Fresenius Fined $82 Million for False Claims

We open the week with yet another story of a large health care organization found by the judicial process to have misbehaved. Here is the story, courtesy of the Kansas City InfoZine:

The United States Attorney’s Office announced that a federal judge has entered a judgment of $82,642,592 in favor of the United States in a 'whistleblower' lawsuit originally filed in the federal district court in St. Louis in 2005, and then transferred to the federal district court in Nashville, Tennessee. The lawsuit claimed that Renal Care Group, Renal Care Group Supply Company and Fresenius Medical Care Holdings, Inc. recklessly disregarded federal law when billing the Medicare program for home dialysis supplies and equipment during 1999-2005.

The judge's reasoning was apparently based on some colorful facts,

The Court's orders in this case discuss the concerns of multiple Renal Care Group employees who complained about the operation and Medicare billing activity of the Renal Care Group Supply Company, including one regional manager who wrote, 'I do not wish to go to jail,' and felt the company 'was not in the best interests of patients' after receiving a corporate directive about converting patients into the Renal Care Group Supply Company. The Court further noted that Renal Care Group failed to heed the advice of the company's lawyers when operating the supply company and also discussed an internal audit of the supply company that found that one hundred percent of the company's files were missing information that Medicare required for billing.

Renal Care Group ('RCG') was a publicly traded for-profit corporation and dialysis provider until it merged with dialysis industry competitor Fresenius Medical Care ('FMC'). RCG had its principal place of business in Nashville, Tennessee, and had locations throughout Missouri, including multiple facilities around the St. Louis metropolitan area. RCG Supply Company ("RCGSC") was a Tennessee corporation that was owned and operated by RCG.

Note further the allegations of the mechanics of the misbehavior, as alleged by the government prosecutors:

The Government's complaint alleged that between January 1999 and December 2005, RCGSC submitted claims to the Medicare program for home dialysis supplies provided to ESRD patients for reimbursement of the supplies and equipment. All of these claims, as well as related claims for support services rendered by RCG dialysis clinics were false because the defendants were prohibited from and not qualified to bill Medicare for these home dialysis patients. Under federal law, the Medicare program pays companies that provide dialysis supplies to ESRD patients only if the companies that provide the supplies are truly independent from dialysis facilities and the ESRD patient chooses to receive supplies from the independent supply company. Defendants set up a sham billing company, RCGSC, that was not independent from RCG. Further, RCG interfered with ESRD patients' choice of supply options, requiring patients to 'move' to RCGSC. Even after RCG employees raised concerns and industry competitors closed their supply companies, RCG kept RCGSC open because of the illicit revenue it created.

Note further that we discussed an earlier judgment in this case, which has now been superseded, here.

So here we go again: yet more misbehavior, yet another multi-million dollar fine, but no real live person suffers a negative consequence.   Almost daily, there are stories about criminal convictions for relatively small scale health care fraud, kickbacks, bribery, etc that often result in the perpetrators going to jail or paying potentially bankrupting fines. However, when misbehavior, including fraud, kickbacks, bribery is on a big scale, almost never does an individual pay a penalty. We have seen lots of stories of big corporations paying big fines like this (e.g., look here.)  However, in a world where those who authorize, direct, or implement misbehavior that makes the company money can get big pay, do we really expect that fines assessed against the company itself, whose costs can be passed on to the employees at large, customers, and shareholders will have any deterrent power?

It is interesting that this latest case occurred around the same time that yet another breathless story appeared in the media about how the US government is about to get tough with executives whose companies misbehave.  The Associated Press ran a story claiming:

Previously, if a company got caught, its lawyers in many cases would be able to negotiate a financial settlement. The company would write the government a check for a number followed by lots of zeroes and promise not to break the rules again. Often the cost would just get passed on to customers.

Now, on top of fines paid by a company, senior executives can face criminal charges even if they weren't involved in the scheme but could have stopped it had they known. Furthermore, they can also be banned from doing business with government health programs, a career-ending consequence.

It included a quote by one government official with which I would agree.

'When you look at the history of health care enforcement, we've seen a number of Fortune 500 companies that have been caught not once, not twice, but sometimes three times violating the trust of the American people, submitting false claims, paying kickbacks to doctors, marketing drugs which have not been tested for safety and efficacy,' said Lewis Morris, chief counsel for the inspector general of the Health and Human Services Department.

'To our way of thinking, the men and women in the corporate suite aren't getting it,' Morris continued. 'If writing a check for $200 million isn't enough to have a company change its ways, then maybe we have got to have the individuals who are responsible for this held accountable. The behavior of a company starts at the top.'

I agree with the concept.  However, the AP story provided no evidence of a get tough policy newer than the case of the proposed "disbarment" from dealing with the government of the elderly CEO of Forest, which we discussed here.  Although a year ago we discussed threats by the US government to hold health care leaders accountable using the "Responsible Corporate Officer Doctrine," which has been available since 1943, so far there is no evidence that this concept has been made operational.

So the march of legal settlements, and corporate convictions for bribery, fraud, and kickbacks continue, but the problem does not go away. 

In 2006, we wrote, "It all is becoming so familiar, almost wearisome, yet the questions remain. Why do the mainly monetary penalties seem mainly to come out of the hides of stock-holders and consumers, rather than the people who actually made the decisions that lead to the offenses? And after all the indictments, prosecutions, settlements, and convictions involving large health care organizations, when will academics, policy makers and politicians, much less company CEOs and other organizational leaders admit we have a systematic problem here?"

In 2008, we wrote, "As long as health care leaders can shrug off the consequences of unethical behavior merely as acceptable costs of doing business, absent any serious attempts to get health care organizations to enforce internal codes of ethical behavior or to avoid hiring ethically challenged leaders, the procession will likely continue. The effects will be continually rising costs, declining quality, shrinking access, and rising numbers of demoralized health professionals."

I wonder what we will write about this in 2012?

The Continuing Parade of Legal Settlements by Health Care Organizations: Cardinal, Cerberus, Dartmouth-Hitchcock, Masonicare

Here is our latest round-up of the more colorful legal settlements made by some US health care organizations.

Cardinal Health

Cardinal Health is a pharmaceutical services company. Per the Kansas City Star:

A pharmaceutical distributor has settled a federal anti-kickback lawsuit by agreeing, in part, to pay $760,000 to former Kansas City Chiefs player Dan Saleaumua and a consultant.

That money is part of an $8 million settlement that Cardinal Health Inc. of Ohio agreed to pay the U.S. government to settle the lawsuit.

The lawsuit alleged that Cardinal offered Saleaumua and consultant Kevin Rinne an illegal $440,000 kickback so it could supply prescription drugs to seven Kansas City area Medicine Shoppe pharmacies that Saleaumua owned at the time.

Cerberus Capital Management/ Dyncorp/ Steward Health Care

This will require some explanation. Cerberus Capital Management now owns Steward Health Care, mostly composed of what was formerly known as Caritas Christi hospital system of Massachusetts, and a large group of physician practices now known as Caritas Christi Network Services (see posts here and here). Cerberus Capital Management now also owns DynCorp (see their web-site), which has been called one of the "leading mercenary firms," by an article in the Nation.

As reported by Bloomberg about DynCorp, and hence indirectly about Cerberus, and Steward Health Care:

DynCorp International Inc., the largest U.S. contractor in Afghanistan, agreed to pay $7.7 million to resolve allegations it submitted inflated claims for construction work in Iraq, the U.S. said.

The Justice Department said yesterday that DynCorp and its subcontractor, The Sandi Group, will settle a whistleblower case filed in federal court in Washington. The Sandi Group, accused of submitting false claims on a police-training contract in Iraq, will pay more than $1 million.

'The hard work of stabilizing Iraq is challenging enough without contractors and subcontractors inflating the cost of rebuilding by making false claims at taxpayers’ expense' Assistant Attorney General Tony West, who oversees the department’s civil division, said in an e-mailed statement.

DynCorp inflated the costs of building camps at various locations in Iraq, the U.S. said.

Dartmouth-Hitchcock Medical Center

Dartmouth-Hitchcock Medical Center is a prestigious medical center. Per the New Hampshire Union-Leader:

Dartmouth-Hitchcock Medical Center has settled a case of alleged billing fraud to various federal health programs, such as Medicare, Medicaid and Veterans Affairs.

