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Justice Dept Considers Joining Home Depot Whistle-Blower Suit

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Now it Might Just Pay to Blow the Whistle

 

NPR Radio, December 20, 2006

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President Bush signed a big tax and trade bill today. Part of it made blowing the whistle on tax cheats far more profitable. Easier too. Steve Tripoli has the story.
TEXT OF STORY

KAI RYSSDAL: You’ve got about 11 more days to finish up your end of year tax planning. That is if you plan to pay taxes. Truth is not everyone does. And for years the IRS has encouraged the rest of us to snitch. When other folks cheat on their taxes you and I are the losers, right? Well, not always. President Bush signed a big tax and trade bill today. Part of it made blowing the whistle on tax cheats far more profitable. Easier too. Marketplace’s Steve Tripoli has the story.

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STEVE TRIPOLLI: The bill aims at the big fish, tax cheats whose underpayment starts at around $2 million. Washington tax attorney Erika Kelton says unleashing whistleblowers on that group should pay the government handsomely.

ERIKA KELTON: I expect that revenues from tax evasion are going to increase into the billions over 10 years. I would expect in the tens of billions of dollars.

It should pay whistleblowers handsomely, too. Under the new law they can take home up to 30 percent of what the government recovers. The law gives them ways to be sure they get their share, too. Chasing the government for payment has been a complaint.

San Francisco tax attorney Paul Scott says incentives this good should produce a whole new class of whistleblowers.

PAUL SCOTT: With the provisions that they have now, people with quality information who have something to risk, those folks are now gonna be in line and thinking seriously about coming forward.

The Internal Revenue Service has been slow to crack down on tax fraud that by its own estimate amounts to $290 billion a year. Erika Kelton predicts that once the new law is up and running, it will change the way the IRS thinks.

KELTON: The culture at the IRS will be more accommodating and more open to whistleblowers. And I think also over time the value of the information will, in itself encourage the IRS to be more welcoming and more open to whistleblowers.

By the way, if you score one of these rewards? Don’t forget to declare it on your tax return. It’s income, silly. And more people than ever may be watching.

I’m Steve Tripoli for Marketplace.

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Tax Report: Legislation Raises the Rewards for Tips Uncovering Big Fraud

By Tom Herman, The Wall Street Journal

December 20, 2006

BLOWING THE WHISTLE on tax dodgers may soon be more rewarding.

Legislation expected to be signed into law today by President Bush authorizes the Internal Revenue Service to pay higher rewards to many informants in cases involving large amounts of money. The reward could be as much as 30% of what the IRS collects, a Senate Finance Committee summary says.

Lawmakers hope this and other incentives in the legislation will encourage more people to step forward with valuable tips that will help the IRS collect additional revenue and reduce the nation’s “tax gap,” the difference between what the agency collects each year and what it thinks it should collect. Earlier this year, the IRS estimated the gap at about $290 billion.

The legislation comes in the wake of a report this year by the U.S. Treasury Inspector General for Tax Administration that said the IRS needs to do a better job of managing the rewards program. The IRS said it agreed with the report’s recommendations and had already begun making improvements. But that hasn’t satisfied critics such as Sen. Charles Grassley, an Iowa Republican.

“It’s a shame that an agency that could really benefit from whistle- blowers hasn’t encouraged them, but I hope that will change with the new law,” Sen. Grassley says. “One well-positioned whistle-blower could expose millions of dollars of fraud. It might take IRS auditors years to catch that much cheating on their own.”

Some informants have complained about their treatment by the IRS. At a Senate Finance Committee hearing in 2004, a man dubbed “Mr. ABC,” testifying behind a screen, said he worked for a “Wall Street investment bank” and tried to tell the IRS about “abusive” tax shelters. He said his experience with the IRS had been “extremely frustrating and discouraging,” and that the IRS was “resistant to and suspicious of” informants.

The committee hasn’t identified Mr. ABC, and Erika Kelton, a lawyer at Phillips & Cohen in Washington who says she represented him, declined yesterday to identify him.

A Senate Finance Committee aide says the new provision applies to a tipster with information involving a business or, in the case of an individual, someone whose gross income exceeds $200,000 for any year in question. In either case, the tip must involve taxes, penalties and interest of more than $2 million, the aide says.

The new provision generally sets a reward floor of 15% — and a cap of 30% — of the collected proceeds, including penalties, interest, additions to tax and “additional amounts,” if the IRS “moves forward with an administrative or judicial action” based on the tipster’s information, the Senate Finance summary says. Smaller rewards may be handed out in certain circumstances.

A congressional committee estimates the provision will raise $182 million over 10 years.

The IRS long has been authorized by law to pay rewards to tipsters. The amount depends on how valuable the IRS considers the tip to be and can vary widely. The IRS has set the reward not to exceed 15% of the amount recovered based on “specific information” that caused an investigation and resulted in recovery, a congressional report said. The reward ceiling generally has been $10 million in recent years, the report said. But the ceiling and percentages can be increased under a “special agreement.”

Even with the changes, anyone itching to turn in a wrongdoer should think twice before expecting a rich reward — or any reward at all. Officials have long rejected most reward claims, claiming the tips produced little or no helpful information.

Former IRS officials say many tips flow in from people seeking revenge against an ex-spouse, an ex-business partner or a former employer. Since the late 1960s, the IRS has received a total of about 258,000 reward claims and has issued rewards on only about 20,000, or slightly less than 8%. Total rewards paid: about $89 million.

The new legislation raises a wide range of questions, such as how the IRS will administer the program and what difference, if any, the changes will make. IRS spokesman Anthony Burke says it’s too soon to comment on these and other issues.

The new incentives “will give a lot of encouragement for people to step forward who otherwise wouldn’t,” says John Phillips of Phillips & Cohen. He and Ms. Kelton say the new law will bring in billions of dollars of additional revenue.

Paul D. Scott, a San Francisco lawyer, predicts the changes will result in a “tectonic shift” in the way the IRS does business.

Mr. Scott says the new incentives will “undoubtedly attract an entirely new pool of knowledgeable insiders — high-level folks who would never have stepped forward previously, based on their very legitimate concerns about whether the IRS would ever reward them and how much their reward might be.”

Donald Alexander, a former IRS commissioner and now a Washington lawyer at Akin Gump, agrees the changes are likely to encourage more people to come forward. But, he says, “I doubt that it will make a major change in the enforcement of our tax laws,” especially since so many tips in the past have turned out to be worthless.
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Legal Complications on Steroids

If Lance Armstrong were found to have been on drugs, and his S.F. handlers knew it, sponsors could demand their money back, and perhaps change sports in the U.S. forever

By Matt Smith

Article Published Dec 7, 2005

Fifteen years ago, former Boston newspaper hack Dan Osipow answered an ad to valet a San Francisco financier’s bike racing hobby, and went on to play a central role in the greatest and perhaps most peculiar story in the history of sports management, as the U.S. Postal Service underwrote Lance Armstrong’s Tours de France-winning comeback from cancer. Now Osipow’s stepping down to take a job Dec. 12 with a private firm that markets UC Berkeley’s athletics programs.

“Leaving something historic behind is tough,” says Osipow, who held senior titles at Tailwind Sports and other companies controlled by S.F. investment bank owner Thomas Weisel to handle ownership of Armstrong’s U.S. Postal Service, and later Discovery Channel, cycling teams. Osipow was also behind the creation of the four-year San Francisco Grand Prix bicycle race, which was canceled last month.

“I can recall being in a Chart House restaurant with Tom, myself, and one other person in 1990, and after perhaps many glasses of wine, Tom pounded the table and said, ‘We’re going to put together the first American team to win the Tour de France.’ The fact it happened nine years later is an amazing achievement,” Osipow adds.

Osipow and Weisel’s achievement has the potential to morph into something even more amazing than helping bankroll Lance Armstrong’s Tour wins. The two men helped put in place an unusual contractual and legal situation that — if widespread accusations that Armstrong’s wins involved using banned performance-enhancing drugs were ever shown to be true, and his handlers were shown to have known about it — could transform all of American professional sports.

If legal investigations under way in Dallas about Armstrong’s alleged drug use were to somehow show the Texan cheated with his handlers’ knowledge, it could put in motion a chain of events with the potential to purge banned drugs from baseball, football, and anywhere else athletes are alleged to employ them.

Sponsorship and bonus-payment agreements entered into by Weisel-controlled companies created a situation in which performance-enhancing drug use could theoretically be construed as a form of financial fraud, defined here as a situation in which a party misrepresents the truth in order to obtain money. If such a definition were ever to hold up in court, it could open a floodgate of legal questions.

When the San Francisco Chronicle reported that Barry Bonds and Jason Giambi told a grand jury they used steroids, could this have meant ticket-buying fans might have been defrauded? Could fans file a class-action lawsuit? What about the Giants’ commercial sponsors? Could they sue, too?

With millions of dollars in potential lawsuits at stake, teams would do everything they could to make absolutely sure their athletes didn’t use banned drugs.

That’s quite a potential legacy for a former sportswriter from Boston.

