Huntington Beach Hospital, which is a Prime Healthcare Services hospital. (Photo credit: Prime Healthcare Services)

Sunday, December 12, 2010 | A Southern California hospital chain known for its aggressive billing practices and cost-cutting is being investigated by state and federal authorities for an unusually high rate of life-threatening infections among its older patients.

The U.S. Department of Health and Human Services and the state Department of Justice are looking into whether a reported spike in septicemia infections at hospitals operated by Prime Healthcare Services reflects a serious health problem or multimillion-dollar Medicare fraud, officials at both agencies said.

Septicemia, or blood poisoning, arises most often in hospitals with poor procedures for infection control. Severe cases can be difficult and costly to treat and are often deadly. Medicare pays hospitals several thousand dollars more to treat septicemia than less severe hospital-acquired infections — prompting some hospitals to file what officials say are false claims.

Health and Human Services department spokesman Don White said the federal probe of Prime Healthcare was requested in July by Democratic U.S. Reps. Henry Waxman, D-Los Angeles, and Fortney “Pete” Stark, D-Fremont.

In a letter to the inspector general, the lawmakers said they acted after reviewing a computer analysis of Medicare billings by the Service Employees International Union, which has repeatedly butted heads with Prime over pay and staffing issues.

Tipped off by a different source, the state attorney general’s office began a criminal investigation into similar allegations about a year ago, said Mark Geiger, director of the Bureau of Medi-Cal Fraud & Elder Abuse. He declined to identify the source, and investigators haven’t determined whether violations occurred, he said.

The investigations are under way even as Medi-Cal auditors, after a separate inquiry, have flagged Prime for $2.8 million in questionable expenses. The spending included payments for the lease on a Beverly Hills home, depreciation on a Bentley sedan, bills for operating a private helicopter, and stays in upscale Las Vegas hotels.

The charges represent potential “fraud, waste or abuse,” according to officials from Medi-Cal, the state health program for the poor.

In e-mails and interviews, Prime Healthcare officials denied any wrongdoing, saying their company provides excellent health care even as it has engineered the turnaround of hospitals that had been in desperate financial trouble.

Ajith Kumar, Prime’s reimbursement management director, said the septicemia allegations are “part of an effort by the SEIU to extort concessions from Prime Healthcare in contract negotiations.” Prime also disputes many of the findings in the Medi-Cal audit, Kumar wrote.

Aggressive Reputation

Prime Healthcare, based in San Bernardino County, operates 12 hospitals in Southern California and a 13th hospital in Shasta County.

There are four Prime Healthcare hospitals in Orange County: Garden Grove Hospital and Medical Center; Huntington Beach Hospital; La Palma Intercommunity Hospital; and West Anaheim Medical Center.

Prime’s founder and chairman, Dr. Prem Reddy, is known for buying struggling hospitals and canceling insurance contracts with managed care companies.

Freed from pre-negotiated discounts, Reddy’s hospitals can collect much higher reimbursements for treating insured patients. To save money, the company sometimes suspends services such as chemotherapy treatments and eliminates birthing centers, the Los Angeles Times has reported.

Prime also has moved aggressively to cut payroll costs. After its 2007 takeover of Centinela Hospital Medical Center in Inglewood, Prime laid off 13 percent of the staff, the Times reported. The United Healthcare Workers union, an SEIU affiliate, complained that Prime had cut the pay of some certified nursing assistants to “poverty wages” of $8 an hour.

Reddy can be hands-on about maximizing revenue, a former Prime nurse has claimed in a wrongful termination lawsuit pending in Los Angeles Superior Court.

In documents filed last year, former Centinela nurse Margaret Karwecki said Reddy had convened a meeting to teach hospital personnel “how to document patients’ conditions, and which codes to use, in order to enable the hospital to collect as much money from insurance companies as possible.”

Reddy “specifically instructed the nurse practitioners and physicians’ assistants that they were not to share with anyone the list of codes indicating how much the hospital got paid,” the lawsuit says.

By requiring her to attend the meeting, Reddy led Karwecki to believe her job was safe, she said. But the following month, she said, she was laid off and denied severance pay. In court, Prime said Karwecki’s claims are without merit.

For his part, Reddy has contended that Prime’s methods are legal and proper — and its profits are not of public concern.

“We are not a public-benefit, not-for-profit company or trading on Wall Street,” Reddy said at a stormy 2006 meeting of the Orange County Board of Supervisors, where dozens of critics spoke out against Prime’s purchase of three local hospitals.

