Odyssey healthcare: a department of justice investigation related to the false claims act.

Newbold, John ; Sullivan, Laura

CASE DESCRIPTION

The primary subject matter of this case is the application of the False Claims Act by the Department of Justice to investigate the recruitment and patient care policies of a for-profit hospice: Odyssey Healthcare. The case provides examples of the types of marketing and management practices which could fall under the purview of the False Claims Act. Secondarily, the case gives instruction as to management practices which would help firms establish and maintain ethical and legally-compliant corporations.

This case has a difficulty level of" two" or" three", and is appropriate for undergraduate students who are being introduced to the topics of business ethics and/or business law. Through its focus on the hospice industry, the case provides a poignant backdrop for the need for ethical business behaviors. The case describes the basics of the Odyssey Healthcare business model, with an emphasis on the types of marketing and management practices which drive hospice businesses in the United States. It culminates with the investigation of the Department of Justice and sets up a beneficial discussion of why False Claims Act investigations are initiated and the specific types of corporate behaviors which are sometimes scrutinized. Finally, the case gives some instruction on the manner in which ethical and legally-compliant corporations can be established and maintained.

The case is designed to be taught in three class hours, with roughly one hour spent on understanding the hospice industry and Odyssey Healthcare, one hour spent on the specifics of the False claims Act. The final hour would be dedicated to the discussion of how to establish and maintain an ethical corporate culture and compliant operations. It is expected to take two hours of preparation by students.

CASE SYNOPSIS

Richard Burnham had major legal and public relations issues on his hands. He had stepped down as CEO of his for-profit hospice firm, Odyssey Healthcare, less than a year previously, in January of 2004. His cofounder, David Gasmire, had assumed his responsibilities, while he stayed on as Chairman of Odyssey's Board of Directors. Now, less than a year later, a Department of Justice investigation was threatening the viability of his company.

In October of 2004, Odyssey Healthcare senior management informed investors and analysts that the firm was under investigation by the Department of Justice for violations of the False Claims Act, with respect to the company's practices for patient admissions, patient retention and billing practices. Immediate action was required. The first thing Burnham needed to do was find out what had given rise to the DOJ investigation. Even if some "rogue" employees had disregarded the firm's Code of Ethics and engaged in illegal activities, could his firm really be held responsible for these actions? Going forward, what steps should the company take to create a more ethical corporate culture and maintain more compliant operations in order to avoid future investigations from the Department of Justice?

INTRODUCTION

Richard Burnham had major legal and public relations issues on his hands. He had stepped down as CEO of his for-profit hospice firm, Odyssey Healthcare, less than a year previously, in January of 2004. His cofounder, David Gasmire, had assumed his responsibilities, while he stayed on as Chairman of Odyssey's Board of Directors. Now, less than a year later, a Department of Justice investigation was threatening the viability of his company.

Founded in 1995, Odyssey Healthcare had enjoyed tremendous growth for nearly 10 years. Odyssey had grown its base of business through organic growth, acquisitions and newly constructed operations to become one of the largest for-profit hospice organizations in the United States. The number of Odyssey hospices had more than doubled from 2001--2003, from 30 to 74. However, as Burnham and Gasmire navigated into 2004, Odyssey began to experience some problems.

In February 2004, Odyssey released its earnings for the fourth quarter of 2003. While the numbers for 2003 came in on target, Odyssey management advised investors that their earnings estimates for fiscal year 2004 were being lowered due to operational issues. Based upon this news, the stock price dropped 26% in a single day (Yu, 2004).

In April, 2004, Barron's, a widely-read financial newspaper, wrote an unflattering article about Odyssey which strongly hinted at Odyssey engaging in less than ethical practices related to patient admissions, patient care and patient discharges (Ward, 2004).

Six months after the Barron's article, at the quarterly earnings announcement on Oct 18, 2004, Odyssey again announced that earnings would be below expectations. But this was just the beginning of the bad news. Chairman David Burnham informed investors and analysts that the firm was under investigation by the Department of Justice for violations of the False Claims Act, with respect to the company's practices for patient admissions, patient retention and billing practices. Finally, Burnham announced that CEO David Gasmire had left the company, and that Burnham would be assuming the role of CEO in addition to his role as Chairman.

Immediate action was required. The first thing Burnham needed to do was find out what had given rise to the DOJ investigation. Even if some "rogue" employees had disregarded the firm's Code of Ethics and engaged in illegal activities, could his firm really be held responsible for these actions? Going forward, what steps should the company take to create a more ethical corporate culture and maintain more compliant operations in order to avoid future investigations from the Department of Justice?

THE HOSPICE INDUSTRY

Hospice Care

Hospice care is defined by the Hospice Association of America as:

"... comprehensive, palliative medical care (treatment to provide for the reduction or abatement of pain and other troubling symptoms, rather than treatment aimed at cure) and supportive social, emotional, and spiritual services to the terminally ill and their families, primarily in the patient's home. The hospice interdisciplinary team, composed of professionals and volunteers, coordinates an individualized plan of care for each patient and family." (Hospice Association of America website, 2005)

The palliative (pain reducing) care provided by hospices differs from curative care which is traditionally provided by hospitals in the sense that it is directed at making the patient more comfortable and improving the quality of life, rather than curing the patient of the ailment. A broad range of services, from traditional nursing care to respite care for family caregivers to bereavement services for family members is traditionally offered.

