The many extracts on these pages are from copyright material. They are owned by the reference given or its owner. They are reproduced here for educational purposes and to stimulate public debate about the provision of health and aged care. I consider this to be "fair use" in the common interest. They should not be reproduced for commercial purposes.

Every attempt is made to provide accurate and well written material. Your contributions, suggestions, additional information and advice sent to the web address at the foot of the page are welcome. Where possible they will be included in revised pages.

The intention is to show the general thrust of corporate practices as well as the nature and extent of any allegations made. Material contained here represents my views based on my study of the operation of the health care marketplace and the material available to me. It should not be assumed to represent the views of any other individual or organization.

Links to Site Maps

Corporate Practices

Path to this page
Home Page
US Corporate page
HealthSouth Overview

US Hospital Companies


US Aged Care

Aged care entry
Aged overview

Managed Care
Citigroup (financiers)

HealthSouth Pages I

HealthSouth's Problems

Accounting fraud
Medicare Fraud
Care of patients
Australian operations

HealthSouth Pages II

Investigations and trials
Congress investigates
Scrushy's fraud trial
Scrushy's bribery trial
HealthSouth staff
HealthSouth court actions

The Business
HealthSouth's recovery

USA section 


Medicare Fraud

Introductory page
This corporate web site addresses the issues of corporate health care within a broad framework. A web page describing this broad context should be considered as an introduction to each page on the web site. If you have not yet read it then
CLICK HERE to open it in another tab or web page.

Content of this page
This page addresses the many allegations that HealthSouth engaged in Medicare fraud. The number of sources and the nature of the allegations point to the probability that this occurred. A US $325 million settlement of whistleblower initiated Qui Tam lawsuits in January 2005 indicates that this was extensive. Press reports show how its reputation as an exemplary company in providing care unraveled.


HealthSouth also has avoided the allegations of misconduct that have plagued other for-profit health care giants, most recently Nashville-based Columbia/HCA Healthcare Corp. - - - - - - - - - HealthSouth hasn't been bothered by investigations into physician referrals, - -

HealthSouth is now confronting a loss of faith on many fronts. Caught squarely in the glare of post- Enron scrutiny, the company is facing questions not just about the quality of its services, but about its financial practices, insider stock sales, business dealings among company officials and the independence of the board.
Growing Concerns on the Health of HealthSouth New York Times September 19, 2002

Additionally, the congressmen (House Energy and Commerce Committee) write that "it appears that HealthSouth may have submitted hundreds of thousands of claims for reimbursement to Medicare and Medicaid based on improper billing of certain rehabilitative therapy claims."
Rehab Giant Faces Congressional Probe Medical Newswire April 28, 2003

HealthSouth, the largest U.S. operator of rehabilitation hospitals, agreed Dec. 30 to pay $325 million to settle Medicare fraud claims, including some first made by DeVage.
HealthSouth Settles Fraud Case Over Medicare Billings With Department of Justice for $325 Million Kaiser Daily Health Policy Report January 3, 2005



HealthSouth repeatedly claimed that it was different and not part of the fraud and neglect which characterised the health care marketplace. HealthSouth was more successful at hiding its practices than most other companies. This may have been because of the close control and surveillance of staff by Richard Scrushy.

While the massive accounting fraud has attracted most attention there are many other facets of HealthSouth's activity, which cause concern - facets which show the nature of its culture.

This page addresses Medicare fraud, the defrauding of the community. These practices usually go hand in hand with problems in standards of care (ie patient fraud). Both depend on a culture of corporate compliance in placing commercial issues ahead of responsibility to the community and the duty of care. This culture extends from the centre to the periphery.

to contents

Medicare Fraud

Familiarity with Medicare Fraud

Scrushy and his close associates purchased or were on the board of a number of companies that were involved in unsavoury allegations and Medicare fraud. These included Integrated Health Services (IHS), Caremark, and Horizon/CMS.

