Complaint Details Fraud Allegations Against Kalispell Regional Healthcare

Years-long scheme allegedly involved illegal kickbacks, physician referral violations and false claims

Kalispell Regional Healthcare. Beacon file photos

Federal agencies have been investigating allegations of a widespread illegal kickback scheme conducted by Kalispell Regional Healthcare to boost revenues that were used to compensate physicians and executives far above market value, while knowingly defrauding the federal government, according to a 91-page complaint filed in U.S. District Court by the hospital’s physician network chief financial officer.

The allegations say numerous physicians have been improperly compensated based on incentivized referrals, for which the KRH system profits, as opposed to their productivity or services rendered. The scheme has enriched senior executives and specialist physicians, while negatively impacting patient care, the complaint alleges.

The goal of the money-for-referral scheme, the complaint alleges, was to increase the number of Medicare, Medicaid and other patients to KRH hospitals, labs, clinics, and specialists to increase revenues. Certain employees were then excessively compensated for their efforts to lock in patient referrals to KRH, which is Flathead County’s largest employer with more than 4,000 employees.

“At least since 2011, Kalispell Regional has engaged in a scheme to pay excessive compensation to certain employed physicians to reward or induce them to refer patients, including Medicare patients, to Kalispell Regional hospitals and clinics,” states the complaint.

The newly unsealed amended complaint was filed in May 2017 by Jon Mohatt, who is still employed as the hospital’s physician network CFO, under the federal False Claims Act, considered the nation’s foremost whistleblower law. The case was first filed in September 2016, according to a docket report available on the U.S. District Court’s electronic case filing system.

Neither government attorneys nor legal counsel representing Mohatt would comment on the case.

Read the entire 91-page complaint>>>

The six-count lawsuit centers on alleged violations of the anti-kickback statute, a criminal law prohibiting financial arrangements between doctors and hospitals or other health-care providers or companies, and the civil Stark statute, a federal physician self-referral law designed to prevent financial incentives for physicians to steer patients to particular providers from whom they stand to reap benefits.

KRH officials previously acknowledged an ongoing investigation by the Offices of Inspector General in the U.S. Department of Health and Human Services and Department of Justice, and confirmed they have set aside $21.5 million for a potential settlement while denying any wrongdoing. But the details of the investigation weren’t known because the complaint had been kept under seal until recently. The lawsuit was unsealed because it has been formally served on Kalispell Regional Healthcare.

Because the complaint was filed last May, all of the allegations stem from former KRH President and CEO Velinda Stevens’ tenure, before Pamela Robertson took over in October. Stevens died in January 2017.

“We do not agree with the allegations and deny any wrongdoing,” KRH said in a statement on Tuesday. “We have responded to the government’s requests for information and have cooperated fully with the investigation. We are hopeful for a quick resolution.”

Court documents state that Mohatt manages financial operations at KRH “for over 46 medical practices consisting of over 220 medical providers and $100 million in net revenues.” In that capacity, he had first-hand knowledge of and access to the financial details and personnel inner-workings revealed in his lengthy, highly detailed complaint.

“Through his work and experience, Mohatt has direct, detailed, and personal knowledge that Kalispell Regional has violated Federal Stark and Anti-Kickback Laws as described in detail below,” the court documents state.

The overcompensation of specialist physicians, who often work few hours, and senior hospital executives led to more than $100 million in losses over a five-year period, which the complaint alleges was the hospital’s “primary strategy to achieve offsetting hospital profits from physicians’ referrals.”

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The complaint also alleges that KRH officials knowingly made false claims to the federal government to “conceal their illegal conduct.”

“Kalispell Regional has submitted and continues to submit false or fraudulent claims based on these referrals to obtain millions of dollars in Medicare, Medicaid, and TRICARE payments that they were not legally entitled to receive,” Mohatt’s complaint states.

The complaint cites numerous pages of email exchanges and conversations among hospital executives as evidence of an allegedly coordinated effort focused on boosting referral-generated revenues, spearheaded by Stevens.

“Stevens led an accounting scheme of tracking, monitoring, and rewarding ‘contribution margins’ from employed specialists discussed in this First Amended Complaint,” the documents state. “Such ‘contribution margins’ were the hospital profits from referrals by each physician.”

“There is extensive evidence of Kalispell Regional’s executives tracking and monitoring the ‘contribution margins’ … and using such data in meetings with physicians, in meetings to address the hospital system’s financial system, and in meetings to address physician compensation.”

Mohatt states that the most “common measure of physician productivity is Work Relative Value Units,” which reflect the “level of time, skill, training, and intensity required of a physician to provide a given service.”