DHMC, which denied any liability in the matter, agreed to pay $2,227,075. The federal government recovers $1.5 million, Vermont $80,396, and New Hampshire $61,541, the U.S. Attorney for the District of Vermont announced Tuesday.

The investigation began in 2007 following a complaint filed by Dr. Thomas J. Prendergast, who was a physician in the DHMC pulmonary department in Lebanon. The complaint alleged the hospital improperly billed federal health care programs for services performed by resident staff without sufficient supervision by physicians. Regulations allow physicians to bill for certain services by resident staff, but only if the services are performed in the presence of a physician.

The investigation, conducted with the hospital's cooperation, found alleged improper billing in the anesthesiology department, pain clinic and radiology, according to the government. The billings at issue were from 2001 to 2007.

Masonicare

Masonicare is a not-for-profit "senior services provider." Per the Meriden (CT) Record-Journal:

A settlement agreement was reached today where Masonicare Health Center will pay the government almost $450,000 to resolve allegations the facility violated the False Claims Act, according to an announcement from U.S. States Attorney David B. Fein.

Fein explained the allegations against the senior-focused inpatient and outpatient health care facility involved improper billing to Medicare and Medicaid for injections of leuprolide acetate, or Lupron. The medication is used to treat prostate cancer in men and endometriosis and fibroids in women. The billing code for the female-related dosage has a higher reimbursement rate than the code for male-related doses, according to the statement.


The government alleges that Masonicare regularly billed for the female-related code for male patients who were being treated for prostate cancer, so they received a substantially higher reimbursement than it should have received, according to the statement.

Further, the government alleges that in 2009, the company realized it had improperly coded the Lupron injections services but never self-disclosed its improper bulling to the government or made any attempt to pay the money back to the Medicare and Medicaid programs, Fein said.

Summary

So in the last 10 days or so, we have seen legal settlements of charges of kickbacks by a pharmaceutical services provider, submitting inflated claims to the federal government made by a subsidiary of a private equity group which also owns a large hospital system and group of physicians' practices, billing fraud by an academic medical center, and false claims by a senior health care services provider. 

I begin to think that if we keep this blog going long enough, the parade of legal settlements will include the majority of US health care organizations.  Again, such legal settlements serve as markers of the scope of bad behavior by a wide variety of health care organizations, including some of the largest and/or most prestigious, but also including many organizations that work regionally or at the community level.  Bad behavior indicated by these settlements seems so prevalent that it must be an important reason for the chronic problems that afflict US health care, rising costs, diminishing access, and stagnant quality.  However, it still seems to be politically incorrect to discuss such mismanagement, malfeasance and/or corruption as important causes of US health care problems. 

Although sometime in the past there may have been a general societal understanding that health care organizations ought to be held to the highest standards, and ought to be lead by people with the best character and of the best reputation, now one seldom hears an expression of shame when such organizations settle claims alleging fraud, over-billing, etc, etc, etc.

Like nearly all such cases we have previously reported, none of these cases seemed to involve any negative consequences for any persons who authorized, directed, or implemented the questionable acts.  While the fines involved may seem large to ordinary folk, they are not big enough to markedly affect the organizations involved.  So the parade of legal settlements has had little deterrent effect. 

Once again, I say: we will not deter unethical behavior by health care organizations until the people who authorize, direct or implement bad behavior fear some meaningfully negative consequences. Real health care reform needs to make health care leaders accountable.

More Hospitals Settle, But Not for Much

In late February, there have been several notable legal settlements made by more or less prominent hospitals, discussed in rough order of size.

United Regional Health Care System

Per the Cypress Times,

The Department of Justice announced today that it has reached a settlement with United Regional Health Care System of Wichita Falls, Texas, that prohibits it from entering into contracts that improperly inhibit commercial health insurers from contracting with United Regional’s competitors. The department said that United Regional unlawfully used these contracts to maintain its monopoly for hospital services in violation of Section 2 of the Sherman Act, causing consumers to pay higher prices for health care services.

Note that this appears to be the first settlement involving the Sherman Anti-Trust Act that included a hospital system, or any health care organization which we have discussed. As the Times article mentioned,

This is the first case brought by the department since 1999 that challenges a monopolist with engaging in traditional anticompetitive unilateral conduct.

Here is more detail about the alleged offenses:

According to the complaint, United Regional is by far the largest hospital in Wichita Falls. Its share of general acute-care inpatient hospital services is approximately 90 percent, and its share of outpatient surgical services is more than 65 percent. It is the region’s only provider of certain essential services such as cardiac surgery, obstetrics and high-level trauma care. In Wichita Falls, United Regional’s average per-day rate for inpatient hospital services sold to commercial health insurers is about 70 percent higher than its closest competitor for the services that are offered by both hospitals.

The department said that in order to maintain its monopoly in the provision of inpatient hospital and outpatient surgical services, United Regional systematically required most commercial health insurers to enter into contracts that effectively prohibited them from contracting with United Regional’s competitors. United Regional’s contracts required these insurers to pay significantly higher prices if they contracted with a nearby competing facility. Since United Regional is a must-have hospital for any insurer that wants to sell health insurance in the Wichita Falls area, and because the penalty for contracting with United Regional’s rivals was so significant, almost all insurers offering health insurance in Wichita Falls entered into exclusionary contracts with United Regional. As a result, competing hospitals and facilities could not obtain contracts with most insurers and were less able to compete, helping United Regional maintain its monopoly in the relevant markets and raising health-care costs to the detriment of consumers.

As far as I could tell, however, for this apparently severe offense there will be no actual penalty. The settlement only appears to provide for a promised change in future behavior by the hospital:

The proposed settlement, which if accepted by the court would be in effect for seven years, restores lost competition by prohibiting United Regional from using agreements with commercial health insurers that improperly inhibit insurers from contracting with United Regional’s competitors. In particular, United Regional is prohibited from conditioning the prices or discounts that it offers to commercial health insurers based on whether those insurers contract with other health-care providers and from inhibiting insurers from entering into agreements with United Regional’s rivals. United Regional is also prohibited from taking any retaliatory actions against an insurer that enters into an agreement with a rival provider.

So if a hospital engages in actions that restrain competition and results in a de facto monopoly, all the hospital leaders must fear is that at some point it may have to change its monopolistic behavior, according to this settlement.

Catholic Healthcare West

Per the San Jose Business Journal,

Catholic Healthcare West, parent company to local Mercy hospitals, has agreed to pay $9.1 million to settle allegations that seven of its hospitals submitted false Medicare claims, U.S. Attorney Benjamin Wagner announced late Friday.

Here is more detail about the alleged offenses:

The hospitals include Community Hospital of San Bernardino, St. Bernadine Medical Center in San Bernardino and St. Elizabeth Community Hospital in Red Bluff.

The settlement also included allegations that O’Conner Hospital in San Jose, Seton Medical Center in Daly City and St. Joseph’s Hospital and Medical Center in Phoenix submitted inflated costs for their home health agencies and were overpaid. The agreement also resolves allegations that St. Joseph’s overstated how much was owed in disproportionate share funding for indigent patients.

CHW no longer owns O’Conner Hospital or Seton Medical Center.

The settlement resolves allegations that St. John’s Regional Medical Center in Oxnard was overpaid for treating a high percentage of patients with end-stage kidney disease for several years, including two when it was not eligible.

Note that while the amount of the payment assessed appears substantial, it will be made a very long time after the alleged bad behavior occurred:

All of the problems occurred in the 1990s. Federal investigators began looking into the matter in 2001, but it took years to compile evidence and reach a settlement. All of the hospitals had set aside money in a reserve account should they have to pay funds back to the government.

So if a hospital submits false claims to the US government, hospital leaders need not fear paying anything back for more than 10 years, according to this settlement.

By the way, this was not the first such settlement that Catholic Healthcare West has had to make:

In 1998, a whistleblower at Woodland Healthcare disclosed instances of alleged fraud by two medical groups affiliated with local Mercy hospitals, Woodland Clinic Medical Group and Medical Clinic of Sacramento.

Following an extensive investigation, former U.S. Attorney John Vincent announced a $10.25 million settlement in May 2001. The allegations included false claims to inflate reimbursement from Medicare, Medi-Cal and military health insurance programs.

Massachusetts General Hospital (Partners Healthcare)

Per the Boston Globe,

Massachusetts General Hospital has agreed to pay the federal government $1 million to settle potential violations of patient privacy laws, which occurred when an employee commuting to work lost patient records on the T’s Red Line two years ago.

