WASHINGTON—California lawmakers are questioning whether an auditing company in which San Francisco investor Richard Blum, the husband of Sen. Dianne Feinstein, has a major financial stake is rejecting Medicare claims at California rehabilitation hospitals in order to reap millions of dollars in profits at the expense of patient care.
The company, PRG-Schultz International, has a contract with the Centers for Medicare and Medicaid Services, the overseer of the Medicare program, to check payments in California for mistakes. Its only pay is a bounty of up to 30 percent on the "overcharges" it identifies.
The California Hospital Association first raised concerns in November that PRG-Schultz was targeting rehabilitation hospitals that cared for Medicare patients after knee or hip replacement surgery. The hospital association said PRG-Schultz has reviewed thousands of cases dating as far back as 2002 and has rejected nearly all as medically unnecessary.
Melinda Staveley, president of the 38-bed Rehabilitation Institute at Santa Barbara, Calif., said more than 100 such cases from her nonprofit institution had been rejected. The facility could face having to repay more than $2 million.
As difficult as that would be financially for a small hospital with a $12 million annual budget, she said the bigger concern is future patient care. The frail and elderly surgery patients with compound medical problems no longer will have access to rehabilitation hospitals and will have to rely on home or outpatient services.
"This is devastating," Staveley said of the audits.
Her husband's business interests in PRG-Schultz have proved awkward for Feinstein, the state's Democratic senior senator, as the hospital association turns to Congress for relief.
This is not the first time the Blum's business interests have collided with his wife's job. Blum Capital Partners is a major investor in Northwest Airlines, which in 1995 won the first contract by an American air carrier to fly to Beijing. Feinstein had been friends with a former Chinese political leader since she was mayor of San Francisco.
More recently, concerns have been raised in Republican circles about some of Blum's investments benefiting from defense contracts at a time when the senator was serving on Senate military construction appropriations committee.
Feinstein's press aide, Scott Gerber, said the senator played no role in the legislation creating the auditing program and did not intervene with program administrators to help PRG-Schultz get the three-year contract in 2005.
On Thursday, after questions from McClatchy Newspapers, Feinstein sent a letter to the Centers for Medicare and Medicaid Services that called the hospital association's concerns "potentially serious." She asked program administrators to investigate, saying the concerns are spreading beyond its determinations on rehabilitation hospitals to other aspects of Medicare-financed hospitalizations for the elderly, including short-stay hospital admissions.
Feinstein made no mention of her husband's interest in PRG-Schultz, which she lists in her annual financial disclosure reports. According to PRG-Schultz, Blum's investment companies own 10.5 percent of its outstanding common stock, 53 percent of its outstanding preferred stock and 28 percent of its notes and securities.
California House members soon will follow with a joint letter of their own asking for an investigation.
Rep. Lois Capps, D-Calif., is taking the lead among Democrats. Her press aide, Emily Kryder, said 15 members—more than a quarter of the state's congressional delegation—have agreed to sign the letter so far.
"The review and collection practices of PRG-Schultz threaten access to rehabilitation services in California," the letter said. "We urge you to examine the actions taken by PRG-Schultz International, Inc."
The auditing program was set up as a demonstration project initially focusing on the three highest-cost Medicare states—California, New York and Florida. Separate contractors are used for each state. PRG-Schultz is the only for-profit contractor among them, and Medicare administrators believe it has been the most controversial because it alone has been zeroing in on rehabilitation hospitals.
On the brink of financial collapse when it won the contract two years ago, PRG-Schultz has found the job to be enormously lucrative. Government figures indicate that it had rejected $105 million in California Medicare overcharges as of Sept. 30, the end of the 2006 fiscal year.
Medicare managers said they could not release figures for how much PRG-Schultz was claiming as commissions for finding the alleged overcharges, saying the information was proprietary. But based on bounties of 28 percent that were used in establishing the program, PRG-Schultz's entitlement could be as much as $29 million.
The California Hospital Association said in a letter to Medicare administrators in November that PRG-Schultz should be suspended for improperly applying Medicare rules and using unqualified personnel.
"It appears to us that PRG-Schultz is in essence running a rehabilitation claims denial `mill,'" C. Duane Dauner, the association's president, said in the letter.
PRG-Schultz declined to comment. But officials of the Centers for Medicare and Medicare Services steadfastly defended PRG-Schultz, saying it's applying rules on medically necessary admissions that probably have been ignored in California for years.
PRG-Schultz "coming to town is probably the first real look at these hospitals in many, many years," said Melanie Combs, senior technical adviser for the federal program.
"These rules have been on the books since 1985," Combs said. "Maybe it's possible some have been overlooking them. Maybe there have been consultants out there helping hospitals to, quote, maximize reimbursements. And maybe perhaps some of that has entailed looking the other way."
A call to Blum Capital Partners—of which Blum is board chairman—asking for comment was not returned.
PRG-Schultz reported a first-quarter profit this year of $1.5 million, compared to a $10 million loss for the same period in 2006.