Last March, I was at a seminar in which Charles Grantham, former executive director of the National Basketball Players Association, described how the NBA recovered, marketing-wise, from drug scandals of the mid-1980s. I asked if he ever thought the United States would treat drug use in sports the way countries such as Italy do, with laws defining it as a form of fraud, in which someone obtains money by making false claims. Grantham suggested such a law could never pass in the U.S. because too many interests would oppose it. In the audience was Wharton business instructor John Percival, and he piped up to say that such a change would have to come in the form of litigation. Plaintiffs would have to allege they’d been defrauded as a result of banned-drug use, and a court would have to sign off on such a claim.

Such a precedent could change the way sports drug use is viewed — from a potentially bad example for youth to a form of illicit means of financial gain.

In a lecture hall populated by academics, a lawyer, and a couple dozen journalists, however, nobody seemed to have ever heard of such a case.

As it happens, there’s a legal situation that roughly follows those lines being mediated right now in Dallas. SCA Promotions, a company that event promoters pay to underwrite sports bonuses, has demanded to see Lance Armstrong’s medical records before it pays $5 million for his 2004 Tour win.

Weisel’s Tailwind Sports paid SCA to underwrite the risk of paying out Tour win bonuses to Armstrong. But last year, a book titled L.A. Confidential published a litany of drug allegations against the cyclist.

SCA posted the $5 million bonus apparently due Tailwind for Armstrong’s ’04 Tour victory into a custodial account and privately requested information from Tailwind Sports in order to evaluate the allegations contained in L.A. Confidential. Tailwind responded aggressively by immediately filing suit.

SCA is asserting that it was wrongfully asked to pay out money based on drugs fraud — a basic concept with the potential for broad application in sports.

An arbitration hearing is scheduled for January.

SCA’s case could be bolstered by allegations published in August in the French newspaper L’Equipe, which stated that frozen urine samples from doping tests taken during the 1999 Tour de France, which were re-examined this year, showed the presence of the banned blood-enriching product EPO in Armstrong’s system. A test to detect EPO wasn’t developed until 2001. The French lab re-examined testing results from 1999, when many cyclists were assumed to be using the drug because they could avoid detection. Armstrong responded with a vigorous crisis PR campaign, appearing on Larry King Live to deny he’d ever cheated.

Dick Pound, chairman of the World Anti-Doping Agency, was quoted as saying the situation bolstered the need to establish a protocol for retesting urine and blood samples from the previous eight years, so as to find traces of substances that might have been misused by athletes before tests to detect them had been developed.

If a Postal Service team member were shown to have doped during the past five years, the prospect for such an investigation could be particularly ominous for the Weisel sports companies where Osipow served as an executive. Starting in 2001, sponsorship agreements between the U.S. Postal Service and these companies included strong anti-drugs language under which the contracts could be thrown out if team management knew of athletes’ drug use and looked the other way. Copies of the agreements I obtained had the sponsorship amounts blacked out. Press reports, however, have claimed the USPS paid out around $10 million per year during the agreement, underwriting Armstrong’s Tour victories between 1999 and 2004.

The Postal Service is considered a government agency under an 1863 federal law called the False Claims Act designed to root out fraud against the government. That means that any insider who believes he has evidence that would hold up in court showing Armstrong used drugs while his team management knew yet quietly looked the other way could potentially reap a bonanza under legal provisions that give whistle-blowers a share of any lawsuit’s proceeds.

“Like most cycling fans I would be reluctant to believe Lance Armstrong, or any other member of the U.S. Postal Service Team, used performance-enhancing drugs. But if that were indeed the case, and the company was aware of that at the time, the company may very well have exposure for treble damages under the False Claims Act,” says Paul Scott, a former U.S. Department of Justice trial attorney in San Francisco specializing in cases involving the act.

I asked Scott, and a different False Claims Act specialist who spoke off the record, to review pages from copies of sponsorship agreements between the Postal Service and Weisel-affiliated companies. I asked them to consider an imagined scenario in which a team member was found to have improperly used drugs, the team organization knew about it, then hid it from its government sponsor.

“The default clause would seem to indicate that compliance with the drug clause was a condition of payment. If that were the case, and they violated the drug clause, and they knew about it, and they continued to solicit payment from the government with that knowledge, they may very well have a problem with the U.S. government,” Scott said.

Osipow says he has confidence the L’Equipe reports will not shake the good relationship the Postal Service had with Weisel’s organization.

“It’s past history, and they know about the relationship they had with us at the time. It’s past history. They have the utmost faith in [team manager] Johan [Bruyneel] and Lance. And they have the utmost faith in our program. And they leave it at that,” Osipow says. “It was difficult news, but you have to recognize the source of the story, and the history behind it. We believe Lance. Everybody in this organization believes Lance.”

Adds Postal Service spokeswoman Joyce Carrier, “Unless someone proves any differently, we have no reason to not trust what the team has told us.” <!–[if !vml]–><!–[endif]–>

In America the idea that beloved champion Lance Armstrong might have cheated is seen as a truly extraordinary allegation. This isn’t so in cycling-savvy Europe, where sports headlines are routinely dominated by doping trials of athletes, doctors, trainers, and other bike-racing hangers-on.

In Europe, police raids and customs searches frequently ensnare athletes who had passed many doping tests as drug free. That’s because many of drugs believed to be used by performance-seeking athletes are still undetectable with current dope-testing methods. There’s a cornucopia of biotechnology-bred medicines that mimic substances that naturally occur in the body, and are therefore extremely difficult to detect. Some of these drugs have a second, shadow use in improving athletic performance. Such drugs include synthetic human growth hormone and various cutting-edge anemia drugs, which boost the body’s ability to produce oxygen-carrying blood cells.

Last October, an Italian court convicted sports doctor Michelle Ferrari on doping charges after a series of SWAT-style drug raids on cyclists’ hotel rooms.

According to the book Lance Armstrong’s War, by Daniel Coyle, Ferrari had been known to offer choice quotes to Italian reporters such as this: “The limit is the antidoping rules; everything that is not prohibited is allowed,” and “If I were a rider, I would use the products which elude doping controls if they helped to improve my performances and allowed me to compete with others.”

One of the most interesting revelations in Coyle’s book is the extraordinarily close, nine-year relationship between Armstrong and his personal trainer, Michelle Ferrari. Ferrari spent a week per month with Armstrong during the spring, and was with him full time during weeks leading up to the Tour. Ferrari flew with Armstrong to training camps off the coast of Africa, to Texas, to Spain, wherever the athlete was undergoing his meticulous process of training, testing, and training.

Key to Armstrong’s success has been this attention to training detail, and his endless appetite for information related to his physical preparation.

If this information were to ever see the light of court proceedings, and if it were to somehow conclusively show that Armstrong’s team looked the other way as he doped, the results just might reverberate throughout professional sports.

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Salesman rewarded for telling on boss

July 5, 2005

RACINE, Wis. — A man is set to get more than a million dollars from the federal government for suing his former bosses.

Gerald Rademacher’s lawsuit accused his former employer of overcharging the government for computer accessories.

The federal False Claims Act allows workers to file such suits and collect part of the damages if they win. Rademacher is set to get $1.575 million from a $9 million legal settlement his company paid.

Rademacher, 62, was a district sales manager for Softview Computer Products, which later merged with New York-based Humanscale.

His lawsuit alleged that between 1998 and 2004, Humanscale gave lower prices to other customers than to the government. The General Services Administration, which oversees purchasing for the U.S. government, demands certification that vendors are giving the government their lowest prices.

Rademacher also claimed the business misrepresented itself as a small, Washington D.C.-based outfit when the D.C. facility really was one of many offices.

”Mr. Rademacher is a courageous man who showed a great deal of resolve in pursuing this matter and is very deserving of the reward he received,” said Paul Scott, Rademacher’s attorney.

AP
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Whistle-blower rewarded with $1.6 million

Little-known law awarded Racine man share of settlement in fraud case

By GINA BARTON gbarton@journalsentinel.com Posted: July 3, 2005

A 62-year-old Racine man is about to become a millionaire for blowing the whistle on a contractor who he says was cheating the federal government.

Quotable

“In my view, this is an important statute that people sometimes don’t realize is available to them to address fraud”- Attorney Paul Scott

Gerald R. Rademacher, a former district sales manager for Softview Computer Products, is set to receive $1.575 million from the U.S. government, which will come from a $9 million legal settlement paid by the company.

Rademacher filed suit against Softview, which later merged with the New York-based Humanscale, on the government’s behalf in June 2003. A federal law known as the False Claims Act allows employees to file such suits and to collect part of the damages if they are successful.

Rademacher’s suit claimed that Humanscale was overcharging the federal government for computer accessories. Jeffrey A. Belkin, the Atlanta-based attorney who represents the company, did not return telephone messages left Friday. The settlement agreement, filed Thursday, says that Humanscale denies the allegations and does not admit wrongdoing. Rather, the company has agreed to pay the government $9 million, “to avoid the delay, uncertainty, inconvenience and expense of protracted litigation of these claims,” the settlement document says.