HealthSouth executives would have been very familiar with Medicare fraud - how it could be used to increase income and how to avoid detection. They would also have known how to maintain a compliant culture and stop whistleblowers. Reports indicate that HealthSouth closely monitored the activities and the email of its employees. It had a security department that watched staff closely. It sued those who spoke out.

Integrated Health Services (HIS) was one of the Nursing Home and aged care corporations involved in a range of allegations of poor care and Medicare fraud in the middle 1990's while HealthSouth's chairman, Richard Scrushy, was on the board. It entered bankruptcy in 1999.

Caremark was one of the big frauds of the late 1980's and early 1990's. In 1995 and 1996 it settled government and insurer fraud actions for over US $200 million and entered an integrity agreement. It was accused of making false claims for medical services and of paying doctors for referrals. Soon after 12 insurers went to court looking for US $3.3 billion in fraud settlements. In 1995 only National Medical Enterprises (now Tenet Healthcare) and SmithKline Beecham had paid bigger fines.

The law began reaping results among healthcare providers in the early 1990s. A series of big-dollar settlements with companies such as SmithKline Beecham, Beverly Enterprises, Caremark and other national chains drew attention to endemic healthcare fraud.
Fighting fraud Modern Healthcare July 23, 2001,

- - - - -a criminal investigation - - that dealt with alleged payoffs to doctors for steering business to the company. Ultimately, Caremark pleaded guilty to federal felonies - - - and agreed to pay civil damages and criminal fines of $161 million to settle the case.
MedPartners Proposed Buy of Caremark Would Be the Latest in a Series of Acquisitions The Wall Street Journal Europe May 15, 1996

Caremark was spun off from Baxter Pharmaceutical in 1992, possibly after its fraudulent practices were exposed. It is not known whether any HealthSouth directors were on the Caremark board at this time.

After the 1995 fraud settlement HealthSouth purchased 120 Caremark rehabilitation facilities. In 1996 HealthSouth's protégé MedPartners purchased the rest of Caremark. Several HealthSouth directors and executives were on the MedPartners/Caremark board including some of those who have now pleaded guilty to accounting fraud. C.A. Lance Piccolo, Caremark's chairman and CEO, moved on to the MedPartners board. It is not known how long he had been CEO of Caremark and whether he had perpetrated the fraud or simply sorted out the mess. He had certainly learned to be careful the hard way

Horizon/CMS was purchased by HealthSouth in 1997. Its founder Neal Elliott was trained in Hillhaven, part of the
National Medical Enterprise (NME) empire. Like Hillhaven and another NME/Hillhaven product, Sun Healthcare, Horizon was a company mired in controversy. There were allegations about poor care, Medicare fraud and less than open financial dealings. It came with a trail of lawsuits.

This web site does not contain a detailed analysis of Hillhaven or Horizon's practices as neither exists today.
(there is some information about it here)

The former owners and manager of two Massachusetts nursing homes that specialized in the care of brain-injured patients have agreed to pay $1.5 million to settle allegations of patient abuse and neglect, improper transferring and billing of residents, and Medicaid fraud.

The settlement, announced April 23 by Massachusetts Attorney General Tom Reilly, stems from a 1998 lawsuit accusing the owners, managers and administrators of the now-defunct Greenery Rehabilitation Center in Brighton and the Greenery Rehabilitation and Skilled Nursing Center of Middleborough of alleged violations of the Massachusetts Consumer Protection Act.

Under the terms of the settlement, Horizon/CMS Healthcare Corporation, a subsidiary of HealthSouth Corporation of Alabama and the former owner of the nursing homes, has paid $625,000 in penalties, associated costs and consumer aid to Massachusetts.

In a separate agreement with Reilly's office, Horizon/CMS also agreed to pay $150,000 in restitution to the Massachusetts Medicaid program.

Similarly, Integrated Health Services Inc. of Maryland, the now-bankrupt management company that oversaw the Brighton and Middleborough facilities, has agreed to a $750,000 claim.