Here is more detail about the alleged offenses:

Health information for 192 patients in Mass General’s Infectious Disease Associates outpatient practice was lost in the incident, including that of patients with HIV/AIDS. The documents included a patient schedule containing names and patient medical record numbers, as well as billing forms containing the name, birth date, medical record number, health insurer and policy number, diagnosis, and name of providers for 66 of those patients.

Note that Massachusetts General Hospital is not independent, but part of Partners Healthcare, which reported net patient service revenue of $1.5 billion in the most recent quarter, again per the Boston Globe. So this settlement amounted to about 0.00167% of the system's patient revenue.

So if a hospital engages in actions that violate the trust patients have that their information will be kept confidential, all hospital leaders have to fear is that their institution will eventually have to pay something much less than round-up error of their revenue, according to this settlement.

Summary

Again, the volume of participants in the ongoing march of legal settlements is a reminder of how pervasive bad behavior is in the US health care system. Remember that these settlements are in some sense the tip of the iceberg. They only indicate behavior that inspired legal action which was in turn was publicized. It is likely that for each behavior that eventually leads to a settlement, there are many behaviors that go unreported, or that cause no reaction.

It is interesting that sorts of bad behavior that formerly caused no official reaction are now leading to settlements. As noted above, there had been no recent legal actions against concentration of power in health care up to the United Regional Health Care System settlement.

However, like many of the settlements we have previously noted, the latest crop seem to have little deterrent power. The United Regional Health Care System settlement seemingly involved no monetary penalties whatsoever, only a promise of not to do it again. The Catholic Healthcare West settlement's monetary penalties were so delayed, occurring over 10 years after the actions in question, their deterrent power is highly questionable. The Massachusetts General Hospital (really the Partners Healthcare) monetary penalty was infinitesimal compared to the size of the institution's budget.

Furthermore, as in nearly every other case we have reported, no person who authorized, directed or implemented the actions in question had to pay any penalty, or suffer any negative consequence, or was even identified.

So while there seems to be some increased interest in addressing some kinds of bad behavior, like monopolistic practices, that heretofore generated no official reactions, regulatory authorities still seem loathe to even slap the wrists of the people whose aggregated actions are making our health care so expensive, so inaccessible, and probably of such mediocre quality.

Thus, in recent years, health care leaders, like leaders of financial service companies, seem to have impunity,  Up to now, they have been able to preside over all sorts of bad behaviors that help support their exorbitant remuneration without fearing any personal penalties.  As Charles Ferguson, the director of Inside Job, said when accepting his Academy Award last night, per MarketWatch,

Forgive me, I must start by pointing out that three years after a horrific financial crisis caused by fraud, not a single financial executive has gone to jail — and that’s wrong

After a slow-motion health care train wreck over the last 30 years, hardly any health care executives have even had to pay a fine, much less go to jail.

So I repeat, and repeat, and repeat: we will not deter unethical behavior by health care organizations until the people who authorize, direct or implement bad behavior fear some meaningfully negative consequences. Real health care reform needs to make health care leaders accountable, and especially accountable for the bad behavior that helped make them rich.

Dr. Ross Koppel: Another Angle on EMR-Incited Upcoding

At my Feb. 15, 2011 post "Does EHR-Incited Upcoding (Also Known as "Fraud") Need Investigation by CMS?" I explained how, based on data I received from an active ED physician, EHR's and their algorithmic "billing advice" tools were apparently inciting massive upcoding.

The upcoding was causing a huge spike in "level 4" and "level 5" determinations for ED billing when comparing 2002 data to 2008 data, with resultant billions of dollars of increased Medicare expenditure for a few extra mouse clicks. See the above post for details, as shown on the graphs below:

(E/M level increases, 2002 compared to 2008. Click to enlarge)

(Est. increased Medicare expenditures from EHR upcoding, comparing 2002 to 2008. Click to enlarge)

Another angle on EHR-incited upcoding comes from University of Pennsylvania sociologist and EHR expert Ross Koppel, PhD. His words are reproduced with his permission below.

First, Dr. Koppel was quoted in today's Wall Street Journal in an article entitled "Many Medical Bills Contain Errors That Could End Up Wrecking Your Credit Score, Here's What You Need to Know" by Jessica Silver-Greenberg:

... What's more, some health-care experts say the number of errors could jump in coming years. That's because the 2009 economic-stimulus legislation included $19 billion in spending to encourage the use of electronic health records—a major source of billing mistakes, says Ross Koppel, a sociology professor at University of Pennsylvania's Center for Clinical Epidemiology and Biostatistics who has studied electronic records extensively.

Dr. Koppel adds the following commentary for HC Renewal:

With several EHRs, there's "auto-fill" for the EHR that reports on parts of the body the physician does not examine. So, for example, if the physician is a hand specialist, she/he will probably not examine the legs, head, chest, back, etc.

On many EHRs this is listed [e.g., entered by the user through clicking a form or checkbox - ed.] as "unremarkable" which in medical-speak means "I've examined these organs/body parts and found no problems."

In billing terms, that means "I've examined these parts and should be paid for a more comprehensive visit....what's called "up-coding."

It's actually dangerous for physicians because if the patient next week walks in with a major tumor that the doc should obviously have seen (had she/he examined that body part) then the physician is on the line and can get sued.

On other other hand, if the unexamined parts don't turn up in a medical case, it means the doc will make more money...with the only danger to the doc that she/he can be charged with fraud by the government and or by a payer.

So, in effect, today's EHR's, not just through algorithmic "recommendations" for upcoding but also through their template-checkbox nature, incite upcoding.

The resultant increased expenditures do not reflect more medical care provided or cognitive processes utilized, but merely a small amount of elbow, carpal and index finger activity:

Click...click...an easy way to generate billions of dollars of additional billing?

-- SS

Massive Nationwide Medicare Bust: 111 Charged For Scams Worth $225 Million

The article "Massive Nationwide Medicare Bust: 111 Charged For Scams Worth $225 Million" in the HuffPo reports that:

MIAMI — Federal authorities charged more than 100 doctors, nurses and physical therapists in nine cities with Medicare fraud Thursday, part of a massive nationwide bust that snared more suspects than any other in history.

More than 700 law enforcement agents fanned out to arrest dozens of people accused of illegally billing Medicare more than $225 million. The arrests are the latest in a string of major busts in the past two years as authorities have struggled to pare the fraud that's believed to cost the government between $60 billion and $90 billion each year. Stopping Medicare's budget from hemorrhaging that money will be key to paying for President Barack Obama's health care overhaul ...

Read the entire story at the link above.

As I wrote at my Feb. 15, 2010 post "Does Possible EMR-Facilitated Upcoding (Also Known as "Fraud") Need Investigation by CMS, And Could it Explain HIT Irrational Exuberance?", those "Federal authorities" need to look into how EHR's facilitate upcoding, which is a form of fraud that is likely worth far, far more than a mere $225 million:

(Click to enlarge. $225 million might be mere chicken feed. See here.)

Worse, without careful scrutiny, EHR-mediated fraud might not be as easily detected as the "conventional" Medicare fraud mills, where, for example, it can get highly obvious something's amiss:

... A Brooklyn, N.Y., proctologist was charged with billing $6.5 million for hemorrhoid removals, most of which he never performed.

Finally, one might wonder if any of those caught in this recent sting operation were using EHR's...

-- SS

Does EHR-Incited Upcoding (Also Known as "Fraud") Need Investigation by CMS, And Could it Explain HIT Irrational Exuberance?

It has long puzzled me why an experimental technology that costs tens or hundreds of billions of dollars to roll out organizationally and nationally, that individual medical centers are spending upwards of $100 million or more upon, and that has a track record as poor as suggested in posts such as "An Updated Reading List on Health IT" and "MAUDE and HIT Risks: Mother Mary, What in God's Name is Going on Here?" is so popular.

At a Feb. 2010 post "A Lawsuit Over Healthcare IT Whistleblowing and Wrongful Discharge" I summed up other critical HIT issues succinctly, with abundant hyperlinks to other materials as below:

... I have written about health IT problems extensively on this blog and at my academic website on HIT failure. These include but are not limited to: medical informatics specialists ignored by nonclinician IT personnel [the link is to another case involving critical care]; inverted and paradoxical organizational structures where IT facilitators become HIT project leaders and clinical leaders become HIT project facilitators; ill-conceived and poorly implemented mission hostile health IT; perverse and in fact clinically cavalier IT "politics"; failure to obtain patient informed consent as if health IT is an elite world not subject to the same ethical obligations as medicine; probable violations of Joint Commission safety standards and hospital executive fiduciary obligations, and numerous others.