Government cost at issue

Rademacher’s suit levels several allegations against his former employer. According to the suit, the General Services Administration, in charge of purchasing for federal government agencies, demands certification from vendors that they are giving the government their best prices. Between 1998 and 2004, Humanscale gave lower prices to other customers, the suit claims. For example, 9- to 14-inch anti-radiation computer screens were sold to the government for $77. Meanwhile, Toyota Motor Products got 14-inch screens for $52 and AT&T Corp. and Chase Manhattan Bank paid $66 for the screens, the suit says.

Rademacher also alleged that the company had misrepresented itself as a small, Washington, D.C.-based business owned by a woman, which gave it an edge in winning contracts. In reality, Rademacher’s suit says, the Washington, D.C., facility was one of many district sales offices for the larger company, principally owned by a man.

Finally, the suit alleged that the company failed to disclose that one of its products contained a part manufactured outside the United States.

According to the company’s Web site, http://www.humanscale.com/, Humanscale was founded in 1982 and “is generally recognized as the leading manufacturer of ergonomic products for the office.”

“Humanscale serves, among others, the majority of Fortune 1000 companies,” the site says. “Our products are available through retailers, contract furniture dealers and direct via our 14 sales offices in the United States. We also maintain offices in London, Prague and China, which oversee our worldwide distribution network. Manufacturing facilities are located in New Jersey, California and Dublin, Ireland.”

Authorities alerted in 2000

Rademacher, who is now retired, worked for the company from 1992 until 1999, when he resigned to take care of his ailing father, said his attorney, Paul Scott of San Francisco. Rademacher first approached the government about the over-charging in 2000, Scott said.

“Mr. Rademacher is a courageous man who showed a great deal of resolve in pursuing this matter and is very deserving of the reward he received,” Scott said.

The government took over the case against Humanscale earlier this year.

Percentage awarded

The government does not choose to take over all cases under the False Claims Act, Scott said. When it does, the whistle-blower can collect between 15% and 25%. When it doesn’t, the whistle-blower gets 25% to 30%.

“In my view, this is an important statute that people sometimes don’t realize is available to them to address fraud,” Scott said.

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Kerlan-Jobe Clinic Pays to Settle Lawsuit

January 21, 2004 — Los Angeles Times — Page D1

By David Rosenzweig

The world-famous sports medicine clinic whose physicians tend to the Lakers, Dodgers and Kings has paid $2.65 million to the government to settle a whistle-blower lawsuit alleging it overbilled Medicare and other federal health-care programs over an eight-year period, the U.S. attorney’s office said Tuesday.

Without admitting any wrongdoing, the Kerlan-Jobe Orthopaedic Clinic agreed to pay the $2.65 million on behalf of itself and 17 of its physicians, including co-founder Dr. Frank W. Jobe.

“This settlement sends a message that no physician, no matter how prominent, is above the law,” said Assistant U.S. Atty. David K. Barrett.

But Dr. Ralph Gambardella, the clinic’s president and chairman, maintained that the dispute was over technical issues that did not reflect on the doctors’ professional conduct.

The lawsuit was brought by a former employee under the False Claims Act, which allows private citizens to sue for fraud on behalf of the federal government and receive up to 25% of the money recovered.

Trevor R. Baylor, who was in charge of maintaining patient records at the clinic, stands to receive $556,500, or 21% of the settlement, according to the U.S. attorney’s office.

It was the second time Baylor had successfully sued a medical facility under the federal whistle-blower law. In 2000, California Emergency Physicians, one of the state’s largest emergency physician groups, agreed to pay the government $1.2 million to settle allegations of overbilling uncovered by Baylor.

California Emergency Physicians was under contract at Pomona Valley Hospital Medical Center, where Baylor was employed in the mid- 1990s as medical records director.

“His experience there led him to know it when he saw it at Kerlan-Jobe,” his attorney, Paul D. Scott, said Tuesday.

Baylor declined to be interviewed, referring all queries to Scott, who said his client was assessing his future in light of the settlement. “It’s been a long ordeal for Trevor,” said the attorney. The lawsuit was filed under seal in 1998, and persuading the government to join the case was a struggle, according to Scott.

The suit alleged that Kerlan-Jobe, which has offices in Los Angeles, Beverly Hills, Pasadena and Anaheim, knowingly overbilled Medicare, Medi-Cal, the U.S. Labor Department’s workers’ compensation program and the Defense Department’s medical program from 1993 through 2001.

In many cases, the suit contended, doctors at the clinic “upcoded” or billed for more elaborate procedures than were actually performed. Other times, the suit alleged, follow-up examinations were booked as first-time consultations, entitling the physicians to bill at a higher rate.

The suit also charged that doctors at Kerlan-Jobe engaged in a practice known as “unbundling.” For example, a physician who performed an orthopedic surgery would bill separately for the surgery and for a graft used in the surgery, the suit alleged.

In 1998, the suit alleged, an internal audit revealed widespread billing irregularities at Kerlan-Jobe. Baylor charged that the clinic and its physicians were informed of the findings but made no effort to reimburse the government for the excessive billings.

He estimated the government’s losses at $1.25 million or more. If Baylor and the government had prevailed at trial, Kerlan-Jobe would have been liable for triple the government’s losses plus civil penalties.

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CHW Resolves Fraud Suit: System to Pay $8.5 million, Denies Wrongdoing

June 10, 2002 — Modern Healthcare — Section: Late News

By Mark Taylor

Maintaining reserve Medicare cost reports has landed another health system in legal trouble, resulting in an $8.5 million Medicare fraud settlement.

The U.S. attorney in Sacramento, Calif., announced that Catholic Healthcare West, a 42-hospital system based in San Francisco, and its Sacramento affiliate, Mercy Healthcare Sacramento, will pay to resolve a 1999 civil whistleblower lawsuit. The charges stem from a suit filed in U.S. District Court in Sacramento by Joseph Kimball under the federal False Claims Act.

Kimball, a former reimbursement analyst at Mercy, alleged in his suit, which the U.S. Justice Department joined in 2000, that four Mercy hospitals and nine other CHW hospitals defrauded Medicare by filing false cost reports that included unallowable or inflated costs. The government alleged that CHW and Mercy kept dual sets of books-one shown to government auditors and a second reserve set hidden from the government that identified nonreimbursable costs. Mercy, which signed a five-year corporate integrity agreement, denied legal wrongdoing.

Mercy Vice President William Hunt said the Mercy system cooperated in the government investigation.

“The disputes between us related to complicated matters of accounting and reimbursement,” Hunt said in a statement. “The cost reports, which are like very complex tax returns, are governed by thousands of pages of highly technical, often confusing and ever-changing regulations. We believe we interpreted those regulations fairly and reasonably, consistent with the interpretations followed by the courts and Medicare itself, and any errors were inadvertent.”

Adisa Abudu-Davis, the assistant U.S. attorney in Sacramento who prosecuted the case, said Mercy allegedly included in its cost reports nonallowable acquisition costs incurred in the purchase of one of its hospitals, even after those costs were denied earlier by a fiscal intermediary. In addition, Abudu-Davis said the system allegedly claimed the same bond feasance costs on two separate cost report worksheets and was paid double by Medicare.

In recent years, because of compliance programs and changes in the way Medicare reimburses hospitals, it was rumored that Medicare cost report fraud cases would grow less frequent, a belief that Abudu-Davis said she sought to dispel.

“Providers’ cost-reporting practices will continue to receive scrutiny under the False Claims Act,” she said.

San Francisco attorney Paul Scott, who represented Kimball, said the statute of limitations under the False Claims Act can date back 10 years.

“I think even if institutional changes occur, because of events in the past these kinds of cases are still going to occur,” predicted Scott, who said Kimball will receive $2.48 million for blowing the whistle on the alleged fraud.

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Mercy Owner Settles Fraud Claim

A Whistle-blower Gets Part of the $9 Million Deal by Hospital Giant CHW

June 8, 2002 — The Sacramento Bee

By Denny Walsh Bee Staff Writer

In one of Northern California’s largest medical fraud settlements, Catholic Healthcare West, which includes Mercy Healthcare Sacramento, has agreed to pay more than $9 million to resolve accusations that it stole millions from the government by lying on health care insurance claims.

The agreement resolves allegations that San Francisco-based CHW and 13 of its hospitals knowingly submitted false cost reports to Medicare and other federal health insurance programs.

The health care giant is obligated to pay the United States $8.5 million and an additional $577,000 to San Francisco attorney Paul Scott, who filed the original lawsuit more than three years ago on behalf of former Mercy Healthcare Sacramento reimbursement analyst Joseph A. Kimball.

In accord with the federal False Claims Act, the 46-year-old Kimball will receive $1.9 million out of the money paid to the United States. The act allows whistle-blowers to collect between 15 and 30 percent of the government’s recovery, plus attorneys’ fees and costs.

Kimball, who lived in Folsom, worked for Mercy in Sacramento from 1984 to 2000. He recently moved to Texas.

“There are few instances in life where people are rewarded for stepping forward and doing the right thing,” Scott said Friday. “This is one of those fortunate cases where that was the result.”

He said Kimball is “immensely gratified to see the case come to a successful conclusion.”

The government is also obligated under the agreement to pay California $58,371 out of its share in connection with alleged fraudulent submissions made to the state’s Medicaid program, called Medi-Cal.

