Clinical Business Strategies

False claims vulnerability – one whistleblower’s view
How do you protect yourself and your facility?

by Eileen McGinnity

A current lawsuit highlights potential gaps in the ability of hospitals to monitor the ultimate cost of physician preference items, codify warranty and replacement policies in PPI vendor agreements and manage vendor rep behaviors.

In May 2006, a former Guidant cardiac rhythm management (CRM) sales representative, Robert A. Fry, filed a second amended complaint in qui tam1 or "whistleblower" suit in U.S. District Court in Tennessee. According to the complaint, Fry and other Guidant salesmen in Tennessee, Florida and California, concealed information related to device warranty and upgrade credits from hospital customers, including Veterans Administration hospitals, university medical centers and nonprofit hospitals.

As a result, the complaint alleges, hospitals did not obtain cost adjustments to which they were entitled. They unknowingly inflated their billings to Medicare and Medicaid, both for outpatient device pass-throughs and inpatient CRM procedure costs, in violation of the federal False Claims Act (FCA).

Replacement for failure,
defect or technology upgrade

The complaint alleges that Guidant sales reps were trained to market to physicians rather than to hospitals. As part of physician-directed marketing, reps promoted a credit program for devices the physician determined should be replaced. Physicians were told that if they ordered a Guidant product to replace a device from a competing company, the hospital could receive credits and thus obtain the Guidant product at a more affordable price. Credits were also available for recalled devices and for devices still on warranty that might be replaced by the physician due to failure, defect or technology upgrade.

The credits program was a selling point with physicians, the complaint alleges, but the availability of credits was not disclosed to the hospitals. Fry described a practice whereby sales reps placed one copy of the warranty in the patient’s pacemaker booklet following the procedure, but discarded the hospital’s copy of the warranty and credit information along with the packaging materials.

According to Fry, "the administrative process for Guidant’s warranty credit program was set up so as to systematically provide strong disincentives ever to actually give credits to hospitals."2 Reps allegedly had little incentive to provide the appropriate paperwork to hospitals, because sales commissions were based on the net sales price, so "the actual use of warranty credits would result in a lowering of their pay."3

With hospitals unaware of the availability of credits, "Guidant was paid by the implanting hospital in full for the replacement device without disclosing any available credits, knowing the hospital was either taking a large loss on the procedure or violating the FCA and parallel state statutes by forwarding the costs on to state and/or federal agencies for reimbursement in full."4 Fry claims that he raised his concerns with his managers but was advised not to flag the warranty issue with customers.

Guidant filed a motion to dismiss the complaint on various legal grounds. In late July, the U.S. Attorney for the Middle District of Tennessee filed a notice that the Department of Justice is considering its participation in the case; their decision is due by September (after this issue has gone to press.) The United States also advised the Court that it stands ready to provide information that will confirm providers’ dates of submission and requests for payment for patients with treatments allegedly at issue in the Complaint, and confirm the amounts that governmental agencies paid to the providers.

Keep tabs on contracts, credits and salespeople

Whatever the outcome of this lawsuit, it points to the need for hospitals to require that vendors include warranty and replacement policies in the actual sales agreement. With this information codified in the contract, hospitals can enforce adjustments to the purchase price.

Hospitals must also monitor what they really pay when they reach the end of the paper trail. Even during the 2005 CRM recalls, EP lab directors and materials managers reported that they had few or no effective mechanisms or controls to tie the hospital’s recall-related rebates to the actual cost of patients’ replacement devices. Most could not even report how many explants they had done on recalled devices. Materials managers and the EP lab rarely worked together to verify cost and ensure appropriate reimbursement.

Finally, this lawsuit highlights the risk of a vendor access policy that allows sales representatives latitude to take care of patient paperwork, unsupervised by the hospital. What may appear to be a helpful gesture from the rep underscores a weakness in the hospital’s internal cost controls. This can directly impact the hospital’s bottom line.

What is the hospital’s duty to monitor device costs that are billed to government payers? This is a question for your hospital legal counsel. In any event, the appropriate controls and policies should help avoid overpayment for expensive medical devices. HPN

Eileen McGinnity is president of Aspen Healthcare Metrics, a national clinical service line consulting and benchmark data firm, based in Englewood, CO. Aspen is a subsidiary of MedAssets Inc. Visit Aspen Healthcare Metrics’ Web site at www.aspenhealthcare.com.

References:

1. United States of America and States of Tennessee, California, and Florida ex rel. Robert A. Fry, Plaintiff-Relator, v. Guidant Corporation. its predecessor Cardiac Pacemakers, Inc., a. division of Eli Lilly and Company and unknown entities and individuals, Defendants. Case No. 3-03-0842, Judge Trauger, United District Court For the Middle District of Tennessee Nashville Division.

2. Complaint, paragraph 35.

3. Complaint, page 12, paragraph 36.

4. Ibid, page 12, paragraph 32.