Massachusetts nursing homes pay $1.5 million to settle state charges Andrews Online May 16, 2003

to contents

Medicare Fraud and HealthSouth

In spite of its diet of unsavoury competitors HealthSouth maintained an image of being above it all. It seemed to be supplying good care without indulging in fraud. It was very successful financially in this. It would certainly have learned how to avoid being caught. Instead of arousing suspicion its model progress was lauded by the market and its analysts. I looked critically at the company in 1998 when it entered Australia. I could not find evidence of misconduct by HealthSouth itself and there were no grounds for opposing its entry into Australia. I did not discover that it was being accused of Medicare fraud in Alabama at the time.

Billing issues and questions about the company's quality of care have dogged HealthSouth for years. The Justice Department lawsuit says that a Medicare-authorized investigation by Alabama Blue Cross in 1998 found that HealthSouth improperly billed Medicare for therapy by students, interns, athletic trainers and other unlicensed aides.
Growing Concerns on the Health of HealthSouth New York Times September 19, 2002

It seems likely that Medicare fraud was already established in HealthSouth by the time it bought Horizon/CMS in 1997. In 1996 whistle blowers had commenced Qui Tam court actions alleging Medicare fraud. A disgusted employee posted allegations on a web site, an action that earned her a defamation action from Scrushy himself. By May 2003 there were multiple references to alleged Medicare fraud in the press and authorities were investigating.

The first press report of fraud which came into my possession was a $1 million fine in 2000 relating to activities in an Alaska company purchased by HealthSouth. While the practices originated with the original owners, it seems that HealthSouth did not stop them, or report them to authorities.

The clinics were bought by Healthsouth in 1997 from Alaska-based North Care Partners, and most of the violations occurred under North Care's ownership, Branchflower said.

The violations -- involving miscoding and overpayment for medical services -- were revealed by an audit conducted by accountants hired by the state, officials said. Healthsouth admitted to the violations when confronted with the audit results, they said.
Alaska, U.S. split $1 million in Medicaid case Reuters: 10 Apr 2000

As indicated above Blue Cross in Alabama cited the company for improper billing in 1998. Further evidence of the company's willingness to exploit the weaknesses in Medicare, if it could get away with it, emerged in 2001. HealthSouth settled a fraud suit for US $8.2 million. As in the rest of the industry fraud was only exposed when a whistle blower took action.

- - - - HealthSouth paid $8.2 million to settle a government lawsuit alleging it overcharged Medicare for services. HealthSouth admitted no liability in the settlement's agreement.

A prosecutor said that most of the payment covered the penalties and interest the Department of Justice (DOJ) sought for health care fraud. The Justice Department said that from 1992 to 1997 HealthSouth had overcharged Medicare and the Defense Department for equipment and supplies purchased from G.G. Enterprises, a company owned by the parents of HealthSouth's CEO and founder Richard M. Scrushy.

The government also claimed HealthSouth illegally billed the items at a price that exceeded costs.
HealthSouth Settles Medicare Lawsuit for $8.2 Million From 23 May 2001

Greg Madrid, a whistle-blower and former accountant at HealthSouth, had noticed that the company did not tell Medicare about the family relationship and violated a regulation that forbids billing Medicare in such cases for more than the original purchase cost. He received $1.48 million from the settlement.
Growing Concerns on the Health of HealthSouth New York Times September 19, 2002

Longstanding problems in HealthSouth's services and in its Medicare billing were reported during 2002 and 2003. Once again whistle blowers were the key to exposure. The same sorts of Medicare fraud that have plagued the rest of the industry were also the subject of an inquiry by the House Energy and Commerce Committee. Multiple whistleblower initiated law suits were eventually settled for US $325 million.

James Devage initiated the action in 1998 and others followed with similar allegations. The government joined the action in 2002.

See United States of America ex rel. James J DEVAGE vs HealthSouth Corporation & others. Civil Action No SA-98-CA-0372-FB Western District of Texas, San Antonio Division.

