DOCTORING THE BOOKS JULY 31, 1997 TRANSCRIPT

---

Three Columbia/HCA executives were charged with defrauding medicare programs for more than a decade, underscoring the government's growing investigation into health care fraud. After a backgrounder, Margaret Warner will lead a discussion on Columbia/HCA's defrauding of medicare.

---

A RealAudio version of this NewsHour segment is available. NewsHour Links July 31, 1997 A background report on Columbia/HCA's defrauding of medicare. May 15, 1997 Tom Bearden reports on Medicare fraud in the home healthcare industry in Louisiana. June 19, 1997: Elizabeth Brackett reports on federal investigations into hospice fraud. July 15, 1997: Congress works on various versions of Medicare reform. May 15, 1996: A Dept. of Health & Human Services pilot project to crack down on Medicare fraud in Florida. Browse the NewsHour's Medicare index.

MARGARET WARNER: For more on this company and the entire for-profit health care industry we're joined by Bruce Japsen, who's covering the Columbia/HCA for Modern Healthcare Magazine, and Gerard Anderson, director of the Center of Hospital Finance & Management at Johns Hopkins University. Mr. Japsen, give us a little more detail, first of all, about these Florida indictments. What are these three executives actually accused of doing? In other words, what did this alleged fraud consist of?

BRUCE JAPSEN, Modern Healthcare: (Chicago) Well, Margaret, one of the executives was actually at national headquarters and two were in Florida. And one of the things that--one of the key things that they're looking at is a complicated issue relative to misrepresenting Medicare cost report information, what they reported to the government as far as things such as capital expenses, which would be relative to construction costs, and people are probably thinking that's very complicated, which it is, because a lot of people think that Medicare is just something that pays for the care of the elderly and the disabled.

MARGARET WARNER: But what you're saying is they also reimburse hospitals for a lot of other expenses at different rates, and so there's other opportunities there for--

BRUCE JAPSEN: Definitely.

MARGARET WARNER: --for problems.

BRUCE JAPSEN: Definitely.

MARGARET WARNER: And maybe this hasn't come out yet, but is the government--where is the government alleging that this $1.7 million went? Who benefitted?

BRUCE JAPSEN: Well--

MARGARET WARNER: In the government's view.

BRUCE JAPSEN: In the government's view, it would be the company, or the hospital--

MARGARET WARNER: You mean the whole company?

BRUCE JAPSEN: The whole company--well, in the end, the whole company because the operations would be--they're talking about the Southwest Florida division. But in the end that's all part of the same $19.9 billion company.

MARGARET WARNER: Now, has anything come out yet about how the U.S. attorneys put this together in front of a grand jury, what kind of--who were the witnesses, or what kind of case they were able to build?

BRUCE JAPSEN: Well, we're hearing a lot of things, and over the last couple of years, the company has reported information in their 10K's, their annual reports they have to report to the Securities & Exchange Commission, about the Office of Inspector General, which is a division of the Department of Health & Human Services, but they're looking into something relative to the company. And we don't know for sure how long they've been looking at this specific issue, but you can probably make an assessment that the FBI was looking into governmental records that were already existing.

MARGARET WARNER: And then now what is the relationship--I noticed that though these indictments became public yesterday, actually they happened--they are secret indictments from a month ago. Is there a relationship between these indictments and the resignations of Mr. Scott and the other top person at the Nashville headquarters last Friday?

BRUCE JAPSEN: Well, some of the things that we're hearing at Modern Healthcare would be that there were people on the board of the company that were getting wind that there was a storm coming. And so they were probably hearing that there may be indictments forthcoming. And initially in March, there were raids of their facilities in El Paso, and the company had maintained that they thought that it was just limited to El Paso and then, you know, in recent weeks it spread to about a half dozen other states. And so the board wanted to take an action.

MARGARET WARNER: What do you know about--now, turning to the wider probe, and as you said, they've seized records in many states, records at Columbia/HCA facilities. How did this probe start, and why was there a focus on Columbia?

