Medicare auditing program could end up costing U.S. taxpayers

WASHINGTON -- U.S. taxpayers will end up paying millions of dollars in commissions to an Atlanta-based auditor even though the firm's wholesale rejections of Medicare claims from California rehabilitation hospitals are now being reversed on appeal.

The rulings by administrative law judges for the Office of Medicare Hearings and Appeals will restore money withdrawn from California hospitals, some of which are suffering financial hardships and have trimmed services to Medicare patients as a result of the reviews.

But PRG-Schultz International, which is paid as much as 25 to 30 cents for each dollar of Medicare spending it identifies as wrongly paid, can keep its bounty as long as its findings are sustained through the first two levels of administrative review. The reversals are coming in the third level, the first time PRG-Schultz’s decisions are being looked at through independent eyes in trial-like settings.

The rulings are turning an experimental federal program to root out waste, fraud and abuse in Medicare into a costly fiasco. But they also could undermine the basis for a congressional decision to permanently expand the Centers for Medicare and Medicaid Services auditing program to all 50 states by 2010.

Medicare officials are worried.

“CMS is watching the ... rulings very closely and they will be one of the factors used when making future policy decisions concerning the program,” said program spokesman Dan McLeod.

A spokesman for PRG-Schultz said the firm is deferring to the Centers for Medicare and Medicaid Services for comment.

But lawyers representing California hospitals think the end is near for the controversial program. PRG-Schultz began its work by looking at the state’s 74 rehabilitation hospitals, swamping them with reviews of cases dating back to 2002.

Its auditors have rejected almost all of the claims for patients admitted after knee and hip replacement surgery, saying in essence that the highly focused therapy the patients received was medically unnecessary and that they should have been treated through outpatient services or sent to nursing homes.

As of Sept. 30, 2006, according to a CMS report, $105 million in charges had been rejected by PRG-Schultz under the program. The company's commission could be as high as $29 million. But since that report, the hospital association said thousands of additional claims have been rejected and that auditors are now starting to deny rehabilitation hospital services for stroke victims.

According to opinions trickling out from the administrative judges, auditors have no authority under Department of Health and Human Services rules to review cases older than a year without good cause, which PRG-Schultz has not shown. The rulings point to a fundamental flaw in the audit program, which according to a 2005 CMS press release was designed to look at cases at least a year old.

“We think this sets a precedent that applies to virtually all of the case denials,” said Patricia Blaisdell, vice president of medical rehabilitation services for the California Hospital Association. The decisions cannot be appealed by the federal government, lawyers said.

The audit program was established as a demonstration project in three states -- California, Florida and New York -- in 2005. Auditors were chosen for each state to review Medicare records for mistakes and overcharges. Their only compensation is the commissions, which critics see as a powerful incentive to find problems where there may be none.

While congressional aides said complaints are on the rise in Florida and New York, there has been an avalanche California. The California Hospital Association has asked for an investigation, and the powerful California congressional delegation demanded that CMS amend the program or face legislation.

Sen. Dianne Feinstein, D-Calif., sent a separate letter to CMS raising concerns about the program even though Blum Capitol Partners, a business interest of her husband, Richard Blum, is a large investor in PRG-Schultz and helped bail out the auditing company from financial difficulties about the time it was awarded the California contract.

CMS defended PRG-Schultz in a July response to Feinstein’s letter.

Leslie V. Norwalk, acting CMS administrator, said that after reviewing the hospital association’s complaints and PRG-Schultz’s work, the agency “concluded that it is acting in accordance with Medicare law and statutes.”

But that view may be shifting. McLeod, the audit program's spokesman, said last week that the agency is trying to establish whether “the determinations by PRG-Schultz are accurate.”

The first cases headed into administrative courtrooms last month, shifting from an internal paperwork review within the department into adversarial trials, with witnesses called and other evidence submitted.

In eight cases so far -- three of them one day last week -- administrative law judges are ruling for the hospitals without considering the medical evidence.

One case involved a 77 year-old woman admitted to the rehabilitation unit at Glendale Adventist Medical Hospital in 2002 following knee replacement surgery. She had heart problems and lived alone. When transferred to the rehabilitation unit, she could not stand without help, antibiotics were being given to her intravenously and she was in extreme pain. After eight days in the unit undergoing therapy, she was able to return home alone.

Even though Medicare had paid the claim in November 2002, PRG-Schultz sent the hospital a letter in June 2006 saying it was reopening the case “due to a recent review and discovery of potential overpayment.”

“There are no documents in the record that show what PRG-Schultz did to review or discover a potential overpayment in this manner,” wrote administrative law judge Richard B. Gould in his Aug. 13 ruling. “There was no evidence of good cause.”

Ronald Connelly, the Washington, D.C., attorney representing Glendale Adventist in this and other cases, said he expects similar rulings in the “tsunami of appeals” coming out of California.

“The gist of this is that CMS has sent PRG-Schultz on a fishing expedition without giving them good cause to look at these claims,” he said. “We can expect many more, if not the vast majority, will be overturned in favor of the hospitals.

“This could be extremely damaging to the audit program,” he said. “This was a program intended to root out overpayments to save the Medicare Trust Fund money, and it appears now it will end up costing money.”

Lloyd Bookman, a Los Angeles attorney, said he and other lawyers representing California hospitals are now asking judges for summary reversal of PRG-Schultz determinations.

“There are literally thousands of cases in the pipeline in our office,” he said. “I think the ruling is going to result in almost all of the cases being overturned.”

For hospitals, it is the end of a costly nightmare.

Warren Tetz, a senior vice president at Glendale Adventist, said Medicare officials yanked more than $4 million out of the hospital’s account based on PRG-Shultz audits. Patients have suffered, he said.

“We have almost shut the door on these types of cases because of financial fear,” Tetz said.

This is happening, said Glendale rehabilitation director Marion Watson, even though studies show clearly that joint-replacement patients recover faster and are discharged to their homes more frequently than if cared for in nursing homes or outpatient units.

For some rehabilitation hospitals already in a financial struggle, the PRG-Schultz audits have been disastrous.

Melinda Staveley, president of the 38-bed Rehabilitation Institution at Santa Barbara, said the hospital is in the final stages of selling to Santa Barbara Cottage Hospital because the cost of preparing for the PRG-Schultz audits were too much on top of its other problems.

“It is one thing after another,” she said of the institution, which has operated as a non-profit for 53 years. “This whole audit process has pushed (the hospital) over the edge.”