Columbia/HCA reports warned Rick Scott of potential legal problems

Rick Scott, right, leaves the Columbia/HCA annual shareholders meeting in May 1997 in Nashville. Scott resigned from the company two months later.

Associated Press (1997)

Rick Scott, right, leaves the Columbia/HCA annual shareholders meeting in May 1997 in Nashville. Scott resigned from the company two months later.

Rick Scott has said he would have immediately stopped his former hospital company from committing Medicare fraud — if only "somebody told me something was wrong."

But he was cautioned year after year that the financial incentives Columbia/HCA offered doctors could run afoul of a federal antikickback law that seeks to limit conflicts of interest in Medicare and Medicaid.

They were contained in the company's annual public reports to stockholders that Scott, now the Republican candidate for Florida governor, signed as Columbia/HCA's president and chief executive officer.

The reports said the company believed it was complying with the spirit of the law. But as far back as 1994 — three years before the FBI began scrutinizing the company — Columbia/HCA acknowledged that it might not be following the letter of complex health care rules.

"Certain of the Company's current arrangements with physicians … risk scrutiny" from investigators and "may be subject to enforcement action," the 1994 report said — a precaution echoed over the years in documents filed with the Securities and Exchange Commission.

Scott today says he doesn't remember the reports he signed, but that the warning language sounded like "boilerplate, written by SEC lawyers just to cover all bases." Indeed, the precautions mirrored those issued by some other health care companies.

Before Columbia merged with Hospital Corporation of America (HCA), Columbia executives were warned as early as May 1988 that the payments to doctors may be illegal, according to a 2001 Justice Department lawsuit against Columbia/HCA.

When the corporate brass asked for a legal opinion, a lawyer said the payments could violate antikickback laws, according to the Justice Department lawsuit.

"HCA executives, however, ignored counsel's advice and structured the transaction exactly as the lawyer warned them not to do," the suit says.

Asked about that warning this week, Scott said: "I don't know what the document said. I'm sure they used boilerplate that said something about they used all their efforts to comply with all the laws."

Scott signed his last SEC report as a hospital executive on March 27, 1997 — eight days after the FBI raided two El Paso, Texas, hospitals in what became the largest Medicare fraud case in U.S. history, spanning six states during a seven-year criminal probe. Scott resigned from Columbia/HCA four months later and he was never charged with a crime.

In the end, Columbia/HCA paid a record $1.7 billion in fines and pleaded guilty to 14 felony charges for a variety of transgressions. About $30 million in fines stemmed from illegal payments to doctors, a practice federal investigators traced back to El Paso, where Scott and a partner began Columbia in 1987 with the purchase of two distressed hospitals.

• • •

The payments in question — alleged sham loans and stock deals — are largely forbidden by federal antikickback laws, because the financial incentives can tempt doctors to refer Medicare patients to their own hospitals and labs. That can potentially stick taxpayers with bills for unnecessary treatment.

As part of its business strategy, Columbia offered ownership shares and other inducements to local doctors, hoping physicians would in turn send more patients to Columbia hospitals. This became one of Columbia's hallmarks, helping the company grow rapidly and ultimately take over the larger HCA in 1994.

In the last year of Columbia's stand-alone existence, its stockholder report gave no indication that the arrangements with physicians could run afoul of federal law. In fact, the report lauded the arrangement as a way to reduce costs, improve health outcomes and increase profitability.

Under the new Columbia/HCA, the warnings apparently went unheeded as it began acquiring hospitals, at one point, at a rate of one a day to become one of the nation's largest employers — and the most revolutionary private-market force in health care, said J.D. Kleinke, a Portland, Ore., health economist who studied Columbia/HCA.

"Rick Scott forced most of the system to grow up, to act like real businesses, to do difficult things with unions, with efficiency and with old sleepy bureaucratic practices," Kleinke said. "He was the Henry Ford of health care, turning the hospital into a brutally run but efficient system, a factory almost."

Kleinke said Columbia/HCA was more guilty of exploiting gray areas of the law — such as the doctor payments — than in actually committing rampant fraud. But he said Scott was on a crash course with the industry and the government, thanks to his drive to shake up the hospital industry and take on then-President Bill Clinton over health care.

"Rick was an outsider," he said. "And much of the hospital industry is clubby. And he wasn't a member of the club."

Hospital expert James Roberts, now general counsel with Gainesville-based Shands Healthcare, said Columbia/HCA was playing a "roulette wheel," betting that the risk of fines was lower than the profitability of the physician arrangements.

Roberts agreed that the language about physician payments was "boilerplate" but said Scott — a lawyer as well as a hospital chief executive — should have known better.