BRUCE JAPSEN: Well, I guess we don't really know for sure why it started, but the company has a history of aggressiveness, and Modern Healthcare has reported over the past couple of years instances where competing hospitals may have cried "foul" and thought that they were up to something. And other--we have reported those type of things--so it could be just something that's built over time. And these investigations take a long time, so it's very difficult to say when it actually started. Even when they indictments came out, they talked about how these particular individuals were involved in stuff for the better part of the last 10 years. The investigation probably didn't start 10 years ago. It probably was more recent than that. But we don't know for sure when.

MARGARET WARNER: And do you know--do all of the--does the whole wider probe focus on the issue of government reimbursements?

BRUCE JAPSEN: That's pretty much--that's pretty much where it is, because the gentleman who was indicted in Nashville was a reimbursement director, a middle management person. And so pretty much what we know is relative to reimbursement.

MARGARET WARNER: Okay. Gerry Anderson, give us a little background now on Columbia/HCA, more than we were able to present. How did it get so big, so fast?

GERARD ANDERSON, Johns Hopkins University: As we heard in the introductory piece, it started with two hospitals, and essentially acquired for-profit hospitals and not-for-profit hospitals. It did very little buying. It did a lot of buying but did very little of building of hospitals.

MARGARET WARNER: So mostly through acquisitions.

GERARD ANDERSON: Mostly through acquisitions.

MARGARET WARNER: Where did it get the funding for this, the financing?

GERARD ANDERSON: Well, essentially, it got it through the stock market. And the stock market has been very good to Columbia/HCA in giving them a price/earnings multiple of about 18 for most of the period of time, which means--

MARGARET WARNER: Put that in--what does that mean?

GERARD ANDERSON: Well, essentially if you--if you--are a hospital and earn $10 million, the stock market values at $180 million, or 18 times your earnings. And what the Columbia/HCA has been able to do is acquire hospitals at about six times earnings and then take that money and turn it into 18 times earnings when it's part of the Columbia/HCA family, and then it is able to go out and buy some new hospitals with that money. So it keeps buying hospitals. And as long as its price/earnings multiple is at eighteen, and it can buy hospitals at six, it can keep acquiring hospitals and not do anything more efficient, not do anything different, and it just keeps on buying.

MARGARET WARNER: So explain a little more. Why do these smaller hospitals sell out? I mean, why are they only valued at six times earnings, where Columbia/HCA can get essentially private investors to back them at the rate of eighteen times earnings?

GERARD ANDERSON: Well, what they are is many times are scared hospitals. They are hospitals that are alone in a marketplace. They see managed care coming on. They see all these changes occurring in the health care market, and they are scared. And so they are looking for somebody to buy them. What they keep hearing is that you've got to merge with a larger entity, and that can be Columbia/HCA. It can be a not-for-profit chain. It can be a managed care organization. But they're concerned that alone they can't do it, and the stock market and the investment bankers don't give them very much of a price/earnings multiple as a single entity, but they do give them as part of a larger chain.

MARGARET WARNER: Now, you said that they don't operate any differently, but if you're a non-profit hospital, a county hospital, there is no profit, how can Columbia/HCA come in and make that hospital profitable for the stockholders?

GERARD ANDERSON: Well, first of all, they're buying hospitals that are somewhat profitable, and they're trying to make them more profitable, and to some extent what they do is they reduce certain types of services like they will increase the number of nurses that--or decrease the number of nurses--they have increased the ratio of nurses to beds. They will be able to get some economies in terms of drugs and other things that they buy in bulk. But, in general, what we don't find is that they are, in fact, any more efficient than the not-for-profits that they are purchasing. So they are not getting their savings through cost reductions. Mostly, the way they're able to generate their profits is through revenue enhancements, and that is being more aggressive and getting money from patients, from Medicare, from Medicaid programs.

BRUCE JAPSEN: And one of the--

MARGARET WARNER: Go ahead.

BRUCE JAPSEN: If I could add something, one of the things that Columbia would say is that when--as they acquired a lot of these hospitals--and in the early years of Columbia, they were just acquiring other for-profit companies, or there might be a CEO that wants to cash out, who wants to retire and move on, and in the last few years they've had--they've been forced to acquire now more not-for-profit hospitals, and they will say that one thing they can bring to the table is because they have huge purchasing power, and they can negotiate as such a big entity with insurance companies for lower rates.