At a Jan. 2011 post "Healthcare IT Delirium" wrote that:

... On top of an irrational exuberance (see this blog query) largely unsupported by the literature (e.g. here), the technology is experimental, its rollout is a grand national experiment in social re-engineering of medicine, there is no patient informed consent, nobody is in control, and nobody is taking responsibility for regulating the domain despite known risks. The results will very likely reflect the Wild West free-for-all that is now extant.

Finally, at a Feb. 2011 post "An Updated Reading List on Health IT" I aggregated recent literature that sheds significant doubts on health IT beneficence.

Is the popularity of health IT as it exists in 2011 a paradox, or not?

When I was dealing with public employees in a transit authority several decades ago, I learned that mysterious circumstances and paradoxes were not paradoxes at all. The assumptions were simply wrong. Often, mysterious circumstances proved to be related to money (as in worker's comp fraud) and/or money related to [illegal] drugs.

Below are some charts and data from a HC Renewal reader, an ED physician, that may answer the mystery of the "irrational exuberance" exhibited by healthcare organizations towards clearly disruptive, medically risky and liability-provoking experimental technology. This is especially so in high risk areas such as an ED.

It should be noted that my recommendations as a CMIO a number of years ago in a very large regional medical center were that an ED would benefit best clinically from paper charts supplemented by document imaging, so that images of past charts could be instantly retrieved. ED's are busy places where clinicians have little time for distractions (such as computer data entry), but where access to past charts can be important. ED charts are also not generally very long or complex documents. Further, document imaging is a mature technology (e.g., Documentum).

Those ED recommendations still stand.

(Incidentally, a relative, injured in 2010 via an EHR issue, would certainly be in far better shape had this been the case. The error would not have occurred. I've worked in settings where document imaging systems were used.)

Note that the data and charts below are estimates only, pointing to a potentially huge problem -- with computer-assisted Medicare fraud implications -- if the projections are reasonable.

First, from the ED physician reader, a graph showing an increase in overall ED billing levels of 2002 versus 2008:

(E/M level increases, 2002 compared to 2008. Click to enlarge)

This appears to indicate a great increase in upper level (level 4 and 5) billings from 2002 to 2008 in ED's with increasing advent of EHR (part of this is likely due to "paper template" charting).

A very terse summary of these billing codes, for laypeople. Claims submitted to managed care organizations and States include the emergency levels of screening and treatment. They range from CPT 99281 ("straightforward medical decision making") to CPT 99285 ("medical decision making of high complexity"). These codes reflect not only the complexity of the treatment but also the time and difficulty of making a diagnosis:

• 99281 - level 1 - very short visit - low level service, minimal charge
• 99282 - level 2 - e.g. ankle sprain
• 99283 - level 3 - limited focus history & physical exam performed, e.g. physisian evaluation with additional tests such as an x-ray.
• 99284 - level 4 - significant history & physical exam performed, significant or major injury, often admission
• 99825 - level 5 - significant time, e.g., 45 minutes to an hour spent by physician. (Note that considering that a high % of ED visits are using that code, it might be physically impossible for ED physicians to be spending this much time seeing each patient.)

Second, a spreadsheet with some estimated numbers:

(Click to enlarge)

There appears to be an absolute increase in Medicare/Medicaid payments to ER doctors due to this billing-upcoding phenomenon from 2002 to 2008 (roughly $2 billion in payments, which at 80% allowed Medicare rate represents appx. a $2.6 Billion increase in billing)

The 2006-2008 billing levels for each specialty are public info on the CMS website. The hard part was obtaining earlier numbers. These were found in 2 papers from 2004 and 2006:

Variation in Coding of Evaluation and Management (E&M) Services by Hospital Emergency Departments
Paul Shoemaker, FACHE, President and CEO
American Hospital Directory, Inc.
Jan. 2004
http://www.ahd.com/EMstudy040108.pdf


Variations and Trends in the Coding of Evaluation and Management (E&M) Services by Hospital Emergency Departments
Paul Shoemaker, FACHE
Leatrice Ford RN, BSN, CCS, Founder, ConsultCare Partners, LLC
May 2006
http://www.ahd.com/EMstudy060530.pdf

Apparently Shoemaker and Ford were able to get CMS data for 2002 and 2004 and draw the conclusions that while some hospitals and ER groups were undercoding, there was a significant level of upcoding occurring.

Note that the above projections assume the same Medicare physician allowables for 2002 and 2008; lesser values in 2002 (compared to 2008) would push the 2008 payment increases upward.

Finally, some actual ED screens from a major HIT vendor, McKesson, that "encourage" physicians to upcode.

The "coding engine" of this ED EHR system produces "recommendations" for "additional documentation" to support a higher level of coding. Such incentives themselves might be legitimate, but can create moral hazard - and the means, motive and opportunity for "playing with the coding a little bit" - if physicians' coding levels are monitored by their organizations.

(Click to enlarge. An abscess. ED EHR advising physician to "provide more documentation" in order to upcode from level 2 based on the data entered, to level 5 or maximum, via unknown algorithms. A "Correct Deficiencies" button brings up screens with selections a physician can click on to "support" the cybernetic upcoding.)

(Click to enlarge. In this example an ED physician is begin cybernetically cajoled - uh, "reminded" - to enter data to support upcoding a sprained ankle evaluation from a level 3 to a level 5.)


It should be remembered that increased ED coding levels by ED groups, often contractors to hospitals, may permit hospitals to increase their own billing charges for services rendered to the ED patients.

In summary:

• With little solid evidence of major clinical benefit, ED physicians seem to be paradoxically "asked" to utilize distracting, often mission hostile, even hateful ED EHR systems that many despise, even in face of the critical nature of an ED environment and increased risks and liabilities that can occur with distractions such as data entry. This is a seeming paradox.

• The ED physicians, after automated coding algorithms analyze the clinical data entered, may be "reminded" that if they fill in a few more details, the visit might be significantly upcoded.

• Payers such as CMS have little or no way to ascertain the veracity of the additional entered information that may result.

• The ED physicians' coding levels may be monitored by their employer(s) i.e., group or hospital compared to the "possible" coding levels suggested by the vendor software algorithms. ED EHR software makes this easy. This would create the means, motive and opportunity for upcoding, so as to prevent negative repercussions on a "low coding" doctor. (The ED physician who submitted this data claims that this is so in his organization, and in others.)
  

While the above is not a rigorous analysis, if it overall reflects the current situation with ED and other EHR's in the field in 2011, we may be seeing:

• A significant explanation for "irrational exuberance" around health IT - which would actually not be so irrational after all (just unethical) - with potentially deadly results;

• A highly systematic, major fraud participated in by major stakeholders, from software vendor to purchaser to clinical user to biller. This would represent a cybernetically-facilitated swindle of major (and growing) proportions; and

• Claims of purported savings from health IT that we hear about from pundits and government officials being a rather pathetic joke.

Perhaps CMS (and other payers as well) could perform the needed rigorous investigation using their data and resources, to either confirm or disprove these findings. That's what we, the taxpayer, pay the government for.

-- SS

Executive Compensation at Non-Profit Hospitals: Pay for ... Fraud?

We have often discussed executive compensation at US hospitals and academic medical centers, which seems to run from generous to outrageous.  The usual explanation by organizational spokespeople, and occasionally boards of trustees is that this is the sort of compensation needed to attract the best and the brightest, a variation of the "pay for performance" meme that resounds throughout business schools and executive suites.  However, almost never does anyone at any hospital or AMC acknowledge that their leaders are not the best and brightest, although outside of Lake Woebegone, all cannot be above average.

Here are two recent stories about hospital executives whose compensation contrasted with their performance.

Danbury Hospital

We previously posted about how the former chief financial officer (CFO) of Danbury Hospital, now part of Western Connecticut Healthcare, was found in violation of a no-contact order that arose after he was charged with multiple counts of fraud.  It turns out that the William Roe, the former CFO, previously was paid $267,990, per the Danbury News-Times. 