He said the law is tough to comply with but pretty clear: Anything beyond giving "mugs and pencils" to doctors risks trouble. He said hospitals now spend a considerable amount of time and money on compliance.

"What the company didn't have an appreciation for was all the restrictions and the compliance issues," Roberts said. "They established a draconian set of rules designed to maximize profit and that inevitably led to a culture where rules were bent for the almighty dollar."

• • •

Not every hospital did it. As Columbia/HCA noted the red flags about its doctor deals, the second-largest hospital chain at the time, Tenet Healthcare, issued stockholder statements that said it was at a "competitive disadvantage" because it was "less willing than some of its competitors to enter into business arrangements that do not clearly satisfy" the letter of the law.

Still, Tenet was later fined about $900 million for various Medicare violations in a sign that the federal government, starting in the 1990s with Columbia/HCA, had stepped up enforcement efforts to save taxpayers' money. Ultimately, scores of health care companies have since had the FBI at their doors, but Scott's company paid the biggest fine largely because of its size.

The year Scott was ousted, in 1997, the Columbia/HCA stockholder report noted it discontinued many of the practices that got it in trouble in the first place — including the physician payments.

Scott says he didn't do anything wrong and wanted to fight the charges long before the hospital board settled the case without trial. "I believed we were doing the right things," he said, though Scott has acknowledged he was focused more on buying hospitals and performance than compliance.

In responding to questions about Columbia/HCA, Scott often notes how the hospital chain reduced national health care inflation and costs, and increased patient satisfaction. As for any wrongdoing, he often says "I'm responsible. … I should have hired more auditors."

It's unclear how hiring more auditors would have persuaded Scott that some of the doctor payments were not legal — especially when he either discounted or didn't receive the warnings of company attorneys and the stockholder reports.

In June, he told a Times/Herald reporter that he never met with Jerre Frazier, a company attorney, who said he warned Scott of potential compliance issues.

"I don't believe that ever happened," Scott said. "If somebody told me something was wrong, I would have done everything to fix it."

Frazier insists the meeting took place, albeit toward the end of Scott's reign at HCA.

Scott has said that he was never interviewed by the FBI, nor was he criminally charged.

Yet Scott was scheduled to be interviewed by investigators, according to media reports at the time. During a July 27, 2000, deposition in a civil lawsuit involving an unrelated contract dispute, Scott refused to answer questions by invoking his right to Fifth Amendment protection from self-incrimination 75 times — a maneuver that can be legally applied only when the witness suspects he is the target of criminal investigation.

Two former Columbia executives who worked with Scott in Texas pleaded guilty in 2001 to felony charges stemming from the probe, court records show.

• • •

From the start, Columbia used a variety of incentives to attract doctors to their company: free office rent and supplies, luxury trips, partnership deals, and loans the feds later described as shams.

The strategy was profitable. Federal investigators said Columbia made almost $7 million in illegal payoffs to 77 El Paso doctors — and, in return, received $105 million in Medicare patient referrals.

Federal investigators also said Scott knew about the doctor payments, court records show. In its lawsuit, the Justice Department said Scott personally told doctors that their payments from the company would increase with the number of patient referrals. Scott and other executives paid as much as $5,000 to doctors to cover their investments with Columbia — loans never repaid by doctors, the suit says.

In a 1997 civil trial, a former Columbia executive testified that Scott approved a $200,000 payment to one El Paso doctor as part of a business deal — though the company could provide no records to justify the payment. In a deposition, Scott denied any knowledge of the deal with the doctor — despite letters discussing the deal under his signature, court records show.

Another physician, James Thompson of Corpus Christi, filed a successful whistle-blower suit against Columbia/HCA. He recalls being recruited as an investor at a dinner meeting of area physicians led by Scott. Thompson was also treated to a Venezuelan fishing trip, and he received ownership shares in a hospital — though he paid nothing for them. Thompson ultimately complained to the feds.

"It's a perfect business model, other than the fact that it happens to be illegal in medicine," Thompson said.

But Scott said he isn't sure about Thompson's allegations, either: "I don't remember anything like that."

"What happens in companies is that you have to take responsibility for what happens under your watch," he said. "Mistakes that were made you take responsibility as CEO and you do everything you can to make sure those things don't happen. What I tell people is that's what I'll do as governor."

Times political editor Adam C. Smith contributed to this report. Marc Caputo can be reached at mcaputo@MiamiHerald.com. Scott Hiaasen can be reached at shiaasen@MiamiHerald.com

Columbia/HCA reports warned Rick Scott of potential legal problems 09/18/10 [Last modified: Saturday, September 18, 2010 8:32pm]

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