsuit against HCA, Quorum and other HCA-related companies for cost-report fraud on January 5, 1993.

Quorum, which was the nation's largest hospital management company, paid $85.7 million in 2000 to settle its case. After concluding that the contributions to the case by Alderson and his attorneys were "exemplary," a federal judge awarded Alderson a 24 percent share of the settlement. Under the False Claims Act, whistleblowers are entitled to 15 percent to 25 percent of the funds the government recovers as a result of their qui tam lawsuits.

Schilling, a former reimbursement manager for Columbia in Florida, filed his qui tam lawsuit in 1996. His lawsuit alleged that all hospitals that were part of the Columbia chain prior to the 1994 merger with HCA also engaged in cost-report fraud. As a result of the Columbia-HCA merger, Alderson and Schilling's cases were prosecuted as a single matter.

In addition to Phillips & Cohen and Heller Ehrman, the other law firms that represented the whistleblowers were: Hennigan, Bennett & Dorman; Irell & Manella; Boies Schiller & Flexner LLP; and James, Hoyer, Newcomer & Simljanich.

The settlement includes a $250 million payment by HCA to resolve its administrative liability to the Centers for Medicare and Medicaid.

The 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)

For more information, please see the following news stories:

  • "HCA case holds lessons for corporate world," Tennessean, 12/28/02.
  • "DOJ, HCA reach tentative $631M agreement to settle allegations of health care fraud," BNA's Federal Contracts Report," 12/24/02.
  • "HCA execs faced attorneys' query," Bill Lewis, Tennessean, 12/19/02.
  • "HCA, U.S. agree to fraud settlement; hospital chain to pay $631 million," Robert O'Harrow Jr., Washington Post, 12/19/02.
  • "HCA's accusers may challenge U.S. settlement," Barbara Martinez, The Wall Street Journal, 12/19/02.
  • "$631 million ends health-care-fraud probe," Karin Miller, The Philadelphia Inquirer, 12/19/02.
  • "HCA says fraud settlement is near," Daily Journal, 12/19/02.
  • "HCA reported in agreement to settle fraud case," Kurt Eichenwald, The New York Times, 12/18/02.
  • "HCA to pay U.S. $631 million to settle fraud litigation," Keith Snider, Bloomberg News, 12/18/02.
  • "$898.5 million! HCA, government reach tentative deal," Mark Taylor, Modern Healthcare, (www.modernhealthcare.com), 12/18/02.
  • "Hospital chain ends fraud case," Associated Press, 12/18/02.