A Hole in Health-Care Reform

President Barack Obama and his Democratic allies on Capitol Hill say that a vast expansion of health coverage can be funded by squeezing out waste and fraud rather than cutting benefits. Whether that turns out to be true may help determine the success of the sweeping reform package being debated by Congress. Slashing costs is no easy task, and stopping fraud is even tougher. No less than $47 billion in Medicare spending went to dubious claims in the year ended Sept. 30, according to the U.S. Health & Human Services Dept. That's 10.7% of the $440 billion program that subsidizes care for the elderly. Medicaid, the government program for the poor, lets billions trickle away at roughly the same rate. The $10 million annual increase that Congress is allocating to fight fraud may not be enough to do the trick.

One spending sinkhole can be traced to large medical-equipment suppliers, device makers, and pharmaceutical companies, which government auditors and industry veterans describe as a recalcitrant bunch. Medical manufacturers know public agencies generally pay first and ask questions later—if ever. Medicare receives 4.4 million claims daily; fewer than 3% are reviewed before being paid within the legally required 30 days.

One way to get a sense of the scale of the seepage—and the challenge facing the Administration—is to look at whistleblower lawsuits filed under the federal False Claims Act. That law allows company employees to sue on behalf of the government to recover improperly claimed federal funds.

A suit filed by William A. Thomas, a former senior sales manager at Siemens Medical Solutions USA, one of the nation's largest medical suppliers and a unit of German engineering giant Siemens (SI), offers a case study in the difficulty of containing costs. Thomas, a 15-year Siemens Medical veteran, alleges in federal court in Philadelphia that for years the company overbilled the Veterans Affairs Dept. and other government agencies by hundreds of millions of dollars for MRI and CT scan machines and other expensive equipment. These high-tech systems—used to examine everything from damaged knees to suspected cancers—cost $500,000 to $3 million apiece, sometimes more. Thomas, who retired from Siemens in 2008, claims that with no justification other than larger profits, his former employer charged its government customers far more than private-sector buyers for the same equipment.

"Billions and billions could be saved with the right government regulation and oversight applied to health care," Thomas, 56, says in an interview. "But I think corporations will continue running circles around the federal government."

In court filings, Siemens has denied any wrongdoing and has sought to have the Thomas suit dismissed. A company spokesman, Lance Longwell, declined to elaborate for this article, citing the litigation.

The Thomas suit illustrates some of the vagaries of False Claims Act cases, hundreds of which are filed every year against government contractors in a range of industries. As the plaintiff, Thomas stands to pocket up to 30% of any court recovery, with the rest going to the Treasury. The Justice Dept., which can intervene in such suits to help steer them, announced last year that it will stay out of the case against Siemens for now. Yet Thomas' allegations have helped drive a parallel criminal investigation of Siemens' equipment marketing practices by the Defense Dept. and the U.S. Attorney's Office in Philadelphia.

In April federal investigators searched for records at the headquarters of Siemens Medical in Malvern, Pa., a suburb of Philadelphia. Ed Bradley, special agent-in-charge of the Defense Criminal Investigative Service, confirmed that the investigation is continuing but declined to comment further.

Longwell, the Siemens Medical spokesman, says the company is cooperating with criminal investigators. In March, just weeks before the search of its offices, Siemens won a new $267 million contract to provide radiology equipment to the U.S. military and several federal agencies. Its global health-care division reported a profit of $2.1 billion on revenue of $17.5 billion for fiscal 2009.

SCATTERSHOT APPROACHWhistleblower cases like Thomas' battle with Siemens are an unsystematic way of policing alleged fraud, but one that from time to time can pay off for taxpayers. In September, Pfizer (PFE) agreed to give the government $2.3 billion to resolve criminal and civil allegations that it illegally promoted the use of several drugs in ways that hadn't been approved by regulators. The settlement—the largest of its kind—was initially triggered by private whistleblower complaints. During the year that ended Sept. 30, the federal government recovered $1.6 billion from health-related suits filed under the False Claims Act.

The case against Siemens turns on federal contracting law that requires vendors to disclose prices and discounts to ensure the government receives the best deals available. Thomas alleges Siemens withheld this kind of information and instructed salespeople to falsify records to avoid detection by government auditors. The former executive alleges the government paid 10% to 44% more than private customers for the same equipment.

The suit cites a 2005 summary of Siemens equipment discounts, which the company routinely offers to large customers. The average overall discount exceeds the government discount in each of 13 product categories. For instance, the average Siemens discount for ultrasound machines was 58%, while the government discount was 36%. The document lists reductions of up to 74% on CT systems for some clients; the government received a 32% discount.

In court filings, Siemens says it has not misled the government. Some of the disputed pricing information was in fact shared with the government, the company argues, and public agencies continued to purchase the Siemens equipment.

This isn't the first time Siemens has been accused of wrongdoing in medical contracting. In 2007, Siemens Medical pleaded guilty in federal court in Chicago to obstructing justice by giving false testimony and withholding records involving a $49 million radiology contract for a county hospital. Siemens was ordered to repay Cook County $1.5 million and pay an additional $1 million fine. Prosecutors said Siemens gave a local man $500,000 to pose as a minority business partner to meet the county's affirmative action purchasing rules. Siemens declined to comment on the Illinois case.

Even before passage of any health-reform legislation, the Obama Administration is trying to step up enforcement with help from private informants. "We have such volume [of funding] going through government health programs, it is important to get tips from whistleblowers so we can build cases," says William Corr, Deputy Health & Human Services Secretary. Corr is leading a new antifraud task force formed in May. It has assigned teams of investigators to cities with especially high rates of fraud, such as Miami, Detroit, and Los Angeles. By the end of December, Corr says, the government should have all Medicare claims combined in one database so investigators can detect suspicious patterns faster. Data are now split among several government contractors that audit claims by region.

But some health business veterans doubt that the government can catch up. "I've been in this industry for 30 years, and the federal government hasn't put a dent in fraud and abuse," says Deborah J. Grider, a compliance consultant to medical providers. Without addressing the Siemens case, she adds that for every wrongdoer the government nabs, "there are thousands they don't even know about."

Jeffrey S. Bucholtz, who oversaw False Claims Act enforcement in 2007 and 2008 for the Justice Dept.'s Civil Div., predicts some drugmakers and medical suppliers will resist tougher enforcement. "Companies will increasingly fight back, and the government will have a hard time winning in court," says Bucholtz. He should know: As a partner with the law firm King & Spalding, he now defends the kinds of corporations he used to police.

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