HealthSouth officials are doing a lot of explaining these days. Among them are issues related to Medicare billing practices that caused its stock price to tumble over the last few weeks and a lawsuit filed by the Justice Department against HealthSouth last May accusing it of seeking payment for services by unlicensed therapists. The company has also disclosed in proxy statements and other filings over the years the outlines of a number of insider deals.
Growing Concerns on the Health of HealthSouth New York Times September 19, 2002

Last May, the Justice Department joined lawsuits brought by private whistle-blowers, who claim that HealthSouth billed Medicare for individualized therapy by licensed physical therapists, when patients were actually treated in groups and by unlicensed employees, including interns and students.

In September, the Office of the Inspector General of the Department of Health and Human Services, which investigates Medicare and Medicaid fraud, confirmed that it was looking at HealthSouth.
If a company is found guilty of a crime related to Medicare or Medicaid, it is excluded from the program for a minimum of five years, she said.

HealthSouth's Chart: Guarded but Clearly Unstable New York Times March 22, 2003

Medicare inspectors have been investigating HealthSouth on a few fronts for several years, said Katherine Harris, a spokeswoman for the U.S. Department of Health and Human Services' inspector general's office. She declined to give details of the probe.

Those actions will likely prompt private insurers to take stock of their dealing with the biggest U.S. rehabilitation chain, and perhaps lead them to claim damages if HealthSouth is forced to pay a settlement because of its faulty billing, analysts said.
UPDATE 1-U.S. government, HMOs eye HealthSouth's billing Reuters March 28, 2003

For five years, the company has been fighting a whistle-blower suit filed in federal court in San Antonio that contended widespread abuse of Medicare. The company was accused of billing for services it never provided and delivering poor care, treating patients without a formal plan of care or using unlicensed therapists. HealthSouth also routinely billed Medicare for individual therapy when people were being treated in groups, a practice Mr. Scrushy went to great lengths to defend last year. The company has vigorously denied the other accusations. In 2001, the Justice Department joined the whistle-blower suit.
The Scrushy Mix: Strict and So Lenient The New York Times April 20, 2003

Additionally, the congressmen
(House Energy and Commerce Committee) write that "it appears that HealthSouth may have submitted hundreds of thousands of claims for reimbursement to Medicare and Medicaid based on improper billing of certain rehabilitative therapy claims." The missive cites in particular contentions that the company: billed for services not rendered, billed for therapy provided by supportive personnel as if it had been furnished by licensed therapists, failed to include physicians' plans of care when appropriate and billed improperly for group therapy.
Rehab Giant Faces Congressional Probe Medical Newswire April 28, 2003

The complaint asserts that defendants were aware as of the beginning of the class period that the federal agency responsible for administering healthcare reimbursements required services provided to two or more patients at a single time to be billed as "group" therapy service at a lower rate rather than as separate "individual" services at higher aggregate rates. This federal policy had been in place since the mid-1990s and yet defendants failed to disclose, or to factor into HealthSouth's publicly disseminated projections, the impact of that policy.

Federal law enforcement officials are investigating possible Medicare fraud at HealthSouth, the troubled chain of rehabilitation and surgery centers, after a Texas jury awarded $1.5 million in damages to the former medical director of a Houston hospital, officials said yesterday.
In a related action, the House Energy and Commerce Committee has sent three investigators to HealthSouth's headquarters to look for Medicare fraud and other possible violations, Ken Johnson, a committee spokesman, said yesterday.

Troubled HealthSouth Faces Medicare Fraud Investigation New York Times September 11, 2003

Also, from our claims review for 30 sampled beneficiaries who received outpatient cardiac rehabilitation services during calendar year 2001, we determined that the Hospital received Medicare payments of $26,279 for services provided to beneficiaries not allowable, and payments of $902 where medical documentation may not have supported Medicare covered diagnoses.