CHW Vice President William J. Hunt said Friday the company denies it engaged in any wrongdoing.

“The cost reports, which resemble very complex tax returns, are governed by thousands of pages of highly technical, often confusing and ever-changing regulations,” Hunt said. “We believe we interpreted those regulations fairly and reasonably, consistent with the interpretation followed by the courts and Medicare itself, and any errors were inadvertent.”

He said the settlement grew out of CHW’s wish to “end the distraction caused by this litigation,” and to focus on health care. “We are satisfied with the outcome and pleased to put this matter behind us.”

The settlement calls for CHW, the largest Catholic hospital system in the West, to enter into a corporate integrity agreement with the Office of Inspector General for the U.S. Department of Health and Human Services, which polices the administration of federal health insurance.

Kimball agreed to drop his claims against CHW in a second suit filed two years ago in Sacramento federal court, but, according to Assistant U.S. Attorney Michael Hirst, the government will continue to investigate the claims in that suit. It never chose to intervene in that action.

After investigating Kimball’s allegations in the suit that was settled, the government intervened as a plaintiff twice in certain portions of it, first in March 2000 and again in January 2001. The case was handled by Assistant U.S. Attorney Adisa Abudu-Davis in Sacramento.

In an amended complaint following its second intervention, the government alleged that CHW and four of its Sacramento-area hospitals — Mercy General, Mercy San Juan, Mercy American River and Mercy Hospital of Folsom — submitted reports of costs that were inflated or not allowable.

The government alleged that two sets of books were maintained, one that was shown to auditors and a hidden set that identified the false claims. It also alleged that CHW established undisclosed reserves, setting aside funds to repay the government in case the fraud was detected.

The alleged scheme embodied false statements in Medicare and Medicaid hospital cost reports, and in requests for reimbursements on claims by members of the military and their dependents, which are covered by a separate program.

The conduct allegedly occurred between 1990 and 1999, and involved a variety of expenses, such as costs associated with refinancing hospital bonds, the purchase of a hospital, treatment of indigent patients, and the allocation of costs among hospitals and affiliated home care and hospice agencies.

From its inception in 1965 as an added Social Security benefit, Medicare has been a tangle of red tape. It provides health insurance for the elderly and consists of two parts. Part A covers hospital services and related care. Part B cover physicians’ and ancillary services.

Providers file cost reports with insurance companies that the government has designated as “fiscal intermediaries.” The companies pay providers based on the reports and, in turn, receive funds from the government to underwrite the program.

“Although the cost reports are subject to audit review, it is known throughout the health care industry that the fiscal intermediaries do not have sufficient resources to perform in-depth audits on the majority of (them),” according to Kimball’s suit.

It says that two to three years elapse from the time the reports are submitted until they are finalized through audit or “desk review,” but providers are generally paid most or all of the claimed amounts within weeks after the reports are submitted.

The system “relies substantially on the good faith of providers,” the suit says.

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Hospital Operator Settles Lawsuit

June 8, 2002 — Los Angeles Times

By Don Lee, Times Staff Writer

Medicare: Catholic Healthcare West denies wrongdoing but agrees to pay U.S. government $8.5 million after being accused of false billings.

Catholic Healthcare West, California’s largest not-for-profit hospital operator, agreed to pay the federal government $8.5 million to settle a whistle-blower lawsuit alleging fraudulent Medicare billings, the Justice Department said Friday.

The government claimed that San Francisco-based Catholic Healthcare West and 13 of its hospitals submitted false Medicare cost reports, kept a separate book of disallowed charges and set aside reserves in case Medicare money had to be repaid.

In settling, Catholic Healthcare denied wrongdoing. Analysts said the settlement amount was unlikely to have an effect on the finances of the company, a 42-hospital chain with $4.8 billion in revenue in fiscal year 2001. The company is in the middle of a reorganization to reverse years of losses. Russell Hayman, an attorney for the hospital chain, said Friday that the settlement amount was significantly less than what federal officials originally sought. But he acknowledged that there were cost-reporting mistakes made by Catholic Healthcare West employees, which resulted in overpayments to the hospitals.

He said, however, that errors also were made by Medicare officials and that the government’s audit over the last decade turned up cases of underpayments, which Hayman said the hospital company will pursue.

U.S. Atty. John K. Vincent said in a statement that he was pleased with the settlement.

Over the years, the Justice Department has pursued numerous whistle-blower lawsuits accusing hospital companies of cost-reporting fraud.

The allegations against Catholic Healthcare West arose in a lawsuit brought in February 1999 by Joseph Kimball, a former employee. The suit was filed under the False Claims Act, which allows whistle-blowers to get as much 30% of the government’s recovery.

Kimball’s attorney, Paul Scott, said his client will receive $2.48 million.

For Catholic Healthcare West, the settlement is the latest in several whistle-blower lawsuits that have cost the hospital company more than $20 million over the last two years.

In August, Catholic Healthcare West agreed to pay $10.7 million to settle civil charges related to the use of investigational medical devices.

Mimi Park, a senior analyst at Moody’s Investors Service who tracks hospital finances, said Friday that Catholic Healthcare West has made progress in its reorganization. But she said the company’s financial performance still remains weak.

Moody’s latest bond ratings for Catholic Healthcare West were in the low end of investment grade, with a negative outlook for future ratings.

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Hospital Chain to Pay 8.5 Million Settlement

June 7, 2002 — San Francisco Chronicle — Page A-27

Chronicle Staff Report

Sacramento — Catholic Healthcare West has agreed to pay $8.5 million to the federal government to settle accusations that some of its hospitals submitted false bills to Medicare and other federal programs.

The settlement was announced Tuesday. The 13 hospitals involved included St.

Mary’s Medical Center in San Francisco and Dominican Hospital in Santa Cruz, said Paul Scott, attorney for the former employee who filed the suit in a Sacramento federal court in February 1999.

Joseph Kimball, an analyst who prepared cost reports for CHW affiliate Mercy Healthcare Sacramento, accused the hospitals of making false statements in federal reimbursement claims. The government later intervened in the case.

As a whistle-blower, Kimball will receive $1.9 million of the settlement, plus $577,000 in legal fees and costs paid by the hospital chain, Scott said.

Catholic Healthcare West, the state’s largest nonprofit hospital chain, operates 42 hospitals in California, Arizona and Nevada. The company did not admit any wrongdoing and said the case involved complex and confusing federal regulations.

“We believe we interpreted those regulations fairly and reasonably, consistent with the interpretation followed by the courts and Medicare itself, and any errors were inadvertent,” William J. Hunt, a company vice president, said in a statement.

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Largest Western Catholic Hospital System Settles Fraud Charges

June 7, 2002 — Associated Press

By Don Thompson, Associated Press Writer

14:57 PDT SACRAMENTO, Calif. (AP) —

The largest Catholic hospital system in the Western states has settled allegations that 13 of its hospitals made false Medicare claims. It agreed to pay the federal government $8.5 million to settle the whistleblower lawsuit, officials said Friday.

It’s the second set of similar allegations against San Francisco-based Catholic Healthcare West and its affiliate Mercy Healthcare Sacramento, and the second settlement in little more than a year.

Each time, the system admitted no wrongdoing.

The hospital system agreed to pay $10.25 million a year ago to settle a whistleblower complaint that it inflated reimbursement claims at two clinics, Woodland Clinic Medical Group and MedClinic of Sacramento.

Friday’s settlement concerns allegations that the system and its hospitals knowingly defrauded Medicare and other federal health insurance programs by filing false cost reports to obtain millions of dollars for costs which were inflated or not allowable.

The hospitals kept two sets of books, federal prosecutors alleged: one for government auditors, and a second hidden set that showed the inflated and unallowable costs. The hospitals set up hidden reserve funds to repay the government if the overpayments were discovered, prosecutors said.

William J. Hunt, the system’s vice president for operations, blamed the dispute on “complicated matters of accounting and reimbursement.”

He said the cost reports “are governed by thousands of pages of highly technical, often confusing and ever-changing regulations. We believe we interpreted those regulations fairly and reasonably…and any errors were inadvertent.”

He said the system cooperated in the investigation, is satisfied with the settlement, and is “pleased to put this matter behind us.”

The federal government intervened in complaints involving four hospitals in the Sacramento area: Mercy General, Mercy San Juan, Mercy American River, and Mercy Hospital of Folsom.

Friday’s settlement also ends claims by whistleblower Joseph A. Kimball involving nine other Mercy hospitals: Mercy Medical Center Redding; Mercy Hospital of Mount Shasta; St. Mary’s Medical Center in San Francisco; Dominican Hospital Santa Cruz; Mercy Hospital Bakersfield; St. John’s Regional Medical Center in Oxnard; Saint Rose Dominican Hospital in Henderson, Nev.; St. Joseph’s Hospital and Medical Center in Phoenix, Ariz.; Mercy Hospital and Medical Center in San Diego.

Kimball worked for Mercy Healthcare Sacramento as an accountant since 1984. He received more than $1.9 million under the settlement. The whistleblower in the first case, George Baca, also received nearly $2 million.

Besides the repayments, the system entered into a “corporate integrity agreement” with the U.S. Department of Health and Human Services’ inspector general, designed to prevent future fraud.

