SAN FRANCISCO, CA — Accounting giant KPMG LLP has agreed to pay $9 million to settle a whistleblower lawsuit, brought by Phillips & Cohen, that alleged the firm helped Columbia/HCA Healthcare Corp. — now called HCA-the Healthcare Co. — prepare and later conceal false claims in Medicare “cost reports” that defrauded the program of millions of dollars.

It is the first time that the federal government has held a “Big Five” accounting firm liable under a civil fraud law known as the False Claims Act for aiding and facilitating Medicare fraud committed by a client. The settlement amount exceeds the $7 million Arthur Andersen paid in June, which was the largest-ever civil penalty in a Securities and Exchange Commission action against such a firm.

“KPMG’s participation in the fraud proved costly,” said Stephen Meagher, a San Francisco attorney with Phillips & Cohen, which is representing the whistleblowers both in the KPMG case and in two qui tam lawsuits against HCA. “KPMG received less than $200,000 for its work, but it has been held accountable for more than the full loss to the government from the cost reports it prepared for HCA.”

The settlement, filed in federal district court in Florida today, means of the three companies sued by whistleblowers and the federal government in connection with a massive cost report fraud scheme, only HCA has yet to resolve its outstanding civil fraud charges.

At issue in the HCA case are Medicare cost report claims totaling more than $600 million. Because the False Claims Act is a treble damages statute, providing for additional penalties of $5,500 to $11,000 for each false claim, HCA’s liability could exceed $1 billion.

KPMG (formerly KPMG Peat Marwick LLP) performed cost report consulting services for six Columbia hospitals in Florida from 1990 to 1992. Health care providers submit Medicare cost reports annually to get reimbursement for costs related to patient care and some general administrative costs. Medicare pays a percentage of those costs based on the number of Medicare patients a hospital treats.

“KPMG evidently was more interested in client relations than the integrity of its work,” said Peter W. Chatfield, a Washington, D.C., attorney with Phillips & Cohen. “If outside accountants help their clients perpetrate Medicare fraud, ‘just following the client’s orders’ is no defense.”

The government used KPMG documents as key evidence in the 1999 criminal trial in Florida that resulted in the conviction of two HCA executives for Medicare fraud.

Last year, two HCA subsidiaries, Columbia Management Companies Inc. and Columbia Homecare Group, pleaded guilty to multiple counts of making false statements to the government in Medicare cost reports. HCA agreed to pay $95.3 million to settle criminal charges and $745 million to settle several other qui tam lawsuits against it. But it has yet to resolve its civil liability for cost reporting fraud.

A former HCA employee in Florida, John W. Schilling, brought the whistleblower lawsuit against KPMG in 1998 and a separate one in 1996 against HCA, which the government also joined. Schilling was the main witness at the criminal trial.

When the qui tam case against KPMG was unsealed in 1999, a KPMG spokesman, George Ledwith, attacked Schilling and his motives. “The only false claims we are aware of are those apparently being made by Mr. Schilling,” Ledwith told the Wall Street Journal. The Journal said that Ledwith “described as ‘a gross exaggeration’ the lawsuit’s contention that ‘millions’ of dollars in improper payments were at stake.”

“Who showed more integrity: Mr. Schilling, who exposed the fraud, or KPMG, which went along with it?” attorney Chatfield said. “KPMG’s settlement demonstrates that HCA’s fraud — and KPMG’s complicity — have not been exaggerated.”

Quorum Health Group earlier this year paid $85.7 million to settle cost report fraud charges made in a separate whistleblower lawsuit that the government joined. The case included charges arising from HCA’s former ownership of Quorum. HCA is accused of defrauding the government of nearly 10 times the amount that was at issue in the Quorum case. The lawsuit was brought in 1993 by James F. Alderson, who is represented by Phillips & Cohen as well. Alderson’s and Schilling’s lawsuits sparked the largest federal investigation into Medicare fraud ever.

Both HCA and Quorum included costs that were not reimbursable in its annual cost reports, the lawsuits 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 discovered a false claim and demanded repayment, according to the qui tam lawsuits.

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. Whistleblowers are entitled to a share of whatever money the government collects as a result of their lawsuits.

The Justice Department has not announced yet Schilling’s award in the KPMG settlement. A federal court in Tampa recently awarded Alderson 24 percent of the recovery from Quorum.

For more information, please see the following news stories:

  • “KPMG is paying $9 million to settle medical fraud case,” Kurt Eichenwald, The New York Times, 10/24/01.
  • “KPMG to pay the U.S. $9 million to end suit tied to HCA scandal,” Jonathan Weil, The Wall Street Journal,” 10/24/01.

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. 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)
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