“I have no shareholders to report to,” Reddy continued, according to a transcript. “OK? So therefore, what I make and what you make — what anybody else makes here — is their business.”

Kumar, the reimbursement management director, acknowledged in an e-mail that Prime hospitals have higher rates of septicemia. He said the rates reflect the company’s emphasis on “early detection and treatment” of the illness.

Because of this emphasis, and because Prime physicians strictly follow Medicare coding guidelines for reporting the illness, he said more septicemia cases get reported, even though they may be early, not advanced, cases.

Septicemia rates also may be elevated among Prime hospitals because “sicker patients are being admitted” at Prime, Kumar wrote. That’s a result of the company’s emphasis on emergency-room admissions.

Kumar also disputed that the company received premium payments for treating septicemia, saying that in “a number of scenarios” its Medicare reimbursements were actually lower when septicemia was listed as a patient’s primary diagnosis.

As an example, he cited the hypothetical case of a 75-year-old stroke victim hospitalized with aspiration pneumonia, respiratory failure and early sepsis. Kumar asserted that Medicare coding guidelines would require coding the patient’s primary diagnosis as sepsis; if it were coded as pneumonia or respiratory failure, Medicare would reimburse the hospital an additional $2,800, he said.

“The septicemia rates at Prime Healthcare hospitals do not represent potential fraud,” he wrote.

Regarding the Medi-Cal audit, Kumar said Prime disputes many of its findings, saying the report would be “challenged appropriately.” He said Prime had lost more than $50 million in 2008 treating Medi-Cal patients.

Investigating Upcoding Schemes

As the Department of Health & Human Services’ inspector general wrote in a 1999 report, Medicare pays providers a premium in septicemia cases because it’s considered more difficult and costly to treat than other hospital-acquired infections.

According to figures provided by the federal Centers for Medicare & Medicaid Services, a provider might be paid between $1,800 and $3,400 more for treating a case of septicemia rather than a urinary tract infection, depending on complications and other factors.

The lure of an extra payment to treat septicemia infections has led some providers to file false claims with Medicare when they had actually treated less serious conditions. A fraud scheme of this sort is called “upcoding” because it involves assigning false diagnostic codes on Medicare billings to obtain improper reimbursement.

In its 1999 report, the inspector general’s office described the Medicare payment process in this way: When a patient leaves the hospital, a physician is supposed to document the ailment that caused his or her hospitalization, any other relevant medical conditions and any medical procedures involved in treatment.

Later, a coder trained in medical classification reviews the patient’s file and assigns the appropriate diagnostic code, which Medicare uses to determine reimbursement.

In its report, the inspector general’s office said upcoding of septicemia was rampant: In one sample of hospital billings investigators studied, 20 percent of septicemia cases had been upcoded.

To prove or disprove that upcoding actually has occurred, investigators must conduct “a detailed claims review,” analyzing individual patients’ medical and billing records, the inspector general noted.

For years, the government has targeted upcoding through lawsuits and prosecutions. One of the biggest cases ended in 2006, when Tenet Healthcare Corp. paid $900 million to settle a series of Medicare billing fraud lawsuits that included allegations of upcoding septicemia cases, the U.S. Justice Department said.

Septicemia Rates at Prime Hospitals

Suspicions of septicemia upcoding at Prime have been fueled by the union, which represents about 150,000 hospital and healthcare workers in California. It distributed its computer analysis of national Medicare billing data to state and federal officials earlier this year.

According to a copy of the analysis, Prime’s septicemia rate for fiscal year 2008 was extremely high. Six Prime hospitals ranked in the 99th percentile of U.S. hospitals for septicemia. Five more Prime hospitals were in the 95th percentile.

Overall, according to the analysis, the septicemia rate for Medicare patients in Prime hospitals was 15.7 percent — triple the national average. Four Prime hospitals — Montclair Hospital Medical Center, West Anaheim Medical Center, Sherman Oaks Hospital, and Desert Valley Hospital in Victorville — reported septicemia rates of more than 20 percent.

Between 2004 and 2008, the septicemia rate at every hospital in the Prime chain had at least doubled, the union analysts wrote.

The union analysts also noted an anomaly in the data. Although septicemia at Prime hospitals was triple the national average, the death rate for septicemia patients at Prime was far lower: 38 percent below the national average, according to the report.