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Living by the Truth

March 7, 2001 Verdicts & Settlements

by Leonard Novarro

Clients measure a lawyer’s worth in many ways. In Paul D. Scott’s case, it was in boxes.

When client Daniel Dean, 34, came to his office in San Francisco to discuss his case, the “boxes and boxes and boxes” lining every corner of Scott’s office impressed Dean.

“And every one was my case,” says Dean, whose wife, Dr. Kerry Spooner-Dean, 30, was killed by a carpet cleaner hired to work in their house.

Scott, on behalf of Dean, sued the company that hired the cleaner, an ex-convict, and won a 9-3 jury verdict declaring America’s Best Carpet Care of Milpitas negligent in its hiring and awarding Dean $11.5 million, later negotiated to an undisclosed settlement amount.

“He basically gave up his practice for six to eight months to pursue this,” Dean says.

Scott even made six-hour round trips to Mule Creek Prison in Ione where the laborer, Jerrol Glenn Woods, was serving time for the murder.

“Scott did it without knowing he’d get anything. That’s how he pursued it,” Dean adds.

San Francisco Superior Court Judge Quentin Kopp, a former state senator, had worked with Scott on a number of cases before his election to the bench. Kopp’s former partner, Thomas DeFranco, worked on the Dean case, calling Scott’s performance “magnificent.”

“And my partner is less likely to use strong expressions,” Kopp says.

That same doggedness and commitment marked Scott’s six years with the U.S. Justice Department’s civil fraud division in Washington, D.C., where he handled a number of high-profile cases, winning back tens of millions of dollars for the federal government before leaving in 1995 to found his own firm in San Francisco.

His last case for the Justice Department involved dozens of German firms accused of bribing procurement officer for the U.S. Army to secure government contracts. The cases concluded with a significant settlement.

Scott also recovered $6.9 million for the Department of Veterans Affairs in another case, in which a bank employee made fraudulent loans to veterans who defaulted on their properties. The Veterans Administration then bought the homes back at inflated prices.

In his earliest case for the Department of Justice, he prosecuted a Richmond, Va., defense contractor who overcharged the government on radio parts that proved defective.

“They were being put into the hands of men and women who would be in potentially hazardous situations, where they would rely on communications for survival,” Scott recalls.

Scott’s work for the federal government earned him several awards, including commendations from the Department of Veterans Affairs and former Attorney General Janet Reno.

Other government lawyers also recognize Scott’s talents.

“I have practiced against and with some of the finest lawyers in the country, and I think of Paul as the finest lawyer I know. In terms of work ethic, he’s an animal,” says Robert Kirsch, a prosecutor with the U.S. attorney’s office in New Jersey and former colleague of Scott’s.

As a result of his work with the Justice Department, whistle-blower claims have become a specialty with Scott, 36, and the subject of articles he’s contributed to several legal journals.

The fights are long, and so are the odds, Scott says. And the chance of recovery sometimes can be a gamble. But the pursuit gives him purpose.

The cases are intellectually challenging, requiring an enormous amount of discipline to mount an attack against what Scott sometimes sees as overwhelming odds.

“You’re often facing lawyers from big firms with enormous resources. Whistle-blowers are very much the underdog in these battles,” he says.

“But you cannot be afraid of having the odds stacked against you, because they usually will be,” Scott adds.

Scott explains a way to even the playing field.

“You outwork them,” Scott says. “You just have to work very hard to keep ahead and rely at the end of the day on the undisputed facts in the case.”

“If you live by the truth, and your objective is to live by the truth no matter what a lawyer throws at a case, you can’t undo those facts,” Scott says.

Scott’s attack plan encompasses many angles.

“Convincing a jury can sometimes take a massive procedural battle, but that comes with the territory,” he adds.

Scott, a native of Calgary, Alberta, Canada, moved to the United States to attend the University of California, Berkeley, where he majored in economics.

The path to a career in law was not particularly well-thought-out.

“As a youngster, I remember seeing an attorney with a cool car and declaring to my dad that I wanted to be a lawyer. I wound up sticking to that,” he says.

While attending Yale Law School, he worked summers for the San Francisco offices of Orrick, Herrington & Sutcliffe and, later, Morrison & Foerster. But on graduation in 1989, public service beckoned.

“On my death bed, I want to look back and see that I did something worthwhile, pursuing cases for purposes I believed in,” he says.

Those cases paved the way for his eventual specialty, whistle-blower matters, which he pursued after opening his own office in San Francisco.

To Scott, whistle-blowers are today’s unsung heroes and, sometimes, the only thing standing between fraud and corruption.

“Often, they’re the underdog, terminated by a large defense contractor or a health care concern for trying to prove that the organization defrauded the government. It’s not easy to do that,” Scott explains.

One such underdog – a hero in Scott’s mind – is client Joseph Kimball, who uncovered false Medicare claim submissions by his employer, a hospital chain. Kimball was fired, according to Scott, and is suing the company.

“He intended to spend his career there and was faced with the decision whether to put all that in jeopardy. It’s not easy to walk away from a career and put up with all the flap that follows when you stand up to be counted like that,” Scott says.

On the plus side, according to federal law, whistle-blowers are entitled to 15 percent to 25 percent of what is recovered in a civil lawsuit, or 25 percent to 30 percent if the government intervenes. The U.S. Justice Department has joined Scott in his claim against the hospital chain, according to Scott.

“Still, it takes people with courage,” Scott says. “You don’t know whether you are going to recover anything.

“You’re risking being blackballed in the business you’re working in. But that’s OK. If what you believe is the right thing, it’s all right if you lose. It’s not all about the money.”

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Feds Raise the Stakes in CHW Lawsuit

February 16, 2001 — Sacramento Business Journal — Vol. 17, No. 49, page 1.

Kathy Robertson – Staff Writer

The U.S. Department of Justice is joining new portions of a whistle-blower lawsuit that accuses Mercy Healthcare Sacramento and its parent company, Catholic Healthcare West, of cheating the government of millions of dollars by filing false Medicare cost reports.

The new allegations come from whistle-blower Joseph Kimball, a Folsom man who worked in Mercy’s billing department until August 2000. His initial lawsuit, filed in 1999, alleges fraudulent billings worth $19 million.

In an amended complaint filed after the U.S. government intervened in portions of the case last May, Kimball claimed that CHW, Mercy and 13 of its hospitals knowingly double and triple-charged the Medicare program for the same expenses on multiple occasions. The new charges increase the claim to $20 million.

Federal investigators said they found enough merit in specific allegations against four Sacramento hospitals — Mercy General, Mercy San Juan, Mercy American River and Mercy Folsom — to jump in and pursue the new claims. That increases the portion of the lawsuit now in the hands of the feds to $9.3 million. The government said its amended complaint will be filed Feb. 28.

“We have intervened at this time because we thought it was appropriate,” said U.S. Attorney John Vincent. He declined further comment.

“We are as interested as the federal government in having the facts clearly understood, so that all relevant concerns may be addressed and resolved,” CHW president and chief executive officer Lloyd Dean said in a prepared statement.

In a related development, a $1.4 million case filed by Mercy consultant turned whistle-blower Arlan Boyd reached tentative settlement last week. That lawsuit — which also was joined by the government — related to overpayment of a Medicare claim that Mercy initially hired Boyd to fix.

“The case has settled, but the final papers haven’t been signed by anybody,” said David King, a Petaluma attorney who represents Boyd. Until then, he declined further comment.

Ongoing investigation: Healthcare providers nationwide are undergoing intense review of how they bill Medicare, the federal healthcare program for seniors.

This is especially true of large hospital operators like CHW, which has been under investigation for several years. Health system officials consider the announcement last week by the U.S. attorney’s office an extension of the same investigative process. “We will cooperate with the government and the courts in an effort to put these issues behind us as soon as possible so that we may return our attention to fulfilling our mission, which is providing quality healthcare for all people, regardless of their ability to pay,” Lloyd said in response to the announcement that government’s role in the case has expanded.

Last spring the feds intervened in about $6.4 million worth of Kimball’s $19 million original case. Among the local entities named are: Mercy San Juan Hospital, Mercy American River (which closed in June 2000), Mercy General, Mercy Folsom and Mercy Home Health.

Other hospitals in the CHW system named include: Mercy Hospital of Bakersfield; St. Joseph’s Hospital and Medical Center in Arizona; St. Mary’s Medical Center in San Francisco; Mercy Medical Center Redding; Mercy Medical Center Mt. Shasta; Dominican Santa Cruz Hospital; Mercy Hospital and Medical Center San Diego; St., John’s Regional Medical Center in Ventura; and St. Rose Dominican Hospital in Nevada.

The allegations cover a period of nine years and claim that:

The hospital system failed to disclose billing errors in its own favor.

Mercy’s organizational costs were disguised as reimbursable capital costs.

That Mercy manipulated the reimbursement ratio for caring for indigent patients.

Mercy incorrectly reported the costs of retiring its bonds, benefiting Mercy financially.

And that it inappropriately claimed depreciation expenses on used building space.

“This is a dispute over rules that are complex, confusing and literally ever-changing,” Douglas Kelley, a Minneapolis attorney who represents Mercy, told the Business Journal when the first charges became public. “No quality-of-care issues are involved.”