“Such compensation formula is the most common way for hospitals to pay employed physicians in the United States,” the documents assert.

While KRH has paid many physicians based on that formula, Mohatt states, the specialist physicians cited in the complaint have instead been incentivized by referrals, inflating profits for the hospital system and leading executives to reward them with “excessive base salaries plus bonuses” even as their “personal productivity is generally minimal and commonly less than the lowest national percentiles.”

“These physicians have been compensated at high levels with no relationship to their personal productivity or the collections for their personal services,” the complaint asserts. “None of these physicians was required to work a full-time schedule.”

“Kalispell Regional has agreed to such contract terms,” it continues, “because all of these physicians were clinical decision-makers with leverage to make substantial referrals to the hospital system.”

Mohatt cites numerous examples of specialist physicians who work part-time and fail to meet productivity standards but are paid large salaries and bonuses based on their referrals within the hospital system. Their full-time equivalent compensation, the complaint notes, is often in the 90th percentile for their positions, although they infrequently perform services and collect comparatively little money from those services.

In one example, a neurosurgeon regularly received an annual compensation above $900,000 from 2014-2016, although collections for his services ranged from $207,442 to $374,124, either below or just above the national 10th percentile for neurosurgeons. The complaint states that he also ranked below the national 10th percentile for productivity metrics.

Another example points to an invasive cardiologist whose part-time compensation of $392,244 translated to a full-time equivalent compensation of $4.3 million, more than five times the national 90th percentile for invasive cardiologists.

The complaint also states that various physicians were paid extra for “director” services without any documentation or confirmation of any services performed. The additional director payments ranged from $50,000 to $150,000 per year.

Mohatt claims he repeatedly warned executives about the compensation system’s improprieties but was rebuffed.

“Despite Mohatt’s expressed concerns and objections, in the past three years, the bonuses and base pay of specialists continued to grow even though their practices continued to lose substantial money,” the documents state.

The complaint asserts that in July 2014 Mohatt “advised the executive leadership that Kalispell Regional needed a common physician compensation philosophy” ratified by the board. He notes that the board later did adopt a new compensation policy, “but it has not been followed or implemented with physician contracts and physician compensation.”

“To date Kalispell Regional has not reviewed a single physician employment contract for compliance with the new compensation policy,” Mohatt said. “The policy has been a token gesture for appearance, not actual compliance.”

Peter Chatfield, a whistle-blower attorney with the Washington D.C.-based firm Phillips and Cohen, which handled the largest health-care fraud settlement ever made involving physician referrals to hospitals, said Kalispell Regional Healthcare must now respond to the complaint, likely by filing a motion to dismiss.

Both of the statutes cited in the complaint are designed to provide a safe harbor for “whistleblowers,” allowing them to work with the government to stop kickbacks and subsequently receive a reward by filing a “qui tam” lawsuit under the False Claims Act.

Chatfield said the whistleblower statutes are important because they protect whistleblowers like Mohatt from retaliation while holding powerful institutions accountable.

“It’s like a sledge hammer. It’s a very powerful litigation tool,” he said. “But in the case of both statutes, the goal is to make sure that when physicians are referring patients for care or testing or labs, that they are referring them for medically necessary reasons, not to line their own pockets because the referrals are incentivized.”

The impact of such a money-for-referrals scheme is harmful to patient care because it drives up health-care costs and eliminates competition while raising the median income of physicians, Chatfield said. It can also undermine the level of care a patient receives by referring them to medically unnecessary services.

The cases can also be prohibitively difficult for government agencies to investigate, both in the amount of time and resources they require, Chatfield said

In many cases, Chatfield said a particular specialty medical service is overutilized.

“What the government is really looking for when they investigate these cases are arrangements in which a lot more medical care is given than is necessary,” Chatfield said.

In September 2017, attorneys with the U.S. Department of Justice’s civil division filed a notice that the government was not intervening in the case “at this time” because its ongoing investigation was not yet complete.

According to the notice filed by Elizabeth Rinaldo, senior trial counsel for the Department of Justice, the government had not completed its investigation by the Sept. 21, 2017 deadline set by U.S. District Judge Donald Molloy, and as such “is not able to decide … whether to proceed with the action.”

“Accordingly, the United States hereby notifies the Court that it is not intervening at this time,” the notice states. “However, the Government’s investigation will continue.”

The notice further states that in the event that either Kalispell Regional Healthcare or the whistleblower proposes to dismiss or settle the case, the government must be notified and given the opportunity to be heard before granting its approval.

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