The anomaly suggested upcoding, the union analysts contended. “If a facility upcodes patients from a low-mortality [diagnostic code] to a high-mortality [code] like septicemia, the mortality rate among the incorrectly marked ‘septicemia’ patients is very likely to be lower than expected,” the union analysts wrote.

In his e-mail, reimbursement management director Kumar said the lower mortality rate is another reflection of the company’s emphasis on treating septicemia.

“Patients with sepsis [receive] early and aggressive treatment and better patient outcomes, which leads to lower mortality rates,” he wrote.

Geiger, the state Medi-Cal fraud director, said his bureau’s investigation into allegations of upcoding already was under way when he received a copy of the union’s report. He said the state probe began a year ago, in response to allegations from “an independent source other than the (union) analysis.” He declined to be more specific.

In a letter written in May, Geiger told the union that he was referring the results of the computer analysis to a joint state-federal Medicare fraud task force in Southern California. The union also took its analysis to Waxman, chairman of the House Committee on Energy and Commerce, and Stark, chairman of the Ways and Means Committee’s Subcommittee on Health.

In July, the lawmakers wrote to the inspector general, asking for an investigation of Prime.

“The SEIU report offers two possible explanations” for the high septicemia rates, the lawmakers wrote, “(1) a system-wide pattern of upcoding that may have led to $18 million in excess Medicare payments in 2008 alone, or (2) a real infections crisis at the hospitals. … Either possibility is deeply concerning to us.”

The inspector general’s investigation was described as beings in its early stages. Then, last month, state Sen. Elaine Alquist, D-San Jose, who leads the Senate Health Committee, asked the California Department of Public Health to investigate septicemia at Prime hospitals.

“The extreme infection rates may reflect a pattern of upcoding by Prime,” she wrote in an Aug. 17 letter that also cited the union’s analysis. “This theory is bolstered by the exceptionally low mortality rate among Prime’s reported septicemia patients, indicating that the diagnosis of septicemia may not have been warranted.”

Alquist asked the health department to “withhold any additional facility licenses” from Prime until the matter is resolved.

On Sept. 8, Assemblyman Bill Monning, D-Santa Cruz, who leads the Assembly Health Committee, wrote a similar letter to the health department, also asking for an investigation of alleged upcoding at Prime and a moratorium on new hospital licenses for the chain until the probe is complete.

The request could complicate Prime’s effort to add a 14th facility, Victor Valley Community Hospital in Victorville. The company announced plans to acquire the San Bernardino County facility earlier this month.

A spokesman said the health department was gathering information to respond to the lawmakers’ request for a probe of Prime.

Medi-Cal Audit Questions Expenses

The Medi-Cal audit that highlighted Prime’s spending on luxury goods was conducted at Prime’s corporate headquarters in 2008, said Norman Williams, spokesman for the Department of Health Care Services, which operates Medi-Cal.

Regarding the helicopter, auditors reviewed details such as flight logs and maintenance records to determine whether expenditures were related to patient care, as required by state and federal law.

Prime’s use of helicopters was well-known: In a 2007 profile in the Times, Reddy was quoted as saying he owned a $1.4 million Eurocopter and kept a pilot on call to whisk him to and from his hospitals.

Eventually, authorities flagged $491,000 in operating costs related to the helicopter as unjustified. Other disallowed costs identified in the audit included $820,000 for a lease and taxes on the home in Beverly Hills and $303,000 in depreciation for the helicopter and for the Bentley.

Another item auditors targeted was $184,000 in “interest expense paid to the owner.” Details about those payments were not included in the audit report. Auditors also targeted charges for travel, fringe benefits and executive bonus payments, and “professional fees not related to patient care,” according to the audit.

Finally, the auditors struck out $436,000 in political lobbying expenses unrelated to patient care.

Prime officials said the expenditures were justified. Chief Executive Lex Reddy, Prem Reddy’s brother, said the helicopter is needed so executives can avoid spending hours stuck in traffic. Another company official said the Beverly Hills home was necessary because many company executives work in Los Angeles-area hospitals but live in Apple Valley in San Bernardino County.

General Counsel Michael Sarrao said most of the lobbying expenses flagged by the audit actually were consulting fees. He said the company was considering appealing that exclusion.

The funds flagged by auditors do not represent tax dollars that have been sent to Prime. Rather, they signify sums that the state will not recognize when compensating the chain for its corporate office expenses.

Informed of the audit, some advocates for Medi-Cal patients said they were outraged.

“This would be hard to make up — it’s over the top,” said Anthony Wright, executive director of Health Access, a patient advocacy group.

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