This month, again according to the News-Times, he pleaded guilty:

William Roe, the former chief financial officer of Danbury Hospital arrested in August and charged with defrauding the hospital out of more than $100,000, pleaded guilty Tuesday to one count of wire fraud.

The plea reduces the charges against Roe. In September, in addition to the wire fraud charges, federal prosecutors charged him with two counts of interstate transportation of stolen money. Those charges have been dropped as part of the plea deal.

Along with the guilty plea, Roe has agreed to reimburse Danbury Hospital more than $140,000. He also will reimburse St. Rita Hospital in Lima, Ohio, where he worked as CFO before coming to Danbury Hospital, an additional $75,000 for funds he allegedly stole there.

Archbold Memorial Hospital

This is one of those cases it would be hard to make up. The Dow Jones News Service originally reported in December, 2010:

A Georgia hospital paid $13.9 million to settle allegations it submitted false claims to the state's Medicaid program, the Justice Department said Wednesday.

The settlement resolves allegations that between November 2002 and July 2008, Thomasville, Ga., John D. Archbold Memorial Hospital Inc. made false representations to the Georgia Department of Community Health, the state agency that administers the Medicaid program in Georgia, that it was a public hospital for Medicaid purposes in order to increase the amount of funds provided to the hospital.

Under Medicaid rules, only public hospitals may participate in the Medicaid Upper Payment Limit, or UPL program. Contrary to its state certification, Archbold Memorial was in fact a private hospital, the Justice Department said, and as a result received millions of dollars in funds to which it was not entitled.

A private not-for-profit hospital claimed to be a public hospital to Medicaid?  And it took years for anyone to figure out that was not the case?  It would have been hard to make that one up.
Two executives took the rap:

in early 2008, then-Chief Financial Officer William Sellers resigned after a three-month suspension and pleaded guilty to charges related to his role in the matter. Former Chief Executive Ken Beverly, who also resigned in February of that year, was recently convicted on charges regarding his involvement.

The Albany (Georgia) Herald reported that Mr Beverly did quite well between the time of his resignation and his conviction:

Former CEO Ken Beverly resigned from his post in 2008 and walked away with more than $6.1 million in compensation and benefits. He was later indicted by a federal grand jury.

Convicted Dec. 8, 2010, of six felony counts related to an indictment alleging he was part of a scheme to defraud Medicaid, Beverly remains free on bond and is awaiting a sentencing hearing.

So is that $1 million per felony count? At least we can be assured it was not a "golden parachute,"

Archbold Spokesman Mark Lowe said that the figure as noted in the hospital’s Form 990 for 2009 as filed with the IRS on August 2010 is the sum of Beverly’s deferred compensation and benefits package as it has accumulated over the course of his 30-plus year career with the hospital and was not a 'golden parachute,' as described in some media reports.

'The ‘other compensation’ is from his retirement program that accumulated deferred compensation over the entire term of his employment. In his case, that was in excess of 30 years of deferred compensation. It’s not severance; rather, it’s compensation that was earned but not paid out until retirement,' Lowe said.

Well, that is reassuring.  Of course, regardless of what you call the payment, a lump sum of $6.1 million is far more than most citizens ever will get for their retirement from any employer.  Having $6.1 million in one's retirement account would fit most peoples' definition of "rich." 

Summary

Again, almost all hospital and academic medical center executives seem to be well-paid, even if they work at small institutions, or at those with shaky finances. When their pay is noticed by the news media, the usual explanation is the executives' general brilliance and excellence, with little more than more vague adjectives supplied in justification.

Given the lack of clear evidence for most executives' large compensation, I believe it is reasonable to cite anecdotes where generous compensation was obviously, if retrospectively coupled with poor performance to challenge the rationale for ever-increasing executive compensation in health care. The two cases above are not of merely poor, but criminal performance, and so stand out.

As we have said before, far too often the leaders of not-for-profit health care institutions seem more interested in padding their own bottom lines than upholding the institutions' missions. They often seem entirely unaware of their duty to put those missions ahead of their own self-interest. Like the financial services sector in the era of "greed is good," health care too often seems run by "insiders hijacking established institutions for their personal benefit." True health care reform would encourage leadership of health care who understand health care and care about its mission, rather than those who see a quick way to make a small fortune.

Hackensack University Medical Center CEO's $5 Million Golden Parachute: "the Public Will Perceive the Institution as a Kind of Insider's Group"

Last year was an embarassing one for Hackensack University Medical Center (HUMC), a large academic medical center affiliated with the University of Medicine and Dentistry of New Jersey.  In April, former state senator Joseph Coniglio was convicted of fraud (against the public) and extortion for a scheme that involved him being paid $5000 a month for undefined consulting work for HUMC while he promoted the hospital's interests in the state legislature (see post here).  A subsequent investigative report revealed widespread self-dealing on the part of the HUMC board (see post here).  Soon after, the HUMC CEO, John Ferguson, announced his retirement, per the Newark Star-Ledger.

Scandal Leads to Apparent Reforms

So when I read an article from last week on NorthJersey.com entitled "Hackensack University Medical Center works to revamp reputation hurt by trial" I hoped that these travails lead to some real improvements in the leadership and governance of the institution.  Hope springs eternal, and the article did describe some apparent progress.

The medical center's board of trustees was streamlined:

the hospital's board of governors — once a 57-member behemoth run by a core group of powerful and politically connected members — was whittled to less than half its former size and is now overseen by what the hospital is calling a 'reinvigorated' parent company, Hillcrest Health Service System Inc.

Conflicts of interest and self-dealing were apparently banned

Members of the two boards may no longer do business directly with the hospital — a significant change because some of them own or work for companies that have been paid millions of dollars by Hackensack. In 2009 alone, these companies were paid $13.2 million by the hospital, according to its federal tax filings. They were paid $17.4 million in 2008.

The Devil in the Details
Although the board was reduced in size, it gained almost no new members, and the politically-connected members who previously were accused of self-dealing remained:

Serving as chairman of the board of governors is Joseph M. Sanzari, a construction magnate, multimillion-dollar donor and longtime board member. His company, a joint venture with former board Chairman J. Fletcher Creamer Jr., has been one of the highest-paid independent contractors at the medical center.

Also,

There were no new board members until Tuesday, when two were appointed. Many who held influential positions on the board of governors — including Sanzari, Creamer and Joseph Simunovich — are still in key roles.

Furthermore, there was a big loop-hole in the apparent ban on conflicts of interest and self-dealing:

members of both the board of governors and Hillcrest can still do business with the hospital as long as they work as subcontractors or move to the foundation board or a newly created advisory panel that doesn't have voting or fiduciary powers.

Also,

Members of the board of governors and Hillcrest still can be hired as subcontractors.

The ban on doing business with the hospital also doesn't cover members of the advisory panel or the board that oversees the foundation. About a dozen members of these two groups are affiliated with companies that have made money — millions, in some cases – in work with the hospital.

As one outside expert noted,

'They may have changed the structure, but if you don't change the people, you don't change the culture,' said Jamie Orlikoff, a governance expert who advises the National Hospital Association.

Furthermore,

'People who had influence and clout when they were members of a fiduciary board will still have influence and clout even if they are moved to an advisory board,' Orlikoff said.

So,

'The concern is that the public will perceive the institution as a kind of insider's group and things are being done to benefit them,' said Daniel Borochoff, president of the American Institute of Philanthropy.

The CEO's Golden Parachute

Hope spring eternal, but is too often crushed.  However, at least the former CEO is gone. But it turns out he got quite a going away present. As described in a companion article,

John P. Ferguson received a severance package of more than $5 million when he was forced out as president of Hackensack University Medical Center last year, bringing his total compensation for 2009 to $7.7 million, according to recent federal tax filings.

The other executives who presided over HUMC in 2009, the year that its former consultant was convicted, also did very well for themselves,

His senior vice president for operations, Doreen Santora, received $2.6 million — including more than $1.5 million in severance — when she left in the executive reshuffling that followed, the documents show.

In all, seven top executives at the non-profit hospital each received more than $1 million in total compensation in 2009, up from five the year before.

This extremely generous compensation could not be related to the financial success of the hospital at the time:

The compensation packages came in a year in which tax filings show the 775-bed medical center employed 317 fewer staff and Moody's Investors Service downgraded its credit rating to Baa1, leading to higher interest payments when new debt is issued.

