Feds Probing Valley Firm

In the last decade, the profits at IPC The Hospitalist Co. Inc. have grown nearly 4,200 percent and have financed the acquisition of dozens of doctors’ groups nationwide. And investors who went along for the ride were handsomely rewarded, with the stock price rising some 200 percent since the company went public in 2008. Now, the U.S. Justice Department is alleging some of that profit may not be legitimate. A whistleblower lawsuit unsealed Dec. 6 in a Chicago courtroom alleges the North Hollywood company, which provides doctors to hospitals, has overbilled Medicare and Medicaid for years by “upcoding,” a practice in which doctors claim to do more complex medical treatments than they actually perform. In addition, the suit alleges the doctors billed for procedures never performed. “IPC hospitalists regularly submitted daily billing records for services that would have taken in excess of 24 hours to perform, even using extremely conservative estimates,” the suit states. “At least one IPC hospitalist submitted a billing record for treating 65 patients in a single day.” The lawsuit was originally filed in 2009, and long-term investors learned of its existence at the time, but the situation grew more serious when the Justice Department joined the suit last month and the details were revealed. Dr. Bijan Oughatiyan, a physician who worked for IPC in San Antonio from 2003 to 2008, filed the suit under the whistleblower provision of the False Claims Act, which permits private parties to sue on behalf of the government and to share in any recovery. The law also allows the government to “intervene” or take control of the lawsuit, and to recover three times its damages in addition to penalties – and those damages can be huge. Since January 2009, the Justice Department has recovered more than $17 billion through False Claims Act cases, with more than $12.2 billion of that amount recovered in cases involving fraud against federal health care programs. IPC declined to speak about the suit, saying in an email it would not comment about an on-going investigation. However, in a regulatory filing on Dec. 9, the company said it was cooperating with the investigation and that “it is not possible to predict whether or when this matter may be resolved or what impact, if any, the outcome of this matter might have on our consolidated financial position.” Upcoding scheme The 93-page complaint alleges that IPC doctors not only upcoded, but were given incentives to do so by the company. Medicare typically specifies three levels of complexity for a medical procedure, with reimbursements escalating based on difficulty. For example, the suit cites the costs of admitting a patient to a hospital. In a simple case, the doctor will spend about 30 minutes at bedside, and Medicare will pay $87.61; in a more complex case, the doctor will be there 50 minutes and receive $119.63. In the highest level of service, the doctor might spend 70 minutes and the government will pay $175.88. When IPC trains doctors on billing, it tells them to assume that hospitalist work is complicated so they should usually bill at the highest rate and rarely to never at the lowest rate, according to the suit. But in fact, Medicare pays more for a doctor visit in a hospital than in an office, so the higher complexity is already calculated into the schedule, the suit states. To illustrate the effect of the IPC training, the suit cites statistics on five IPC doctors and compares how they billed when hired and after assimilating to IPC’s “fraudulent culture.” At first, the doctors billed about 35 percent of their cases at the highest level, 59 percent at the medium-cost level and 7 percent at the lowest level. Afterwards, they billed 91 percent at the most expensive level, 9 percent at the medium level and zero at the lowest level. Also, IPC doctors have a financial incentive to overbill, the suit claims. Every month IPC adds up the total amount billed by each doctor and subtracts the hospitalist’s salary and benefits. Of the remainder, the doctor gets 70 percent and IPC keeps 30 percent. “The more IPC’s hospitalists bill, the more they take home (and the more IPC earns),” the suit states. “IPC regularly reminds its hospitalists about this incentive.” Linda Kobayashi, president of Codebusters, a medical billing service in Culver City, said a good coder tries to get as much money possible, but it must be based on documented treatment. While there is a small amount of leeway on coding, the conduct outlined in the suit, if true, is beyond the norm in the industry. “That’s fraud, that is absolutely wrong and they deserve to get punished,” she said in reference to the allegations in the IPC suit, if true. “But they’ve probably gotten away with it for a long time.” As for checks and balances on coding, Kobayashi said Medicare has an enormous database containing every submission by every hospital in the country, and administrators look for unusual patterns. If a red flag appears, they will ask to review charts for patients, but even so a lot of errors get through the system. “A lot of mistakes are based on ignorance as opposed to caculated cheating,” she explained. The suit doesn’t give a dollar figure for IPC’s overbilling. The False Claims Act stipulates a penalty between $5,500 and $11,000 for each violation, plus three times the amount of damages sustained by the federal government. Matthew Organ, an attorney at the firm Goldberg Kohn