We recommended that the Hospital: - - - - - - - refund the $26,279 overpayment - - - - - - conduct an internal review of all cardiac rehabilitation claims from August 1, 2000 to the present and report the overpayments to the fiscal intermediary and the Office of Inspector General; and, - - - implement controls to ensure only 1 unit of service per beneficiary is billed for each cardiac rehabilitation session.
From Executive Summary "Review of the Outpatient Cardiac Rehabilitation Services - HealthSouth Sea Pines Rehabilitation Hospital," (A-04-03-01004) Office of Inspector General -- AUDIT December 10, 2003

The company hopes to reach a large settlement with the Medicare office covering all potential wrongdoing.

HealthSouth perpetrated its fraud essentially by inflating the amount it was receiving from the Medicare program for the elderly and disabled.
HealthSouth Fraud Larger Than Estimate Reuters January 20, 2004

The civil allegations against HealthSouth include billing for unnecessary services, for services provided by uncredentialed providers and for individual physical therapy when group therapy was provided.

HealthSouth tentatively settles U.S. civil charges Modern Healthcare December 21, 2004

The $325 million settlement includes an initial payment of $75 million, with the remainder paid quarterly over three years (AP/Wall Street Journal, 12/31/04). Of the $325 million, $169 will settle allegations that HealthSouth submitted improper reimbursement claims to the government for outpatient physical therapy services. In addition, $89 million will resolve claims that the company sought improper reimbursement from Medicare for "lavish entertainment" and travel costs for administrators at an annual meeting in Florida, according to DOJ. Plaintiffs in the case will receive a combined $4.2 million in payments under the federal whistle-blower law, with Devage receiving an additional $8.2 million. (AP/Wall Street Journal, 12/31/04)
HealthSouth Settles Fraud Case Over Medicare Billings With Department of Justice for $325 Million Kaiser Daily Health Policy Report January 03, 2005

The settlement values the accounting fraud claims at $65 million. It says HealthSouth paid bonuses to executives pegged to fraudulent accounting, inflated the value of assets by $1.1 billion and sought improper reimbursement for airplane expenses.

The settlement also includes $89 million to resolve claims HealthSouth submitted to Medicare unallowable costs, including "lavish entertainment and certain travel costs for HealthSouth's annual administrators' meeting at Disney World," the Justice Department said in a Dec. 30 press release.
Tenacity exposes company fraud Pittsburgh Tribune Review (BloombergNews) January 27, 2005

 In signing the civil settlement, HealthSouth's new management admitted no wrongdoing and agreed to a five-year program of reforms in a "corporate integrity agreement." The company will repay the U.S. government over three years.
Whistleblower stands to collect $8 million : HealthSouth to settle Medicare fraud charges The Houston Chronicle January 26, 2005

to contents

Whistleblower James DeVage

There were several whistleblowers but the most important of these was James DeVage. It is typical of regulatory failure that his complaints to Medicare authorities were ignored. The story of fraud exposure in health care is the story of multiple decent citizens who saw something which they felt was unacceptable happening and who found authorities disinterested - even discouraging. They were prepared to take on the burden of doing something about it themselves. DeVage, who suffered no personal loss from the fraud is a classic example. He received US$8.1 million for his efforts and became "whistle blower of the year".

The 83-year old former HealthSouth patient, and veteran of three wars, was astounded to receive a copy of his physical therapy bill and find Medicare was being billed for services that had not been delivered. Mr. DeVage called HealthSouth to complain to no avail, and then called Medicare, also to no avail. Later, while talking with a friend, Mr. DeVage learned about the False Claims Act.
For his extraordinary efforts to squeeze fraud out of the U.S. health care system, Taxpayers Against Fraud is awarding Mr. DeVage its first "Whistleblower of the Year" award."
When we reviewed all of the cases that were settled this year -- nearly 100 -- it was Mr. DeVage's that stood out, not only because of its size, but also because of the fact that Mr. DeVage was a patient. He was not a company insider with access to insider information, but a consumer who was willing to take action in pursuit of fiscal integrity from a giant company. Truly, this is a David and Goliath story."
Taxpayer Group Awards Whistleblower of The Year & False Claims Act Lawyer of the Year Taxpayers Against Fraud Education Fund <> November 2, 2005