If this was pay for performance, by what measure these executives' performance was measured was not clear. Actually, who even decided to award them such sumptuous pay was unclear:

only a handful of board members were aware of the millions of dollars in pay and perks that had been handed out to executives over the last few years. Several employees saw their overall compensation double or triple.

Board members expressed 'sticker shock' when they first learned of the compensation numbers at a fall 2009 meeting, said J. Fletcher Creamer Jr., who completed his term as chairman of the board of governors in March.

'We went through every single executive' whose salaries must be disclosed on the IRS form for non-profit institutions, Creamer said in an interview earlier this year. 'It's the first time they actually saw it. … We always made the numbers available if they wanted to come see it, but not everyone looked.'

Keep in mind that per the first NorthJersey.com article, Mr Creamer will still be in a "key role" at HUMC, his failure to think that top executives' compensation was something his fellow board members needed to consider notwithstanding.

Summary

Is this any way to run a hospital "which has a national reputation for quality care?" The hospital leadership did and still appears to be an "insider's group" which works to promote its own self-interest.

As we have said before, far too often the leaders of not-for-profit health care institutions seem more interested in padding their own bottom lines than upholding the institutions' missions. They often seem entirely unaware of their duty to put those missions ahead of their own self-interest. Like the financial services sector in the era of "greed is good," health care too often seems run by "insiders hijacking established institutions for their personal benefit." True health care reform would encourage leadership of health care who understand health care and care about its mission, rather than those who see a quick way to make a small fortune.

"Drug companies are now No. 1 When it Comes to Defrauding the Government"

A new report from Public Citizen, as summarized by National Public Radio:

Drug companies are now No. 1 when it comes to defrauding the government, leaving defense contractors in the dust.

A report from the consumer group Public Citizen says financial penalties against drug companies under the federal False Claims Act far outstripped defense contractors between 2007 and 2010.

The problem has been getting worse recently:

Documented pharma fraud has been accelerating lately, Public Citizen says. It looked at fines and settlements paid by drug companies over two decades. Since 1991 those penalties totaled $19.8 billion. But three-quarters of those occurred over the past five years.

Regarding the biggest offenders:

Just four giant drug companies – GlaxoSmithKline, Pfizer, Eli Lilly and Schering-Plough – account for more than have the pharma penalties over the past two decades. They belong to the Billion Dollar Club — companies that have paid out settlements of $1 billion or more. Altogether the four have paid $10.5 billion back to the government.

Reading the report itself makes the acceleration of drug company fraud settlements even more apparent (p. 12):

Data from the Department of Justice shows that annual federal FCA settlement totals for all industries have increased dramatically over the past 20 years, from $341 million in fiscal year (FY) 1991 to $3 billion in FY 2010. The proportion attributed to all Health and Human Services (HHS) cases (i.e., cases that involve pharmaceuticals and other health care industries), increased from 4 percent of the total in FY 1991 to 84 percent in FY 2010.

Furthermore,

the pharmaceutical industry did not comprise a substantial portion of federal FCA penalties until FY 2002, when it overtook the defense industry for the first time. For every year since and including FY 2007, the pharmaceutical industry total has far exceeded the defense industry total.

As stated above, the total healthcare industry (as represented by HHS totals), has been the biggest defrauder of the federal government under the FCA for most of the past decade. Defense industry payments and the combined total for all other (non-defense and non-HHS) sectors each represent an amount smaller than the pharmaceutical industry total alone since FY 2007. In addition, since FY 2008, the pharmaceutical industry’s FCA payments have exceeded the total law-violation payments of each of the other sectors within the health industry.

Of course, data about settlements of US False Claims Acts claims is only one, limited measure of unethical and criminal behavior. However, in lieu of better data, it is striking that the vast majority of such settlements are now by the health care sector, and the pharmaceutical industry in particular accounts for the biggest share of such claims within that sector.  

In my opinion, these data illustrate just how unethical, if not corrupt, health care in the US has become. It is particularly appalling because health care is not just another "industry," but traditionally was regarded as a calling to relieve suffering, and when possible prevent or cure disease. Traditionally, health care practitioners and health care institutions were held to higher standards than other industries, like the defense industry, or the trash hauling industry. Now, however, it appears that the health industry holds itself to the lowest standards.  Is it any wonder that our health care system is dysfunctional, or that our costs constantly rise, while access and quality decline.

This data should prompt massive outrage, and lead to yet more ringing calls (like those we discussed recently here and here) for reform, at least of specific aspects of health care.  I doubt that will happen, however, because these data, like so much of the cases and data we discuss on Health Care Renewal, probably will be muffled by the anechoic effect.

Despite its striking results, this report has not been covered in print by any major market newspaper. (Duff Wilson did blog about it for the New York Times.) The only US newspaper coverage so far appears to be in the New London (CT) Day. There has been no coverage on US television.

The Public Citizen report noted that the largest settlement for clinically related reasons was by Pfizer of $2.3 billion for unlawful promotion and kickbacks (see blog posts here). Despite the apparently staggering size of this settlement, a Google Scholar search revealed only one mention of it, and that rather tangential, in a large circulation US medical journal, the New England Journal of Medicine.(1) It was mentioned in the news sections of two major journals outside of the US, the British Medical Journal(2) and the Canadian Medical Association Journal.(3)

So unless US health care is about to change drastically, I do not expect any discussion of this data in the medical and health care literature. The likelihood that this report will be noticed by most physicians, health care researchers, or health care policy makers is almost nil.

Why does such striking information create so few ripples?  It has never been formally studied, to may knowledge.

However, I suspect it has to do first with the vast web of conflicts of interest that now drapes over health care.  As we have mentioned before, the majority of US medical school faculty,(4) and the majority of US medical schools' department chairs(5) have significant financial relationships with industry, often the pharmaceutical industry.   Some leaders of US academic mission are simultaneous members of boards of directors of for-profit health care corporations (e.g., see this example), and thus have fiduciary responsibilities towards those corporations.  Thus, how many academics are going to want to offend their employers, or their colleagues' and supevisors' employers, by writing about such recent unpleasantness as billion dollar pharmaceutical settlements for fraud? 

Second, it probably has to do with the power derived from the wealth of the leaders of pharmaceutical corporations, wealth they seem to amass no matter what ethical violations their companies pile up.  For example, according to the 2010 Pfizer Proxy Statement, Mr Jeffry Kindler, the CEO of Pfizer through this year, currently owns the equivalent of  1,084,212 shares of Pfizer stock (worth $18,615,920 at today's price of $17.17/ share), has the rights to 1,996,000 stock options, and received $5,534,285 total compensation in 2009, $7,553,015 in 2008, and $4,469,760 in 2007.  

I can only hope that the anechoic effect eventually breaks down, and a movement to truly reform US health care eventually develops.  True reform will require holding health care organizations to higher, not lower standards than trash haulers and gambling casinos, and regarding working in health care as a calling, rather than a means to satisfy one's greed.  

Hat tip to Prof Margaret Soltan on the University Diaries blog.

ADDENDUM (21 December, 2010) - See also this comment by Prof Margaret Soltan on the University Diaries blog, and comments (here and here) by "Condor" on the Shearlings Got Plowed blog.

References


1. Kesselheim AS, Studdart DM, Mello MM. Whistle-Blowers' experiences in fraud litigation against pharmaceutical companies. N Engl J Med 2010; 362:1832-1839. Link here.
2. Tanne JH. Pfizer pays record fine for off-label promotion of four drugs. Br Med J 2009; 339:b3657. Link here.
3. Anonymous. Federal committee to review Pfizer v-p appointment to CIHR council. Link here.
4. Campbell EG, Gruen RL, Mountford J et al. A national survey of physician–industry relationships. N Engl J Med 2007; 356:1742-1750. Link here.
5. Campbell EG, Weissman JS, Ehringhaus S et al. Institutional academic-industry relationships. JAMA 2007; 298: 1779-1786. Link here.

BLOGSCAN: Corporate Characteristics that Lead to Fraud

Kurt Eichenwald on the corporate characteristics that lead to fraud: 1) huge positive incentives for achieving financial targets, huge negative incentives for not achieving them; 2) a cult of personality, or a rock-star CEO; 3) a weak compliance department.  The example was for-profit hospital system Columbia/ HCA, whose former CEO just was elected governor of Florida.  See the video on PharmaGossip.

