Stepping up fraud defenses
For-profit hospital chains boost their defenses as regulators step up anti-fraud scrutiny
Investor-owned healthcare systems have been adding to their legal ranks and boosting their self-policing in an attempt to get one step ahead of heightened regulatory activity around fraud and abuse. The impact of a healthcare fraud enforcement can go far beyond footnotes in a financial report. On Dec. 2, 2012, allegations of hospital misconduct headlined the CBS News program “60 Minutes,” which took Health Management Associates to task over allegations that the publicly traded system pressured physicians to boost admission rates.
That’s why playing defense, while expensive, makes sense. Systems executives say the greater cost would be failing to fend off an investigation, or worse, a settlement that could reach in the hundreds of millions.
One of the legacies of healthcare reform has been not only an increased focus on costs and access but also stepped-up enforcement against healthcare fraud and abuse. And while all providers have been put on notice, the investorowned chains—some of the largest and most profitable systems in the country—have offered a glimpse into the way the scrutiny has changed the operating environment.
“What you’re seeing is everyone has put a renewed emphasis on their compliance efforts,” says Scott Becker, a partner at law firm McGuireWoods, who counsels healthcare providers on regulatory and transactional issues.
When HMA previewed its 2012 earnings results for investors this year, it revealed that legal expenses ran $15 million over budget, largely attributable to outside attorney fees in the fourth quarter. In total, its legal expenses for the year amounted to $64.5 million—more than double the $24.2 million it paid in 2011.
On a conference call, HMA President and CEO Gary Newsome described the company’s in-house legal team as being at a “size and quality that we’ve not had historically.”
He noted that the costs are from ongoing investigations, which he said are still in the discovery phase.
Nearly all publicly traded systems list the government’s heightened, and more well-coordinated, focus on policing healthcare fraud and abuse as a risk factor for their business. The Obama administration has targeted the return of Medicare overpayments through the recovery audit contractor (or RAC) program, which places four independent organizations in charge of identifying billing anomalies in their respective regions of the country.
The 2009 creation of the Health Care Fraud Prevention and Enforcement Action Team (also known as the HEAT task force) elevated the fight against Medicare fraud to a “cabinet-level priority,” with HHS Secretary Katherine Sebelius and Attorney General Eric Holder jointly directing the task force’s efforts.
As a result, HHS and the Justice Department reported record recoveries of $4.1 billion for fiscal 2011—and then topped that number the following year with recoveries of $4.2 billion.
“These are issues on the front page of the newspaper, whereas perhaps years ago they may have been in the back page in the business section,” said Audrey Andrews, senior vice president and chief compliance officer at Tenet Healthcare Corp. She addressed compliance efforts at the 49-hospital system during a Dec. 18, 2012 Modern Healthcare webinar. “They have become intensely interesting to our patients, media and regulators.”
Lisa Estrada, a partner at law firm Arent Fox who counsels clients undergoing government investigations, notes that because cases can sometimes take two to three years to resolve, healthcare companies are only beginning to feel the impact of the increased enforcement efforts.
“I think we’re probably lagging behind,” she says. “We’re starting to really see the evidence of it in the settled cases.”
Attorneys who work on these cases—on both sides—are quick to point out that healthcare fraud enforcement is not an area where there’s a for-profit/not-for-profit divide. Both types of systems are equally vulnerable to investigations, and all hospitals need to be on alert.
An August 2012 survey from the Health Care Compliance Association found that not-forprofit providers averaged more yearly audits than their for-profit counterparts, or just over six in a 12-month period compared to less than
four in the investor-owned segment.
But publicly traded companies face unique challenges, including greater requirements to disclose investigations in filings with the Securities and Exchange Commission. Although investor-owned chains may represent only 20% of hospital beds, they rank among the largest healthcare organizations by net patient revenue—making them more likely to be targeted.
The HCCA survey, conducted in April, found that while 76% of organizations with 5,000 or more employees had faced at least one audit in the previous 12-month period, only 30% of groups with fewer than 250 employees could say the same.
“In a lot of these cases, the numbers are huge with the penalties,” Estrada says. Smaller cases are “less attractive, frankly—they’re less attractive to the whistle-blowers and the government.”
In an analysis of recent healthcare fraud settlements, A.J. Rice, an analyst at UBS, found that almost every Medicare healthcare provider the investment bank covers is currently or has recently been the subject of a government probe.