None of the money came out of DeVage's pocket, because Medicare paid 80 percent of those costs and his supplemental insurance covered the rest. Still, he complained to both the company and Medicare. He had no success.
Whistleblowers in Florida, Alabama and New York sued later, making similar claims and alleging that unlicensed providers treated HealthSouth patients.
Tenacity exposes company fraud Pittsburgh Tribune Review (BloombergNews) January 27, 2005

On April 10, 2003, the DOJ's civil division notified us that it was expanding its investigation (which began with the lawsuit United States ex rel. Devage v. HealthSouth Corp., et al., C.A. No. SA-98-EA-0372-FV, filed in the United States District Court for the Western District of Texas, as discussed in Item 1) into allegations of fraud associated with Medicare cost reports submitted by us for fiscal years 1995 through 2002. We subsequently received subpoenas from the Office of Inspector General (the "OIG") of the United States Department of Health and Human Services and requests from the DOJ's civil division for documents and other information regarding this investigation. As described in Item 1, "Medicare Program Settlement," on December 30, 2004, we announced that we had entered into a global settlement agreement with the DOJ's civil division and other parties to resolve the primary claims made in the Devage litigation, although the DOJ's civil division continues to review certain self-disclosures made by us to the OIG.
HealthSouth form 10-K filing with the SEC June 27, 2005

Two other whistleblower law suits are documented in HealthSouth's reports to the SEC but there may be more.

The False Claims Act, 18 U.S.C. § 287, allows private citizens, called "relators," to institute civil proceedings alleging violations of the False Claims Act. These so-called qui tam, or "whistleblower," cases are sealed by the court at the time of filing. The only parties privy to the information contained in the complaint are the relator, the federal government, and the presiding court. We recently settled one qui tam lawsuit, Devage, which is discussed in Item 1. We are aware of two other qui tam lawsuits, Mathews and Colbert, which are discussed below. It is possible that additional qui tam lawsuits have been filed against us and that we are unaware of such filings or have been ordered by the presiding court not to discuss or disclose the filing of such lawsuits. Thus, we may be subject to liability exposure under one or more undisclosed qui tam cases brought pursuant to the False Claims Act.

On April 1, 1999, a plaintiff relator filed a lawsuit captioned United States ex rel. Mathews v. Alexandria Rehabilitation Hospital, CV-99-0604, in the United States District Court for the Western District of Louisiana. On February 29, 2000, the United States elected not to intervene in the lawsuit. The complaint alleged, among other things, that we filed fraudulent reimbursement claims under the Medicare program on a nationwide basis.
On January 30, 2001, a plaintiff relator filed a lawsuit captioned United States ex rel. Colbert v. Blue Cross and Blue Shield of Alabama and HealthSouth Corp., CV-01-C-0292-S, in the United States District Court for the Northern District of Alabama. The lawsuit, in which the United States did not intervene, alleged, among other things, that we conspired with Blue Cross and Blue Shield of Alabama ("Blue Cross") to hinder Blue Cross' investigative functions in administering the Medicare program by having Blue Cross terminate, on a pretextual basis, the relator's employment with Blue Cross. The complaint also claimed that we conspired with Blue Cross to (1) violate the whistleblower retaliation provision of the False Claims Act by having Blue Cross terminate the relator's employment and (2) have certain unidentified false claims allowed or paid by Blue Cross under the Medicare program. The parties filed a joint stipulation of dismissal with prejudice and the case has been dismissed.
HealthSouth form 10-K filing with the SEC June 27, 2005

 to contents

The company's position

An interesting insight into the company's thinking and behaviour is revealed in the continued insistence that its billing for group therapy as individual was legal and acceptable. This had been the subject of fraud investigations and penalties during the psychiatric scandal of the late 1980's, and during the aged care crisis of the late 1990's.