New claims: The new charges are part of an amended complaint filed last May.

“As Mr. Kimball went along, he was able to confirm and expand the allegations,” said Paul Scott, a San Francisco attorney who represents Kimball.

The 13 CHW hospitals implicated by the new allegations are those whose bonds were retired in 1994. The initial lawsuit claims the entire bond retirement loss was made in the same year instead of amortizing the loss over the life of the bonds.

The new charges claim CHW and Mercy “knowingly billed the government multiple times for the same loss.” Initially, the losses were billed by CHW — at the home office or corporate level — and again by the hospitals at the hospital level, legal documents allege. The feds have joined this aspect of the lawsuit as well.

The federal False Claims Act allows whistle-blowers who have information about fraud against the government to share in the recovery of financial damages. The person can file a “qui tam” lawsuit, kept under wraps by a court seal, and then serve the government with a copy of the complaint and supporting documents.

That’s what happened in the Kimball case.

The government has 60 days — sometimes longer, if necessary — to investigate and decide whether to intervene and take over litigation of the case. It took the feds six months instead of 60 days to look into the additional charges and decide to intervene, said Assistant U.S. Attorney Adisa Abudu-Davis, a local attorney who, along with Department of Justice trial attorney Lani Anne Remick, is handling the case.

“There is a 60 — day window, but it can be extended,” Abudu-Davis said.

Government intervention increases the likelihood of success for the whistle-blower, but it affects the whistle-blower’s share of the financial recovery.

If the government takes over, the whistle-blower’s share is between 15 percent and 25 percent of the total amount recovered, including fines and damages. If the whistle-blower goes at it alone, his or her share ranges from 25 percent to 30 percent of the total money recovered.

The stakes are huge. The law allows the feds to recover three times the actual damages.

In addition, the court must award no less than $5,000 and no more than $10,000 for each false reimbursement claim, even if no damages resulted. If the false claims were filed after Sept. 29, 1999, the per-claim award is higher — from $5,500 to $11,000.

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Physicians Group Settles Lawsuit for $1.2 Million

September 20, 2000 — Copyright 2000 Los Angeles Times

A federal whistle-blower suit by a former official at Pomona Valley Hospital Medical Center has resulted in a $1.2-million settlement by California Emergency Physicians, one of California’s largest physicians groups, the U.S. attorney’s office said Tuesday.

Trevor Baylor, former medical records director at the hospital, filed his lawsuit in 1998, accusing the Oakland-based physicians group of overbilling federal health insurance programs, including Medicare.

The Justice Department subsequently joined the suit and California Emergency Physicians agreed to the settlement without admitting any wrongdoing.

The medical group provides emergency services at 46 hospitals and 15 urgent care centers in the state. The $1.2-million settlement represents about twice the government’s losses from overbillings at Pomona Valley Hospital Medical Center.

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Doctors’ Group to Pay Feds

Pomona Valley Hospital ER physicians will spend 1.2 million to settle suit.

September 20, 2000 — Inland Valley Daily Bulletin

by Elizabeth Zwerling – Staff Writer

POMONA — The emergency physicians group that staffs the Pomona Valley Hospital Medical Center has agreed to pay the federal government $1.2 million to settle allegations it overcharged Medicare and other federal health insurance providers from 1995 to 1998.

The settlement, announced Tuesday, resolves a 1998 lawsuit filed by the hospital’s former medical records director Trevor Baylor against California Emergency Physicians, one of the state’s largest emergency physicians group.

The physicians group agreed with the U.S. Attorney’s Office on the settlement amount, but admitted no wrongdoing.

We chose this (settlement) as a prudent business decision, said Curry, whose company provides services at 46 hospitals and 15 urgent care centers in California. The lawsuit and settlement involved only the Pomona hospital.

Curry called the suit, an issue of documentation of medical records. He said his company billed the goverment only for patient services that were rendered.

Thom Mrozek, spokesman for the U.S. Attorney’s Office, said, “It is our assertion CEP did overbill the government by about $600,000.”

Baylor Ahad some evidence that CEP was overbilling federal healthcare programs, for emergency room services, Mrozek said.

The settlement also included the group’s entering into a corporate integrity agreement with the Office of the Inspector General of Department of Health and Human Services. The agreement requires the company to undergo annual audits by Medicare.

Baylor will receive up to 25 percent of the settlement money, Mrozek said.

Baylor’s lawyer, Paul Scott, could not comment on the details of the settlement, citing a confidentiality agreement but said his client was satisfied.

AMr. Baylor firmly believed in the legitimacy of the whistle-blower action when he filed it and he remains convinced today that the case was valid,, Scott said.

The lawsuit was filed under a provision of the federal False Claims Act, permitting citizens to sue an organization on behalf of the federal goverment.

The contents of such whistle blower suits are initially only known by the courts and the U.S. Attorney’s Office, Mrozek said. The U.S. Attorney’s Office then reviews the suit’s allegations and decides if it will prosecute.

Elizabeth Zwerling can be reached by e-mail at e_zwerling@dailybulliten.com or by phone at (909) 483-9381.

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U.S. Joining Suit Alleging Mercy Fraud

Plaintiff says Hospitals Lied to Medicare

May 11, 2000 — The Sacramento Bee — Section: Main News, Page: A1

By Denny Walsh Bee Staff Writer

The U.S. Department of Justice is joining a whistle-blower’s lawsuit accusing Mercy hospitals of stealing millions from the government over the past eight years by lying on Medicare claims.

While the department is joining only part of the Mercy accountant’s suit, he is claiming that the health care giant stole nearly $19 million from the Medicare program.

Mercy Healthcare Sacramento, which operates four major hospitals and associated home health agencies, has “systematically caused false cost reports to be submitted to Medicare, including numerous false claims for costs that were known not to be allowable,” the suit says.

Douglas Kelley of Minneapolis, Mercy’s outside attorney in the matter, insisted his client has behaved appropriately. “When we get to the end, Mercy Healthcare Sacramento will be shown to have acted in good faith and it will be apparent that there were no false claims made to the government,” he said.

The suit accuses Mercy Healthcare Sacramento of generating higher reimbursements by:

• Deliberately failing to disclose government errors in Mercy’s favor.
• Disguising organization costs as capital costs.
• Manipulating the ratio of total hospital days to indigent-patient days.
• Claiming an entire bond-retirement loss in the same year instead of amortizing the loss over the life of the bonds.
• Mischaracterizing the nature of its home health operation in order to qualify for overhead reimbursement.
• Shifting hospice costs to a hospital.
• Describing unused building space as being used in order to claim depreciation expense.

The Justice Department has decided to join the accountant as a plaintiff and to assume primary responsibility for prosecuting portions of the civil action.

The suit seeks damages triple the amount of the government’s loss and a $10,000 penalty for each of the false reimbursement claims, which are not quantified.

In a lengthy interview Wednesday, Kelley said that, in some instances cited in the suit, Mercy “blew the whistle on itself” long before the accountant did, and that the organization has repeatedly offered to pay much of what is claimed as damages, plus interest. But, he said, the government won’t accept payment, instead joining a whistle-blower in seeking triple damages under the federal False Claims Act.

“We’ll settle up with them by paying what they’re entitled to and no more,” he said. “We’re not paying treble damages, including the whistle-blower’s cut.”

The amount of damages alleged is approximately 1 percent of the system’s Medicare billings for the same period, according to Mercy spokeswoman Jill Dryer.

Kelley emphasized that quality of care and services provided by Mercy is not being called into question.

“These are disputes over complicated matters of accounting and reimbursement,” he said. “The cost reports are essentially like tax returns, only worse. They are governed by a set of complex, confusing and ever-changing regulations. The law in the area is a moving target.”

As recently as a December administrative ruling, Kelley said, federal health officials deemed acceptable a home-health-agency arrangement identical to one the suit challenges.

Similarly, a U.S. Supreme Court decision that changed the law on how a loss due to early retirement of bonds may be reported came after the reports attacked in the suit, he said.

From its inception in 1965 as an additional Social Security benefit, Medicare has been a tangle of red tape.

It provides federally funded health insurance for the elderly and consists of two parts. Part A covers hospital services and related care. Part B covers physicians’ and ancillary services.

Providers file cost reports with insurance companies that the government has designated as “fiscal intermediaries.” The companies pay providers based on the cost reports and, in turn, receive funds from the government to underwrite the program.

“Although the cost reports are subject to audit review, it is known throughout the health care industry that the fiscal intermediaries do not have sufficient resources to perform in-depth audits on the majority of (them),” according to the suit.

It says that two to three years elapse from the time the reports are submitted until they are finalized through audit or “desk review,” but providers are generally paid most or all of the claimed amounts within weeks after the reports are filed.

The system “relies substantially on the good faith of providers,” it says.

Joseph A. Kimball, who lives in Folsom and has worked for Mercy Healthcare Sacramento since 1984, initiated the suit. In accord with the False Claims Act, it was filed under seal in Sacramento federal court on Feb. 17, 1999.