A Great Investment Opportunity? - Biotechnology Company Run by an Ex-Convict

A sad commentary on the current morality of the health care "business," as provided by the New York Times. Sam Waksal is back in the biotechnology business:

Mr. Waksal says his new venture, Kadmon Pharmaceuticals, will be 'a fully integrated biopharmaceutical company from the get-go,' replete with everything, including its own research and products on the market or in clinical trials that it acquires from others.

'You’ll see a company that next year will be doing significant revenues in a growth area, with earnings, probably five Phase 3 programs and a couple of Phase 2 products,' Mr. Waksal said Sunday in a telephone interview. Phase 3 and Phase 2 are the late and middle stages, respectively, of clinical trials.

Several of Mr. Waksal’s former colleagues from ImClone have joined him at Kadmon, a name from kabbalah, the Jewish mystical movement. He even looked into leasing the Lower Manhattan headquarters ImClone is vacating.

Kadmon, which will focus on cancer, infections and autoimmune diseases, has started to make deals. On Monday it is expected to announce it has licensed an experimental hepatitis C drug from Valeant Pharmaceuticals International, a person close to the transaction said. That follows the disclosure last week that it had acquired Three Rivers Pharmaceuticals, a Pennsylvania company specializing in hepatitis drugs.

Kadmon circulated a private placement memorandum in February to raise $50 million to $175 million. As of July, it had raised $10.8 million from 26 investors, a filing with the Securities and Exchange Commission said.

But David Pitts, a spokesman for Kadmon, said that other debt and equity offerings had raised more than $200 million, with the biggest investor being SBI Holdings of Japan.

Is there a catch? It might be Mr Waksal's record, criminal record. Mr Waksal's previous company was ImClone:

That started to come undone in December 2001, when Mr. Waksal got word that the Food and Drug Administration was not going to approve Erbitux. Before the company announced the news, Mr. Waksal alerted relatives to sell their ImClone stock and tried to sell some of his. Martha Stewart sold her ImClone shares and was given a five-month prison sentence and five months of home confinement for lying to federal investigators about it.

Mr. Waksal pleaded guilty to securities fraud, bank fraud, perjury, obstruction of justice and conspiracy. He is prohibited by a settlement with the S.E.C. from serving as an officer or director in a publicly traded company.

Presumably, Kadmon is not publicly traded, so the SEC ban does not apply to his leadership of that company. Yet despite the ban and his criminal record, investors seem to be ready to throw money at him. 
Maybe it has more to do with emotion than reason, much less morality,

One investor in Kadmon, who also sits on its board, said Mr. Waksal’s energy and his acumen in spotting promising drugs far outweigh his past problems.

'He is irrepressible,' said this investor, who spoke on the condition that she not be named because her company has a policy against being quoted in the media. 'I don’t think what happened to Sam in the past is going to have a negative effect on my investment in this business.'  [Being convicted of 'securities fraud, bank fraud, perjury, obstruction of justice, conspiracy' is a good background for a company CEO? - Ed]

Furthermore,

prospective investors say his trademark exuberance and penchant for hyperbole remains.

'He hadn’t changed,' said a prospective investor who met with Mr. Waksal and spoke on the condition of anonymity to retain relations with him. 'He was spinning big stories about big money, big deals'

Another prospective investor said Mr. Waksal had told him that Carl C. Icahn, the billionaire who is a friend of Mr. Waksal and had invested in ImClone, had committed $30 million to Kadmon. Marc Weitzen, a lawyer for the investor, said Mr. Icahn had evaluated Kadmon but 'decided to pass.'  [It sounds like Mr Waksal has not developed any new affinity for the truth - Ed.]

The private placement memorandum circulated in February said Kadmon had 'a simple yet revolutionary plan for creating the pre-eminent 21st century biopharmaceutical company.'

To make it even more explicit:

Mr. Waksal, who earned a doctorate in immunology, is charming to the point of being seductive. He was a fixture in New York social circles, befriending celebrities and dating many women, including Alexis Stewart, daughter of his friend Martha Stewart. He lived in a spacious SoHo loft with millions of dollars in art, where he hosted extravagant parties and intellectual salons attended by leading lights in literature, art and science.

In my humble opinion, an investor who throws money at an ex-con, apparently because he seems exuberant, irrepressible, even seductive, needs a brain transplant.  (But maybe some investors should read Snakes in Suits, see post here.)

But this blog is not about giving advice to investors. If Mr Waksal invested in basically harmless products that had nothing to do with patients' health and safety, the foolishness of investment decisions about his company would have nothing to do with me.

However, Mr Waksal is proposing to develop drugs to be given to patients:

In its first big deal, Kadmon announced last Monday that it had acquired privately held Three Rivers for more than $100 million.

Three Rivers, whose main products are drugs for hepatitis C, is meant to be the commercial base of Kadmon, its revenues helping to defray the cost of developing new drugs.

The deal, an investor familiar with the structure said, is highly leveraged, to the extent that Three Rivers’ earnings might not be sufficient to cover the debt. But Mr. Waksal is betting that sales will soar because new pills being developed by other companies will make treatment more effective, enticing more people with hepatitis C to be treated.

'The hep C market is going to undergo a real sea change next year,' Mr. Waksal said. Three Rivers has a proprietary form of the drug ribavirin that requires two pills a day, instead of the standard six to eight. Even with new drugs coming, ribavirin will remain a mainstay of treatment.

In fact, Mr. Waksal is increasing that bet. On Monday, Kadmon is expected to announce that it has obtained exclusive worldwide rights to taribavirin, a form of ribavirin that may have fewer side effects. Kadmon is paying $5 million initially, with other payments possible later, to Valeant Pharmaceuticals, which has been testing the drug in clinical trials, according to the person close the transaction. Valeant will pay $7.5 million for rights to sell Kadmon’s ribavirin in Eastern Europe.

Kadmon has bought a tiny company started by Princeton professors that has a way to measure cell metabolism. Influencing a cell’s use of nutrients is emerging as a novel way to treat cancer and infectious diseases.

So, we are not talking about merely foolish investment decisions, but amoral ones. The amorality of this brave new business world becomes relevant.

For many investors, 'there are few judgments beyond whether you made me money,' said Samuel D. Isaly, managing partner at OrbiMed Advisors, a big investor in biotech companies that was not asked to invest in Kadmon. 'Sam Waksal made a lot of people a lot of money with ImClone.'

There, in a nutshell seems to be the problem with running health care organizations not just in a business-like manner, but as businesses, businesses in a completely laissez faire environment, businesses in a new world run by new robber barons.

Would you trust a company run by an ex-convict to product safe, effective, and unadulterated drugs? (After all, some very respected companies run by people who are certainly not ex-cons have proven to be unable to keep all of their products pure and unadulterated.)

This case vividly illustrates the need for assuring that the leaders of all health care organizations, including but not limited to pharmaceutical and biotechnology companies, have some knowledge of the health care context, some sympathy for the values of health care professionals, including putting patients' health and welfare first, and are externally accountable. But at a minimum, health care organizations should not be run by former felons. However, in our extremely laissez faire environment, in a country now increasingly dominated by new robber barons, ex-convicts can run biotechnology companies.

History Repeats, and Repeats: McKesson Settles

Here a settlement, there a settlement, everywhere a settlement....  And the march continues, as reported by the New London (CT) Day,

Pharmaceutical distributor McKesson Corp. will pay Connecticut $15 million for 'illegal and deceptive practices' that inflated drug costs for both individual consumers and state-funded programs, Attorney General Richard Blumenthal announced Tuesday.

The settlement calls for $9 million to be used for reimbursing Connecticut's Medicaid program and $3 million for ConnPace, a state program that provides drug coverage for seniors. In addition, $2.3 million will be paid as a civil penalty and $700,000 will go into the state's drug-assistance program for AIDS patients.

Blumenthal had charged in a lawsuit that San Francisco-based McKesson conspired with First DataBank - which publishes average wholesale prices of drugs - to increase the amounts Connecticut paid for brand-name remedies by about 25 percent over usual wholesale costs. Previously, the prices had been 20 percent above wholesale.

McKesson used the increase to sweeten the 'spread' - the amount of profit - that could be taken by pharmacies, thereby increasing its share of the market, he said.

'McKesson manipulated the drug market - conspiring to inflate costs for hundreds of drugs and exploiting public programs that serve our most vulnerable citizens,' Blumenthal said in a statement.