Bell Black Rosenbloom & Moritz Ltd. in Chicago who represents Oughatiyan, declined to disclose estimates of the size of the damages, but said about 45 percent of IPC’s revenue comes from government programs. For 2008, the final year included in the suit, that amounted to $125 million. And the suit alleges fraud was a significant component of that revenue. “The upcoding was pervasive,” Organ said. “It wasn’t here or there. And you are looking at a 40 percent bump in reimbursement going from one code level from another. From that you can get an idea of the size.” Dmitry Gorin, partner at the firm Eisner & Gorin LLP in Van Nuys who specializes in medical fraud but is not involved in the IPC matter, said the first defense in these cases is that doctors know best what is medically necessary for the patient and the system should respect their judgment. That could be a negotiating point in a final settlement for IPC. “Most of these suits settle with some sort of financial remuneration and a monitor in place to make sure future billings are proper,” Gorin said. “I don’t know the strength of the evidence, but I would certainly offer that.” Growing Trend? IPC has grown by seizing on a trend in medicine in which specialized doctors called “hospitalists” oversee the care of inpatients, who may need a variety of specialized treatments. Its competitors include Cogent HMG in Brentwood, Tenn., and In Compass Health Inc. in Alpharetta, Ga. But IPC is the largest hospitalist company. It had a total of 255 practice groups at the end of last year and so far this year has acquired 16 more in eight states. Some of those groups oversee care at long-term care facilities. The business has been so profitable that those acquisitions, and the dozens that IPC has made in the past, are paid for with cash from the company’s profits. In 2003, the company reported profits of $873,000, or 1.2 percent of revenue. By 2012, profits amounted to nearly $36.6 million, or 6.2 percent of revenue. Earnings per share grew from 8 cents to $1.92 during the same period, 2003 to 2012. If IPC is ratcheting up its medical codes, it may not be alone. A study released last year by the non-profit Center for Public Integrity in Washington D.C. found that between 2001 and 2010, thousands of medical providers in various fields significantly increased their use of expensive codes, adding an estimated $11 billion in inflated charges to Medicare’s bills. Fred Schulte, senior reporter at the center and co-author of the study, said that the expansion of electronic medical records and billing systems may be at least partly behind the upcoding. “Hospitals and doctors will say they’ve been leaving money on the table for years and EMRs (electronic medical records) now enable them to bill the way they should have been able to do,” Schulte said. “But when you can show a jury that guy seeing 65 patients a day would have to work 24 hours a day for the time he claimed he was spending with each of them, that’s a case that prosecutors like.” Indeed, IPC has noted that when it buys a doctors’ group, it professionalizes the practice and installs sophisticated automated billings systems that improve profitability. But Brooks O’Neil, an analyst at Dougherty & Co. in Minneapolis, who has known IPC chief executive, Dr. Adam Singer, and other managers for more than 15 years, doubts the company set out to bilk Medicare and Medicaid. “The chance there was intent to defraud the government is zero,” said O’Neil, who still gives the company a “buy” rating with a target price of $70. “What I think we have here is a big, well-capitalized company that the government thinks it can go after to make a point.” Investors also don’t seem overly concerned. In the two weeks since the government revealed its intent to join the lawsuit, share prices have drifted 8 percent lower to close at $57.01 on Dec. 18 on the Nasdaq. O’Neil said the drawn-out legal process of the suit has mitigated its effect on IPC’s stock price. “The stock hasn’t reacted in any huge way,” he said. “Investors have gotten to the point where they are comfortable with it. It’s out there, but it’s not likely to result in a material change in the company’s business.” And there’s a lot to like about IPC’s roll-up strategy of buying doctor groups and bringing in professional management, IT and billing systems. O’Neil sees hospitalist work as not very capital intensive, but extremely lucrative. He said the doctors don’t require an office, support staff or much equipment, because the hospital supplies it. The only major cost is the doctor’s compensation. “The physician service market in general is incredibly fragmented,” O’Neil said. “What IPC does is full of potential to improve care and ultimately reduce the cost of care. That’s what I think will be important in health care over the next 20 years.” For now, the judge has given the Justice Department 120 days to submit its addition to the suit. Gorin, the attorney, estimates it will take six months to a year to settle the IPC suit, but he figures it won’t be the last in an increasingly long line of Medicare fraud cases. “In the last five or six years, the government has brought dozens of prosecutions,” he said. “The more budgetary problems there are, the more the government looks at where it’s spending money. The hospitals and practitioners that bill the most are under the microscope.” Los Angeles Business Journal Staff Reporter Deborah Crowe contributed to this story.