Justice Department lawyers notified U.S. District Judge Lawrence K. Karlton on April 19 that they were intervening only as to certain parts of the suit. That notification triggered Karlton’s May 1 order that the complaint be unsealed. The government is scheduled to file yet another complaint by May 22.

Kimball is free to pursue those parts of the suit in which the Justice Department has chosen not to intervene, and the department has the option of coming in later if further investigation proves promising. Kimball’s attorney, Paul Scott of San Francisco, said he will continue to prosecute “the vast majority” of the suit.

Scott said in an interview that he has advised his client to refer all inquiries to him. He handled false claims suits as a Justice Department attorney in Washington, D.C., before setting up a private practice specializing in the representation of whistle-blowers.

He described the 44-year-old Kimball as “a decent, honest man. He showed a lot of courage doing what he did.” Kimball is currently a senior Medicare reimbursement analyst at Mercy Healthcare Sacramento.

Kimball would receive 15 percent to 25 percent of any amount recovered in connection with those parts of the suit pursued by the government, and 25 percent to 30 percent where the government has opted out.

Scott estimated damages in the portion of the suit in which the government has intervened at $6.4 million.

From 1990 to 1998, Kimball was a reimbursement analyst responsible for the submission of cost reports to Medicare on behalf of Mercy San Juan Hospital, and in 1997 and 1998 he was also responsible for reports on behalf of Mercy American River Hospital. Both hospitals are in Carmichael.

His most recent complaint was filed Feb. 22. It names Mercy Healthcare Sacramento and its parent, Catholic Health West of San Francisco, as defendants.

Mercy Healthcare Sacramento

Licensed acute beds: 1,128

Current employees: 8,220

(1,655 physicians)

Patient care, 1998-99

(year ended June 30, 1999)

Inpatient days: 296,952

Outpatient days: 391,869

Home health visits: 131,376

Approximately 30 percent of the hospital system’s business was from basic Medicare in 1998-99. An additional 15 percent of the hospital’s patients are covered through Medicare HMOs.

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EX-SR Lab settles suit over tests — Misleading Toxins Report

January 29, 1998 — The Press Democrat

National Environmental Testing, Inc., and two associated companies have agreed to pay more than $320,100 to the government to settle claims the former Santa Rosa office filed misleading test reports about the amount of hazardous substances at military bases in Northern California.

The companies, which include National Environmental Testing Midwest and Ocean Cory plc, did not acknowledge wrongdoing in the settlement, approved Wednesday in the U.S. District Court in San Francisco. Officials at the Illinois headquarters of National Environmental Testing, Inc. could not be reached for comment late Wednesday.

Meanwhile, the Santa Rosa office of National Environmental Testing was sold earlier this year to Legend Analytical Services and no longer has a relationship to the Illinois company, said Paul Scott, one of the attorneys in the lawsuit.

Prior to the filing of the 1996 lawsuit, the Santa Rosa lab had contracted with the Army Corps of Engineers and the Environmental Protection Agency to test water and soil samples for hazardous substances in federal Superfund sites and military installations, including Hunters Point Shipyard and the Presidio in San Francisco.

The lab was responsible for detecting whether hazardous waste such as benzene and toluene remained after cleanup efforts at the sites. The testing included preparation of chromatograms, which are graphs reflecting the amounts of the toxins in the soil and the water samples.

In March 1996, former lab manager Thomas Cullen Jr. filed a whistleblower lawsuit claiming laboratory employees did not measure the amount of toxins shown on the chromatograms, but simply eyeballed them and guessed how high or low the levels were.

The employees then represented to the government they had conducted their work properly, the lawsuit alleged.

“The result was the government was misled as to the amounts of potentially dangerous contaminants in the samples,” said Scott, who represented Cullen. “Rather than using scientifically reliable methods, they were guessing at the amounts in order to save time, effort, and money.”

The lawsuit called into question the accuracy of some $5 million worth of tests paid for by the EPA and the Department of Defense. As the lawsuit proceeded, attorneys from the Department of Justice in San Francisco and in Washington, D.C. joined in the investigation.

With the settlement, Cullen, who now lives in New Jersey, will receive $62,000 and attorney’s fees for revealing the allegedly improper practices.

The EPA suspended the Santa Rosa lab from work on Federal government contracts when the lawsuit was filed, but later lifted the ban three months later after National Environmental Testing Midwest agreed to give the EPA oversight of the facility.

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VA Loan Default Claims Settled

April 4, 1995 — The Charlotte Observer

First Union Mortgage Corp. has agreed to pay the government $6.3 million to settle claims that employees falsified loan forms and caused multi-million dollar losses under the Department of Veterans Affairs loan guarantee program.

The settlement, announced Friday, caps 2 years of negotiations between the U.S. Department of Justice and First Union and covers loans made in the mid to late 1980’s in Colorado Springs, Colorado, and Atlantic Beach, Florida.

Paul Scott, a trial attorney with the Justice Department, said Monday the VA’s losses from loan defaults totaled $4.2 million. Typically, taxpayers foot the bill on such losses.

“The VA noticed several years ago there were an inordinate number of defaults in the Colorado Springs area, and, more recently in Florida.” Scott said. “In investigating those defaults (Justice) discovered there were some questionable underwriting practices being used by First Union personnel.”

Key information about the borrowers’ income, debts, and number of dependents was misrepresented in loan forms, Scott said. In some instances, a loan officer never met with the borrower but instead collected information from sales staff of a developer, he said.

“As of now, we’re still looking at other defendants,” Scott said. Said Jeep Bryant, a First Union spokesman “We’re pleased to have reached this negotiated settlement to put the matter behind us.”

The settlement won’t affect earnings, Bryant said.

Scott said that a loan officer who was “significant” in the case was no longer with First Union Mortgage Corp., which is a subsidiary of Charlotte-based First Union. “This scheme involved only lower-level staff of First Union,” he said. “It didn’t involve… upper management at all.”

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Heart-Valve Case Settled

July 5, 1994 — Wall Street Journal

Shiley Inc., the Pfister Inc. unit that made the Bjork-Shiley Convexo-Concave heart valve, agreed to pay $10.75 million to settle federal civil charges that it lied to win government approval of the device.

Shiley and Pfizer also agreed to provide up to $10 million for valve-replacement surgery for patients who received the Shiley device and are on government medical programs. Shiley, based in Irvine, California, sold the heart valve world-wide from 1978 until 1986, when it was pulled from the market. Failure of a tiny strut in the valve has been blamed for 360 deaths. At least 556 valves have fractured as of May 31, Shiley has said.

The government claimed that Shiley, in seeking marketing approval from the U.S. Food and Drug Administration, withheld evidence of fractures and overstated the valves’ resistance to blood clotting. Shiley admitted no wrongdoing under the settlement, which was announced on Thursday.

Pfizer and Shiley agreed in August 1992 to an out-of-court settlement of all present and future claims over the device. The centerpiece of the agreement, which affects 51,000 recipients worldwide, is a $75 million fund to be paid over 10 years to finance research into methods of detecting defective valves and, in certain cases, to pay the costs of replacing valves.

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Pfizer Unit to Settle Heart Device Charges

February 7, 1994 — New York Times

A unit of Pfizer, Inc. has agreed to pay $10.75 million to settle Justice Department claims that the company lied to get Federal approval for a mechanical heart valve that has fractured, killing hundreds of patients worldwide.

Under the settlement, which was announced Thursday, both Pfizer and Shiley, Inc. also agreed to pay $9.25 million in coming years to monitor patients who received the device at Veterans Administration hospitals or pay for its removal. Both companies denied any liability or wrongdoing. Government officials applauded the agreement, which they said was one of the largest ever involving a medical device.

“This agreement represents a landmark health care settlement,” an assistant United States Attorney General, Frank Hunger, said in a statement. “It is significant that a company accused of making false representations to the Government has been held accountable.”

But the deal was criticized by consumer activists who had long urged Government officials to bring criminal charges against Shiley officials, contending that they had covered up hazards of the device even as it was fracturing and killing patients.

“For this multi billion-dollar company to get off with a 10-plus million-dollar civil penalty, and for the responsible officials to escape jail sentences for the tragic loss of so many lives, is inexcusable,” Dr. Sidney Wolfe, director of the Public Citizen Health Research Group, said in a statement.

In a June 1992 letter to Senator John McCain, a Republican of Arizona, Stuart M. Gerson, an Assistant Attorney General, said Government officials could not criminally prosecute the matter because the statute of limitations had expired.

The settlement marks the latest twist in the long-running saga of the Bjork-Shiley Convexo-Concave mechanical heart, which was marketed in the United States from 1979 to 1986. Life-threatening fractures of a tiny valve strut occurred in 196 of the estimated 31,370 patients in this country who received the device, according to the Federal Drug Administration. Such fractures proved fatal in two out of every three cases.

240 Reported Fractures

Dr. Wolfe said Federal officials had received more than 240 reports of Shiley valve fractures from officials in other countries, though he said his group thought the number was actually higher because many had gone unreported.

Justice Department officials had charged that in order to win approval to market the device, Shiley withheld evidence indicating the valve’s potential to fail. They also said Shiley made questionable representations about the device’s medical value to keep it on the market and that some of the company’s manufacturing processes were also flawed.

