As more healthcare providers and suppliers cough up millions in fines, restitutions and settlements (no-fault or otherwise) to resolve the increasing number of fraud and abuse incidents, materials managers may feel like they’re miles away from influencing any preventive measures and compliance initiatives.

But they’re not immune to clean-up efforts after-the-fact to get the fiscal books back in order.

How much of a cancer has fraud and abuse become in the healthcare industry? Media headlines during the last decade spin the tale of corporate malfeasance uncovered and uprooted by government scrutiny.

Since 2000 investor-owned hospital giant HCA Inc. has paid $1.7 billion in whistleblower settlements while admitting no wrongdoing, including $631 million to the federal government, $17.5 million to state Medicaid programs and $250 million to the Centers for Medicare and Medicaid Services (CMS) for Medicare cost
report disparities.

Last year Tenet Healthcare Corp., the beleaguered No. 2 for-profit hospital chain, agreed to pay $54 million to settle allegations that it billed the government for unnecessary cardiac procedures at one of its hospitals.

Denying wrongdoing, Catholic Healthcare West and one of its affiliates recently agreed to fork over $8.5 million to satisfy charges of Medicare cost-reporting fraud at 13 hospitals. The healthcare systems allegedly maintained two sets of accounting books. They showed one to government auditors and used the other to cover up false cost reports. The healthcare systems attributed it to simple errors stemming from trying to understand the government’s complex cost-reporting regulations. The previous year one of the two systems agreed to pay $10.25 million to settle a whistleblower complaint that it had inflated reimbursement claims at two clinics.

Beverly Enterprises Inc., the nation’s top for-profit nursing home chain, paid $170 million in fiscal year 2000 to resolve claims of Medicare false billings. Meanwhile, Fresenius Medical Care AG agreed to a $385-million settlement courtesy of alleged wrongdoing by its kidney-dialysis unit.

And the fiscal fallout from HealthSouth Corp.’s $4.6-billion accounting snafu has yet to usurp Martha Stewart’s throne of legal woes in media circles.

Fraud and abuse monetary settlements on the supplier side, however, dwarf those among providers.

Bayer AG admitted it bilked Medicaid out of $100 million in discounts and rebates for two of its drugs and wound up paying $251 million to settle civil charges and another $6 million for a criminal fine.

Guidant Corp. agreed to pay $92.4 million after admitting that it didn’t report malfunctions of a device used for treating abdominal aortic aneurysms that contributed to patient injuries and deaths.

In 2001 TAP Pharmaceuticals Products Inc. agreed to pay $875 million in civil and criminal penalties for conspiring with doctors to falsely bill government insurers for free samples. Two years later, AstraZeneca PLC fell prey to the same scheme and was forced to pay $355 million.

The Bottom Line?

Stepped-up investigations by the U.S. Department of Health and Human Services Office of Inspector General enabled the federal agency to collect more than $4.2 billion in fraud-and-abuse-related fines and settlements in the last three fiscal years alone. In the previous decade, the OIG only collected close to $3.3 billion. In fact, last year, in the six months ending September 30, the OIG reported that the government negotiated to receive more than $637 million through False Claims Act civil settlements related to Medicare and Medicaid programs.

Give some of the credit to Congress, which in the merger-manic mid-1990s granted government agencies such as the OIG, Federal Bureau of Investigation and the Department of Justice a budgetary boost to crack down on fraud and abuse, largely typified by false claims.

Many providers categorize their billing errors as innocent and unintentional mistakes stemming from simple confusion rather than from hatching unscrupulous schemes to defraud the government and payers. Such schemes include billing for unnecessary or non-covered procedures and non-existent services, improperly coding procedures for higher reimbursement, abusing outlier payments, charging for free samples or products never used, inflating prices or not reporting discounts and rebates, failing to report device malfunctions.

But the continually growing number of high-profile criminal and civil prosecutions of healthcare providers and suppliers invite credibility questions. Industry analysts estimate that healthcare fraud represents between 3 percent and 15 percent of total healthcare expenditures, which at last count surpasses $1.5 trillion.

Because most of the fraud and abuse incidents involve improper billing, coding and accounting techniques, how can materials management contribute?

"You just need to make sure that your piece of the puzzle is accurate," said Lynn Everard, C.P.M., CBM, co-founder of the Foundation for Healthcare Integrity, and a former healthcare materials manager who considers himself an advocate for supply chain responsibility on the part of hospitals and other healthcare facilities. "That’s the item master. If somebody else wants to screw around with the chargemaster you really can’t do anything about that. You just have to make sure your area is right, that you efficiently do your job and are accurate with what you report. And you can raise a lot of questions in other areas."

To better grasp the potential impact of fraud and abuse from a supply chain management perspective, mull over the following hypothetical situation that does not take into account hospital size, operating margin or revenue base differences. Imagine if the $4.2 billion in collective fines and settlements from providers and suppliers were distributed evenly among the nation’s 5,800 hospitals. Simple arithmetic shows that the per-hospital cash outlay amounts to about $725,000, rounded up.

To offset that $725,000 loss, how much top line revenue would each hospital have to generate? That would depend on the hospital’s operating margin, Everard noted. Assume 2.8 percent as the average, he added, but hospitals would have to insert their own figure. From there it’s a simple algebraic equation that looks like this: $725,000 multiplied by 100 with the total divided by 2.8 percent. Rounded up for simplicity, each hospital would have to generate $25.9 million in additional revenue just to cover that $725,000 shortfall.

Shifting gears and looking at the challenge from the cost-reduction side the equation is much simpler. The hospital would have to cut $725,000 from the budget. "Obviously, it’s easier to save $725,000 than it is to create $25.9 million," Everard said.

That’s where materials management comes in because administration would likely lean on that department to cut costs in order to prevent eliminating services and employees.

"Materials management directors are already facing heightened pressure to cut costs," Everard noted. "They’re being asked to drill for oil with a toothpick but that’s not going to help them locate savings or even get it out of the ground. Their approach to find oil is to use more gasoline." That means turning to GPOs for relief or beating up suppliers on price, he added.

Unfortunately, most hospitals aren’t very good at it because they don’t wield enough influence to make it work, according to Everard. "If you’re pounding your fist on the table it’s amusing at first but not very effective," he said. The suppliers have to decide whether they can offer a hospital a better or equivalent price than another based on expected market share and compliance without affecting any GPO contracts. The hospital also has to consider whether it can continue generating price breaks the next year and factor in any potential built-in price increases in other areas? "In the end, the hospital typically retreats," Everard said.

"We’ve taken procurement and reduced it to shopping at the mall by merely accepting discounts off fictitious list pricing," he continued. "It’s not based on the suppliers’ cost of manufacturing like it is in other industries. Healthcare lacks the expertise, resources or intestinal fortitude to figure this out so few are making sure they’re fulfilling their fiduciary responsibility."