Rice also compiled a list of the 28 largest Medicare settlements or recoveries, of which six were against hospital operators. Only one of those six settlements—against Barnabas Health in New Jersey—involved a not-for-profit system.
Yet in an interview, Rice notes that the numbers show that the largest payouts are still most likely to involve pharmaceutical companies, which represented 17 of the largest 28 fraud cases.
In addition, the largest settlement to date against a healthcare provider was in June 2006—nearly three years before the HEAT task force was established—and involved Tenet’s $900 million expenditure to settle allegations involving manipulating outlier payments, upcoding and bill padding.
But the UBS analysis doesn’t mean providers are out of the woods, since the number of cases and the size of the penalties have been increasing in recent years. Attorneys general in a number of districts also have been making healthcare fraud prosecution a top priority.
In Maryland, for instance, the FBI has added personnel just to handle whistle-blower cases, Estrada says.
And in Nashville, the de facto capital of the for-profit hospital industry, U.S. Attorney Jerry Martin is becoming a national figure by going after fraud and abuse cases. In a July interview with Modern Healthcare, Martin said his office had recovered $130 million in 2011 from healthcare fraud cases compared with only $3 million for all of 2010.
Yet Rice says while allegations such as the ones regarding HMA’s billing practices might have been an overhang on a company’s stock price a decade ago, that’s not the case anymore.
He says systems are more likely to catch overpayments and billing errors in their early stages because internal audits are becoming more fre- quent and a regular part of doing business.
Even the headline risk can be minimal. On Nov. 29, the evening HMA first disclosed in a news release that it would be the subject of an unflattering “60 Minutes” segment, its shares had closed at $8.07. They opened the next day trading only 27 cents lower.
HMA continued to trade under $8 for a little more than a week, before continuing the buoyant run that has swept along all publicly traded systems as investors celebrated the increased certainty around the future of health reform. Three months after the segment aired, HMA was trading about 36% higher than it was Nov. 29.
Still, allegations of fraud and abuse can still take a toll on the way systems operate.
In April 2011, Tenet sent shivers through the hospital industry when—as part of a defensive play to prevent a takeover by Community Health Systems—it accused the Franklin, Tenn.-based chain of using improper admissions practices. It alleged that Community overbilled Medicare by coding observation stays as short-stay admissions.
The tactic led to subpoenas from HHS’ inspector general’s office as well as the SEC— and also sparked fears that other companies could be swept up in the tide. The fears weren’t totally unfounded. HMA, which used the same emergency-department management software as Community, soon disclosed that it too had been subpoenaed.
The fallout led to immediate declines in admissions in favor of observation stays. By July 2011, Community reported a 5.6% decrease in its same-facility admissions. Several months later, Wayne Smith, its president and CEO, acknowledged that the company “overreacted” after it came under scrutiny.
“We were not as deliberate as we could have been or should have been in terms of our process in education and training,” he said on a first-quarter 2012 earnings call last April.
HMA, in its earnings report for year-end 2012, reported a 24% increase in observation stays in the fourth quarter of the year, and a 12% increase for all of 2012.
Representatives from HMA and Community declined to comment.
Investor-owned chains have also increased the number of people they have working on payment issues, with the HCCA survey finding that 54% of for-profit systems have dedicated audit staff compared with 44% of not-for-profits. In a sign of the times, 15hospital Capella Healthcare, Franklin, Tenn., last month created the new position of director of denials and appeals—a role that will oversee the company’s recovery audit contractors appeals process.
Tenet, which entered into a five-year corporate integrity agreement after its 2006 settlement, has continued a compliance program that focuses on elements such as understanding coverage determinations and careful documentation, Andrews says.
She notes that providers might not be able to prevent all disputes over claims data, but “those should be minimized if you really seek to do it right on the front-end. That’s certainly where we’ve put the bulk of our investment.”
Matthew Curley, a healthcare fraud attorney at law firm Bass, Berry & Sims, who previously served as assistant U.S. attorney for the Middle District of Tennessee, notes that many providers are often surprised at how advanced the government’s case is when they find out that they are the subject of an investigation.
“The government might be closer to the goal line than the provider might think,” he says. “You can really see a difference with providers that prepare for those issues … and those that sit on their hands.”
Becker notes that regular billing and coding reviews have practically become another lineitem in the budget for health systems. And providers are continually assessing their compliance efforts across the board, rather than just as a response to a specific issue.
“There’s much more focus on all sorts of compliance efforts,” he says. “It’s just a more constant drumbeat.”