MARGARET WARNER: And, Gerry Anderson, what--or either one of you, but I'll start with you, Mr. Anderson--what percentage of their revenues comes from reimbursements from the government versus private?

GERARD ANDERSON: Well, if you take Medicare, it's probably 30 to 35 percent. Medicaid is another 10 percent. So that it's close to 50 percent of their revenues will be from Medicare and Medicaid.

MARGARET WARNER: Bruce Japsen, what's been the historical record then about the for-profit world versus the non-profit world in terms of fraud problems?

BRUCE JAPSEN: Well, I don't know if we can necessarily say that it's more on the for-profit side or more on the not-for-profit side. I mean--although Columbia is a huge company, they only represent, you know, 7 or 8 percent of the hospital market. For-profit hospital companies represent about 15 percent of the nation's hospitals and the other 85 percent are not-for-profit. I mean, these problems exist on both sides.

MARGARET WARNER: Would you agree with that?

GERARD ANDERSON: I would agree with that, but I think the history of the for-profit industry has been that they have had more indictments; that they have had a more troubled history than the not-for-profits have.

BRUCE JAPSEN: And certainly there was a case a few years ago of a company, National Medical Enterprises, that did pay the largest ever health care fraud fine.

MARGARET WARNER: All right. So, Mr. Japsen, tell me how you think--how this has--all this investigation has affected Columbia/HCA in a business sense?

BRUCE JAPSEN: Well, I mean, as I was saying before, when the company's facilities in El Paso, Texas, were raided in March, a lot of their Wall Street people were taking the leader of the company and saying, quite simply, that it was limited to El Paso. The stock has dropped well over 20 percent since then. And--but with the recent indictments now, this week, and the investigations in the other states and the fact that one of the people indicted was at headquarters, it appears to be a lot more serious than people on Wall Street thought it was two or three months ago.

MARGARET WARNER: And how is the rest of the industry looking at this, from your reporting?

BRUCE JAPSEN: Well, the rest of the industry, you know, there may be some people that are taking, you know, glee in this, but--

MARGARET WARNER: Why? Why would that be?

BRUCE JAPSEN: Because Columbia has been very aggressive, and they've had a lot of in-your-face type styles. But there are people that we talked to that say that, I mean, many people are saying that it's something that the industry--the entire industry should be mindful of, and we write stories about that all the time.

MARGARET WARNER: Meaning that the government is now getting more aggressive in pursuing these?

BRUCE JAPSEN: Definitely. I mean, part of the Clinton administration's recent effort with health care reform has been to hire more FBI agents to investigate health care fraud. And I could actually quote you from an indictment of--from the U.S. attorney, who says that the prosecution of health care fraud cases is the top white collar crime priority of this office, as well as a top priority of the Department of Justice as a whole. And I think that that speaks volumes about, you know, where the government is going to be headed toward investing health care on not-for-profit and for-profit sides.

MARGARET WARNER: Gerry Anderson, do you agree that this is kind of a message to the whole industry?

GERARD ANDERSON: I think it is a message to the whole industry. I think what--again, what we've seen in the past is that the for-profit industry has been the one that has seen much of the indictments they call continue to see. And I think that's to some extent why the inspector general targeted places like Columbia/HCA. They need to make sure that they keep their stock price up; that they keep their earnings growth up. It's hard to do that if you're not particularly more efficient than the not-for-profits. You have to do that by taking a little bit of liberties with the revenues that you're trying to generate.

MARGARET WARNER: Or at least that's what the government thinks. Well, thank you both very much for being with us.

REGIONS TOPICS RECENT PROGRAMS ABOUT US FEEDBACK SUBSCRIPTIONS / FEEDS:

Support the kind of journalism done by the NewsHour...Become a member of your local PBS station.
PBS Online Privacy Policy Copyright ©1996- MacNeil/Lehrer Productions. All Rights Reserved.