Having been posting on this blog for nearly five years, it is interesting that viewed over time, patterns emerge suggesting that certain organizations have chronic problems with bad behavior. Last year, we noted that a former McKesson Chairman of the Board was convicted of five counts of securities fraud arising from actions occurring in the early part of the 21st century. Five former McKesson executives had already pleaded guilty to related crimes. Last year, Bloomberg called this scandal "one of the largest white-collar crimes."

This pattern may go back a lot longer that the turn of the last century.  Amazingly, the same company, McKesson, was involved in one of the biggest frauds of the great depression era. From the Wikipedia entry,

The McKesson & Robbins, Inc. scandal of 1938 was one of the major financial scandals of the 20th century. The company McKesson & Robbins, Inc. (now McKesson Corporation) had been taken over in 1925 by Phillip Musica, who had previously used Adelphia Pharmaceutical Manufacturing Company as a front for bootlegging operations. Musica, a twice-convicted felon, used assumed names to conceal his true identity in taking control of the two companies: Frank D. Costa at Adelphia Pharmaceutical and F. Donald Coster at McKesson & Robbins. Although he was successful in expanding the company’s legitimate business operations, Musica recruited three of his brothers, also working under assumed names, one outside the company and two inside it, to generate bogus sales documentation and to pay commissions to a shell distribution company under their control. Eventually, McKesson & Robbins treasurer Julian Thompson discovered the distribution company was bogus. It was eventually determined that about $20 million of the $87 million in assets on the company’s balance sheet were phony.

In December 1938, the Securities and Exchange Commission (SEC) opened an investigation and Musica was arrested. Only after he was booked, fingerprinted and released on bond did the authorities realize that 'Coster' was in reality Musica. His bond was revoked and he committed suicide before he could be rearrested.

The McKesson & Robbins scandal led to major corporate governance and auditing reforms. The SEC required that public companies have audit committees of 'outside' directors and that the appointment of auditors be approved by the shareholders. The American Institute of Accountants (now the American Institute of Certified Public Accountants) adopted audit standards requiring that auditors verify accounts receivable and inventory.

So I guess in some ways it should not be a surprise that a company involved in one of the biggest financial scandals of the depression era, and then one of the biggest white-collar crime of the early 21st century, should now be involved in a comparatively small settlement involving allegations of over-charges for drugs.

Given that in this latest case, the settlement was small, and there were no negative consequences for any individual who authorized, directed, or implemented the alleged market manipulation, it seems doubtful that it will have any lasting effect on corporate leadership of the corporate culture.

McKesson's long and chequered history suggests some sort of chronic affliction of its corporate culture.  It also suggests a rationale for requiring heath care organizations to have ongoing, active organizational ethics policies.  

Last Week's Scandals

The march of settlements and other unfavorable legal results for health care organizations continued last week, in alphabetical order

CVS Settles for $77.6 Million for Violating the Controlled Substances Act

As reported by Bloomberg,

CVS Caremark Corp. agreed to pay $77.6 million to settle claims that some of its stores in California and Nevada allowed criminals to buy cold medications that were used to make methamphetamine.

The pharmacy chain will pay a $75 million fine, the largest civil penalty ever paid under the Controlled Substances Act, and forfeit $2.6 million in profits from the illegal sales, the U.S. Attorney’s Office in Los Angeles said today in a statement.

Between September 2007 and November 2008, CVS failed to ensure that stores in Southern California complied with laws limiting sales of over-the-counter drugs made with pseudoephedrine, which allowed methamphetamine traffickers to buy large amounts of the drugs, according to the statement. CVS changed its sales practices only after it became aware of the investigation, prosecutors said.

What was unusual about this case is that the company's CEO actually seemed to acknowledge that it did something wrong, and vowed change:

'While this lapse occurred in 2007 and 2008 and has been addressed, it was an unacceptable breach of the company’s policies and was totally inconsistent with our values,' CVS Chief Executive Officer Thomas Ryan said in a statement. 'We have strengthened our internal controls and compliance measures and made substantial investments to improve our handling and monitoring of PSE.'

Amazing, a CEO acknowledging that his corporation's values include complying with the law... [sarcasm off]
Note that we most recently posted about a settlement by CVS, one by CVS Caremark for improperly charging a public entity, in September, 2010, here.

Johnson & Johnson Found Liable for $257.7 Million for Fraud

As reported by Bloomberg,

Johnson & Johnson lost a $257.7 million jury verdict in Louisiana for making misleading claims about the safety of the company’s Risperdal antipsychotic drug.

J&J officials defrauded the state’s Medicaid system by wrongfully touting Risperdal as superior to competing antipsychotic drugs and minimizing its links to diabetes, said jurors in state court in Opelousas, Louisiana.

Specifically,

The jury found 35,542 violations of the state’s Medical Assistance Programs Integrity Law and imposed a penalty of $7,250 for each. The total $257.7 million verdict is the fifth- largest in the U.S. so far in 2010, according to data compiled by Bloomberg.

'You can’t come into Louisiana and disseminate false and misleading information,' Patrick Morrow, who represented the state, said after the verdict in a phone interview. 'I’m sure this matter will be in the appellate courts for years to come. This is the first step.'

The state’s case centered on drug safety claims that J&J and Ortho-McNeil Janssen made in November 2003 correspondence to 700,000 doctors. In those letters, J&J touted Risperdal as safer than competing antipsychotics such as Indianapolis-based Eli Lilly & Co.’s Zyprexa and London-based AstraZeneca Plc’s Seroquel. Risperdal global sales peaked at $4.5 billion in 2007, declining after the company lost patent protection.

The U.S. Food and Drug Administration responded with a warning letter saying J&J made false and misleading claims that minimized the potentially fatal risks of diabetes and overstated the drug’s superiority to rival medicines.

Lawyers for the state asked jurors to hold J&J liable for the 7,604 letters it sent to Louisiana doctors and regulators making those claims along with more than 27,542 sales calls in the state made by the drugmaker’s representatives in 2003 and 2004.

Note that we last discussed problems at Johnson and Johnson, those being manufacturing issues leading to contaminated drugs, in September, 2010, here.

Medtronic Settles for $268 Million for Personal Injuries

As reported by the Minneapolis Star Tribune,

Medtronic Inc. has agreed to pay $268 million to settle thousands of lawsuits that patients filed after a 2007 recall of a faulty heart defibrillator wire that caused at least 13 deaths.

The settlement announced Thursday covers some 8,100 personal injury lawsuits in both federal and state courts over Medtronic's popular Sprint Fidelis lead, which was implanted in some 235,000 people when the company recalled the device after a small number fractured. The malfunction could cause the defibrillator to stop working or to inappropriately shock patients -- a frightening and uncomfortable experience, but usually not life-threatening.

The cases had been lingering in a kind of legal limbo that began with a 2008 U.S. Supreme Court decision involving another Medtronic case that prevented many patients with faulty medical devices from filing suit against the makers of those products.

Rather than wait for a definitive resolution to various legal appeals, the Fridley-based medical technology giant agreed to end the three-year legal battle with a settlement.

Note that we last discussed Medtronic's payments to physicians, in June, 2010, here.

Summary

Ho-hum, another week, another set of settlements, convictions, and/or verdicts unfavorable to large, important health care organizations. Although all the actions above would result in seemingly large payments by the companies involved, all of the payments were trivial in size compared to the companies' revenues. Note that in none of the cases above did any individual pay any penalty. In only one of the cases did a corporate leader acknowledge that bad things were done, but should be done no more.

As we have noted infinitum, penalties that only appear to be (relatively small) costs of doing business are unlikely to deter future bad behavior. Until the people who actually authorized, directed and implemented the bad behavior have to suffer some negative consequences, expect the bad behavior to continue.  Note that each of the companies discussed above have had their previous ethical lapses discussed in previous Health Care Renewal posts.

The continuing march of settlements, and sometimes criminal convictions involving major health care organizations should be regarded merely as providing a floor to estimates of the extent of bad behavior by large health care organizations. Bad behavior may not be reported, or lead to legal action, and legal action may not lead to settlements or convictions. However, it is amazing how many organizations that were once regarded as exemplary have had to settle, or plead guilty, or been convicted.

When it comes to health care's leadership, society seems to have acceded to defining deviancy down. Until we start holding health care leaders to high standards, expect their organizations not to uphold high standards.