For 5 years HealthSouth had been fighting a whistle blower Qui Tam law suit claiming it had done this. There can be no reasonable grounds for HealthSouth's continued claim that it believed this was legal. It may have been an efficient use of time and resources but it was not legal to charge for it, and it was likely to compromise care. The reports suggest that they may have been deliberately blind to this as their income stream depended on it.

Top executives at HealthSouth Corp. say the company had a hint of potential problems involving some of its Medicare billings in June, about two months before HealthSouth disclosed that changes in billing practices could lead to a potential earnings shortfall of $175 million.
The May 17 transmittal clarified billing rules for group therapy services, saying physical therapists must bill Medicare at a lower, "group" therapy rate, rather than the higher individual rate, if two or more patients receive services at the same time even if the patients are performing different exercises or activities. That severely limited HealthSouth's common use of "concurrent" therapy, in which therapists move between several patients who are in the same room though they may have different diagnoses.
A CMS spokeswoman has said the transmittal was merely a "clarification" of existing policy, not a change in policy.
On Aug. 15, Mr. Owens flew with two other HealthSouth executives to Washington, where CMS made it clear that Medicare's billing policy applied to all the company's outpatient services, including those provided at its rehabilitation hospitals, where as many as 70% of patients have Medicare coverage. That meant the impact would be substantial.
HealthSouth Executives Had Inkling of Problems Wall Street Journal - Sept 5, 2002

to contents

Manipulation of Medicare reimbursements

A more unique form of Medicare fraud emerged when the accounting scandal was exposed. Companies are entitled to make claims on Medicare for some of the capital costs in setting up facilities when those facilities are used to treat Medicare patients. By overstating its profits and assets the company was able to make far larger claims for payment than it was entitled to. This is similar to one of the major frauds for which Columbia/HCA paid a US $1.7 billion fraud settlement.

Federal officials are investigating whether executives at HealthSouth used the illegal accounting scheme that has rocked the company as a means of cheating Medicare out of tens of millions of dollars or more, people involved in the case said today.

The investigation of possible manipulation of Medicare reimbursements is a new front in the inquiry into the accounting scandal at HealthSouth, which was set in motion last week when a company executive admitted to participating for years in the scheme with HealthSouth's top officers. Ultimately, it has the potential of transforming the case from a fairly routine accounting scandal into an unparalleled fraud, with bogus revenue leading to the creation of fake assets that were then transformed into additional revenue.
The possible interplay between the accounting scheme and a Medicare fraud is a result of rules that govern reimbursements from federal health care programs. Indeed, people involved in the case said, the accounting fraud was structured in a way that would have potentially allowed HealthSouth to obtain a significant reimbursement benefit from the scheme.
According to court documents, HealthSouth falsified revenue items involving payments it receives from insurers. Afterward, it created a corresponding entry on its balance sheets, mostly by adding to its accounts for property, plants and equipment. Some of those additions were then allocated to company hospitals and other health care facilities, according to court records and people involved in the case. - - - - - - - In effect, the hospitals and health care facilities may have converted suspect assets into increased Medicare reimbursements - unless they specifically removed the expenses associated with the assets from their filings with the government.
As a result, the manipulation of the contractual adjustments resulted in huge - and artificial - increases in the company's assets, according to court documents. - - - - Those adjustments most frequently found their way into what is known as the property, plant and equipment account - an asset account that is known among cost-reporting experts as something of a financial honey pot. - - - - - of the $1.5 billion in artificial assets listed on the company's balance sheet as a result of the accounting fraud, at least $1 billion of them found their way into the property, plant and equipment account, according to court documents.

Looking for Medicare Fraud at HealthSouth New York Times March 28, 2003

 to contents

Clinicians who refused to participate in fraud were fired

There are examples in the early NME scandal, in the later Tenet scandal and in the Columbia/HCA scandal of clinicians and administrators who claim that they were fired for refusing to place corporate financial interests ahead of care and for refusing to participate in fraud. A HealthSouth medical director made similar allegations and her case was settled after a massive jury award which was appealed. The final sum is not revealed.

