The US’s biggest hospital chain has offered $745m to settle fraud allegations against it. But will anyone go to jail, wonders Howard Berliner

In the middle of May, Columbia-HCA, the largest proprietary hospital chain in the US, which operates 200 hospitals and 80 outpatient surgery centres in 24 states, agreed with the Department of Justice to settle allegations of fraud and abuse of the Medicare programme to the tune of $745m. If the deal is approved, it will represent the largest healthcare fraud settlement in history.

This tentative settlement deals with technical financing issues, including ‘upcoding’ diagnosis-related groups to a higher level so that the company would receive a higher reimbursement, ‘bundling’ of unnecessary laboratory tests with necessary ones to receive higher reimbursements, and reporting marketing expenses as community education, for which it was reimbursed.

The settlement does not cover a number of allegations of criminal activity, including the claim that Columbia-HCA illegally overstated its expenses to receive higher Medicare reimbursement and engaged in illegal financial relationships with doctors.

In a separate development a week later, the company announced that it was changing its name to ‘HCA-the Healthcare Company’ since the old name had, in the words of the Wall Street Journal, become synonymous ‘with an aggressive culture that had led to the fraud scandal’.

Columbia-HCA and its former chief executive, Rick Scott, the wunderkind of Wall Street, had been riding high until the charges were filed in 1997 as a result of whistleblowing by former employees. Mr Scott was removed as chief executive officer in the wake of the charges and the company has spent the past three years shedding units and trying to stay out of sight.

Investor-owned hospital chains are beset with financial woes caused by government cutbacks in reimbursement, and the attempts of managed care companies to keep people out of hospitals and to pay low rates for those who manage to get into one. Negative publicity has made it difficult for the firms to acquire new hospitals, and the continued over-supply of hospital beds has made further acquisitions less rational. Perhaps most important, the lustre of these companies has faded on Wall Street as investors have moved their capital to other facets of the delivery system such as electronic data management companies and e-commerce firms.

A deeper look at the history of the for-profit chains would suggest that they could produce a day of inpatient care at a lower rate than their not-for-profit and publicly funded competition, and yet they sold that day of care at the same or a higher rate. In other words, while their costs were cheaper their prices were higher. They were able to produce care less expensively because they neither provided charity care nor unprofitable services such as emergency care or burn care, used fewer staff per bed, did not have unionised workers, did not engage in teaching or research , and were able to secure better pr ices through volume purchasing of supplies and equipment.

It took a long while to clear up the confusion between price and cost, which one would think was a matter of elementary economics. But Wall Street financial analysts were so entranced by the promises of market-based healthcare that this simple perspective was lost. Also lost was the impact of the frequent change of ownership and the constant selling of hospitals back and forth between chains. Until the mid-1980s this practice was abetted by accounting rules that provided for substantial depreciation payments on the sale of a facility. When this source of easy profit dried up, the chains experienced their first major slump and went through a wave of consolidations which left two major chains in place - Columbia-HCA and Tenet.

From the late 1980s until the mid-1990s the two new companies acquired the assets of smaller chains, closed under-performing facilities, and sought to create national brand names. But they were caught in the new Wall Street fascination with managed care and the new sense that health maintenance organisations - insurance schemes under the Medicaid system - would control the rising cost of healthcare. The chains did not have a sufficient concentration in most areas of the country to gain bargaining leverage over the managed care companies, and thus suffered from reduced reimbursements and reduced admissions.

Their attempts to deal with these problems led directly to the fraud and abuse charges that have been haunting Columbia-HCA. In earlier days, when Medicare was a more generous payer, the companies could make their profits on Medicare reimbursement and seem not to charge too much to commercial insurance companies.

When Medicare tightened up its reimbursement in the 1980s, the companies had to try to make up their profits from the commercial sector. Managed care interfered with that ability and so the companies looked for other ways to get more revenue from Medicare - and many of these were not legal.

The lawsuits against Columbia-HCA made obvious what many people in the industry had previously suspected.

Many are now saying that a monetary fine is not sufficient, given the clear attempt to defraud the public.

Representative Pete Stark, a Democrat from California and a long-time critic of the chains, said the settlement was too gentle. ‘I absolutely feel someone has to go to jail. There’s no question that there was wanton criminal activity at the highest level, and I see no reason why they should continue to treat Medicare patients.’