In January 1992, Shiley proposed a settlement estimated at $155 million to $205 million that would cover about 55,000 heart-valve patients. Under the proposal, the company agreed to pay for monitoring of the valves by physicians and research to identify the patients at greatest risk for fractures.

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Shiley, Inc. Settles False-Claims Suit

January 7, 1994 — Los Angeles Times

WASHINGTON–Heart-valve maker Shiley Inc. and it’s parent, Pfizer Inc., have agreed to pay the federal government $10.75 million to settle accusations that they have made false claims about the potentially fatal artificial valves it manufactured from 1979 to 1986.

The settlement amount is what the government estimates it paid for the valves and valve-related treatments through its health insurance programs, Medicare and the Veterans Health Administration, multiplied by 2 times, an amount determined in lieu of penalties. This civil suit against Shiley and Pfizer was brought under the False Claims Act and under common law, which allow the government to recoup damages and penalties.

The valve was implanted in about 83,000 heart patients worldwide. At least 250 people died when the tiny struts that held their valves together snapped.

In addition, Shiley agreed to pay the federal agencies for future medical costs related to the valves, for an estimated total of $20 million.

“This agreement represents a landmark settlement.” Assistant U.S. Attorney General Frank Hunger said in a statement. “It is significant that a company accused of false representations to the government has been held accountable not only for its statements but also for medical costs.” The company admitted no liability in settling the case and said they did so to put the litigation behind them.

“Litigation is tremendously distracting and time-consuming, and it keeps us from real issues at hand” said Bob Fauteux, spokesman for Irvine-based Shiley. He said the company has committed to spending $75 million to, among other things, research diagnostic techniques that would help determine which implanted valves are likely to crack.

Shiley settled last September with 259 valve recipients, for an undisclosed amount. Those close to the case estimated the settlement to be worth $26 million. More than 20 other lawsuits remain unsettled, as well as a federal court appeal of a 1992 class-action settlement in Cincinnati, which includes all 83,000 Shiley heart valve recipients around the world.

Separately on Thursday, Shiley announced that it would spend an undetermined amount to reimburse third-party payers – insurance companies, and in Europe, government health agencies – for their costs to replace the valves when surgery is approved by a doctor. The agreement compliments the provisions of the class action settlement, Fauteux said.

The valve, called the Bjork-Shiley convexo-concave valve, was approved for sale by the U.S. Food and Drug Administration in 1979. Faced with negative publicity, the company pulled it off the market in 1988.

Hunger argued that the valve’s FDA approval was based on false statements made by Shiley. Later, the company made further false statements to keep the mechanical valve on the market, Hunger said. Specifically, Shiley initially told the FDA that the valve caused less blood clotting than others on the market. The government said the Shiley valve’s performance advantage was much smaller than the company represented. In addition, Shiley failed to provide the FDA with all the information it possessed concerning fractures of valves. Eighteen had fractured during prototype testing, the government said.

After the fracture problem became evident, Shiley argued to the FDA that the Bjork-Shiley valve should remain on the market because its purported blood-clotting advantage outweighed the threat to people’s lives posed by the risk of fracture.

Finally, the government contended that Shiley’s manufacturing process was considerably flawed. It said that scrap valves were rebuilt, valves were rewelded an excessive number of times, and cracked valve struts were polished rather than re-welded.

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Clean Hands?

March 7, 2001 Verdicts & Settlements

by Leonard Novarro

When someone comes into your home to perform work, you expect to be safe.

That was the thrust of an argument that won $11.5 million in damages for the husband of a Bay Area pediatrician who was murdered in her home by a carpet cleaner with a criminal record.

“Bringing about change in the manner in which businesses go about providing services in the home was the basic objective, and a lawsuit seemed the best way to achieve that,” plaintiff’s counsel Paul D. Scott says.

In that case, Dean v. Oppenheim Davidson Enterprises Inc., 809231-1 (Alameda Super. Ct., verdict Nov. 16, 2000), an Alameda County Superior Court jury found, 9-3, that the company, doing business at the time under the name America’s Best Carpet Care, was negligent for inadequately screening the application of an ex-convict.

The man, Jerrol Glenn Woods, 52, subsequently pleaded guilty to first-degree murder and robbery. He was sentenced to life in prison without parole.

Nine days after the liability verdict, the jury, again split 9-3, awarded monetary damages. However, both parties agreed to an undisclosed settlement barring any appeals.

Charles Horn of Wright, Robinson. Osthimer & Tatum in San Francisco represented the defendant. He did not return phone calls to discuss the case.

Paul D. Scott, a San Francisco sole practitioner who represented the plaintiff, Daniel Dean, 34, said that, in a sense, the case was a test.

“There was case law available holding that employers could be held liable for negligently hiring employees who later committed violent or sex crimes,” Scott explains.

“But, there was no case law directly holding that a company could be held liable for intentional torts committed by an independent contractor hired by the company. This case was unique in that we succeeded on the latter theory.”

Dean, the victim’s husband, initially hired Quentin Kopp, a former state senator, as his counsel in the case. Kopp asked Scott to take over after he was elected to the Superior Court bench in 1998.

“The Dean family wanted to prevent this from ever happening again,” Scott says. So he tried the case, assisted by Kopp’s former partner, Thomas DeFranco.

America’s Best Carpet Care, a Milpitas company, went out of business after the plaintiffs filed suit in March 1999.

According to the suit, Woods did the initial carpet work in November 1997. However, Dean’s wife, Dr. Kerry Spooner-Dean, 30, called him back to the Rockridge home several times. She asserted that Woods’ work was shoddy and incomplete.

On Woods’ last visit in May 1998, according to police, an apparently enraged Woods robbed and fatally stabbed Spooner-Dean. Spooner-Dean’s husband found her with two kitchen knives sticking out of her chest when he returned home from work.

Spooner-Dean was in line for a commendation from Oakland for her volunteer work at the city’s Head Start centers, homeless shelters and the Children’s Hospital Oakland.

“My honest reaction when I saw the newspaper article describing her murder was that I felt a pain in my chest,” recalls Scott.

“Here was a beautiful young woman who had a remarkable reputation in the Oakland community for helping poor and disadvantaged children, and she was stabbed in her home needlessly, all because a company sent a murderer out there and didn’t take basic steps to check his background.”

Woods, in fact, was no stranger to the criminal justice system.

“He had been in jail the better part of his life,” Scott says.

Woods was most recently in federal custody, according to Scott.

At the time of the murder, he was on parole after having served 12 years for bank robbery.

In the summer of 1996, shortly after his release from a half-way house in the Bay Area, Sears, Roebuck & Co. hired him as a carpet cleaner. Woods listed that employment relationship on his application to America’s Best.

“The law in California provides that an employer can be held liable for negligent hiring if they have reason to believe an employee is unfit or they don’t use reasonable care to discover unfitness when hiring.

“So that puts the burden on employers to check out their people before they send them out to people’s homes,” explains Scott.

Defense counsel Horn, during the trial before Judge Gordon Baranco, argued that Woods never was an employee of the defendant, but rather an independent contractor who entered into an agreement with Spooner-Dean as Jerrol’s Affordable Carpet Cleaning, a separate company.

Horn introduced into evidence the contract Spooner-Dean signed with Woods. According to Scott, Horn asserted that America’s Best was an answering service and not a party to Woods’ firm.

However, Scott showed the jury that America’s Best had solicited carpet cleaners to work for it and simultaneously mailed out thousands of coupons in the Bay Area, advertising its own carpet cleaning service.

“So they were the ones who solicited Kerry to call the business and the same ones who brought Jerrol Woods into their office and sent him into the Dean home,” Scott argues.

Throughout the trial, Scott maintained that America’s Best had the responsibility to insure that the person they sent out was not a danger to customers.

But Steven Davidson, owner of America’s Best, says he had no way of knowing Woods was dangerous. America’s Best had lost Woods’ employment application, which mentioned only the position with Sears.

Yet, a former America’s Best employee, Keith Headley, testified that Woods said he had been in prison. Headley then relayed this information to a manager. However, Headley reports that the manager told Headley that “it really didn’t matter.”

The absence of any further employment history should have been a tip-off that Woods’ past was at least questionable. This should have been investigated further, Scott says.

The plaintiff’s experts, Lester Rosen, owner of Employment Screening Resources Inc. of San Francisco, and Lanier Jeff Bishop, owner of Clean Care Seminars in Albany, Ga., testified that it is customary to go back seven to 10 years to check a job applicant’s employment record.

“Just a basic kind of resume check would have turned up a huge gap in the employment history of Jerrol Woods, which would have been a huge red flag,” Scott says.

“Suddenly, in 1996, he’s dropped on the planet,” he adds. “That’s a very suspicious thing and would have called for a follow-up.”

Scott also argued that a basic check of Woods’ Social Security number would also have shown an unexplained gap in his work history.

At one point, Davidson testified at trial that America’s Best had received an exemplary recommendation from Sears regarding Woods.

Scott then called to the stand Steven Finn, a Sears manager in Northern California. Finn testified that not only did Sears not give Woods a recommendation, the company fired him for trying to defraud it of money.

“That was the moment of clarity for the jury,” Scott says.

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