Helen Schilling was fired in 2000 after working for 10 years as the medical director at 79-bed HealthSouth Houston Rehabilitation Institute, according to her attorney, Tommy Fibich. Hospital administrators began pressuring physicians to increase their patient census after HealthSouth purchased the hospital in 1998, Fibich said. Schilling was terminated in June of 2000 after refusing to increase her personal patient census to an average of 20, he said.
More accusations surface against HealthSouth Modern Healthcare's Daily Dose Sept. 10, 2003

In a civil lawsuit asserting wrongful dismissal, the former medical director, Dr. Helen Schilling, said HealthSouth fired her after she did not follow orders to admit patients who did not meet Medicare criteria.

A jury in a district court in Montgomery County, Tex., voted 10 to 2 late Monday to require HealthSouth to pay Dr. Schilling $400,000 for lost pay, $65,000 for mental anguish and $1.05 million in punitive damages.

Dr. Schilling said in the suit that she was fired as medical director after HealthSouth executives admonished her for failing to keep 20 beds filled in the company's 79-bed Houston Rehabilitation Institute.
Carol Adolph, a former director of nursing at the hospital, said in a deposition supporting Dr. Schilling that she had quit after the staff was asked to admit ineligible patients. ''We had psychiatric patients,'' Ms. Adolph said, ''who were clearly catatonic and belonged in a psychiatric facility, not a rehab facility, but we had a bed available and we were encouraged to take them.''
Troubled HealthSouth Faces Medicare Fraud Investigation New York Times September 11, 2003

On April 5, 2001, Helen M. Schilling, one of our former medical directors, filed a lawsuit captioned Helen M. Schilling, M.D. v. North Houston Rehabilitation Associates d/b/a HealthSouth Houston Rehabilitation Institute, Romano Rehabilitation Hospital, Inc. and Anne Leon, Cause No. 01-04-02243-CV, in the 410th Judicial District Court of Montgomery County, Texas. The plaintiff claimed, among other things, that we wrongfully terminated her medical director agreement. On November 5, 2003, after a jury trial, the court entered a final judgment awarding the plaintiff $465,000 in compensatory damages and $865,000 in exemplary damages. We appealed the judgment and settled the case while on appeal in 2005.
HEALTHSOUTH CORP Form:10-K Filing with Security and Exchange Commission (SEC) June 27, 2005

to contents

Stretching the limits in Rode Island

While not Medicare fraud the company's willingness to get away with whatever it can is illustrated by its move into Rode Island when it acquired facilities from Horizon/CMS and Columbia/HCA. Rode islands restrictions on for profit ownership of hospitals enacted when Columbia/HCA sought to buy a hospital there was widely known and reported in the press. HealthSouth could not have been unaware of them but chose to ignore them. It then denied the allegations and also claimed ignorance.

State officials are questioning whether one of the country's big for-profit health companies has been ignoring Rhode Island's tough laws regulating ownership of medical facilities.
The department has asked whether HealthSouth has taken over a part interest in the hospital - half of which is controlled by Landmark Medical Center of Woonsocket - without complying with a 1997 law governing hospital ownership.

Similarly, the department is asking whether HealthSouth has taken over two outpatient surgical centers in Providence and Pawtucket without seeking state approval.
But HealthSouth denies it is flouting the state's rules in either case.
Underlying the dispute is the state's ability to enforce a strict - and sometimes controversial - set of laws that has given Rhode Island a reputation as a closely regulated place for hospitals and others to do business.
(HealthSouth spokesperson) said. "- - - - Rhode Island regulations are very different from those in the other 49 states, and that probably caught HealthSouth off guard. But it adapted and has cooperated with the Department of Health."
MONEY & MEDICINE State probes purchase of hospital share; The Providence Journal-Bulletin March 6, 1999

Top of page

Web Page History
This page created July 2003 by
Michael Wynne
Revised and Updated October 2007