The Institution of the Medicare Hospice Benefit Spurs Industry Growth

In 2003, the hospice industry in the US was a relatively small and fragmented component of the overall healthcare industry, generating aggregate annual revenues of about $4.5 billion. Spending on hospice services amounted to less than one half of one percent of the $1.4 trillion in annual US healthcare spending. Further, hospice spending accounted for only 1.5% of annual Medicare spending (Shattuck Hammond Partners, 2004).

In 1982, Congress enacted the Medicare Hospice Benefit on a provisional basis. In 1986, the provisional law was made permanent. Each state was given the option of including hospice care in their Medicaid program. In addition, hospice care was made available to terminally ill patients in nursing homes. A significant jump in usage of hospices occurred at this time. Yet the number of hospice patients was growing exponentially to over one million patients, as is shown in Figure 1.

[FIGURE 1 OMITTED]

In 1996, the federal government initiated a program ("Operation Restore Trust") focused on preventing Medicare fraud across all provider groups. This increased level of regulatory scrutiny, while probably needed, likely inhibited referrals of patients and reduced average and median lengths of stay industry-wide. The Balanced Budget Act of 1997 further negatively impacted reimbursement rates, dampening the growth rate of hospice sites. This is shown in Figure 2.

[FIGURE 2 OMITTED]

Factors Driving the Increasing Acceptance of Hospice Care Services

In 2004, there were several factors driving growth in the hospice industry. Foremost was the overall aging trend in the US and the increasing size of the over 65 population. In addition, there was an increasing role of advocacy groups in promoting hospice care over other end-of-life alternatives. Finally, The Center for Medicare and Medicaid Services (CMS) appeared to be promoting hospice care through its liberal policies for reimbursement. The CMS's favorable treatment of hospice care in their reimbursement policies was thought to be at least in part because hospice is viewed as a lower cost alternative to traditional, hospital-based end-of-life care.

Trends in Medicare-Certified Hospice Operations

Traditionally, the hospice industry had been comprised of non-profit operations with an average of less than 50 patients at any given site at any given time. In 2004, 63 % of all hospices were non-profit, with for-profit operations comprising 31%. However, as Figure 3 shows, the trend had been toward growth in the for-profit area.

[FIGURE 3 OMITTED]

At year-end 2003, 48% of hospices were free-standing entities, with 30% being affiliated with hospitals and another 22% affiliated with a home health agency or a nursing facility. The trend had been away from free-standing toward affiliation (NHPCO, 2005). The strategic rationale for a hospice to be a part of an integrated healthcare system was threefold. First, hospice was a critical and growing piece of the healthcare continuum and enabled acute care providers to offer patients an alternative to traditional end-of-life care. Second, hospice programs could act as a strong link to the community, given the large number of volunteers and the high level of emotional attachment to patients. Finally, affiliated hospices offered "hard-wired" opportunities to transfer patients from high-cost acute care situations to the relatively lower-cost hospice environment, thereby enhancing the financial performance of both entities.

ODYSSEY HEALTHCARE

Background

Odyssey was founded by Richard Burnham and David Gasmire, both former employees of another large, publicly held hospice organization--Vitas Healthcare. Burnham was a former regional manager for Vitas and Gasmire a former hospice site manager. With headquarters in Dallas, Texas, Odyssey Healthcare, Incorporated operated 74 hospice care facilities in 30 states and employed over 4,000 healthcare workers in 2004. However, roughly half of those operations were located in California, Texas and Arizona. With an average daily census of 7700, they were the second largest hospice organization in the United States.

Odyssey's Business Strategies

Odyssey Healthcare's business strategies revolved around the following three imperatives: 1) Rapid expansion into new geographies with the ultimate objective to establish a broad geographic footprint, 2) A focus on marketing directed at increasing the admissions rate and average daily census, including the extensive training of their marketing, sales and operations personnel, and 3) Strict cost control and attention to the bottom line.

Rapid Expansion into New Geographies

In organizing for rapid growth, Odyssey established eight regional territories. Each territory was headed by a Regional Vice President, who, in turn, managed teams of District Managers. At headquarters, Odyssey maintained a dedicated acquisitions team, as well as a dedicated expansion/startup team for newly established operations. Having extensive coverage in a particular geography aids large for-profit hospices in receiving referrals from similarly broad-based health care providers. National and regional nursing home and assisted living communities often seek the administrative and service consistency benefits resulting from working with a limited number of broad-based hospice service providers.

Increasing Scale and Geographic Breadth

The hospice business model is also highly sensitive to scale. Once the average daily census breakeven point was reached (between 30--40 patients per month), operating margins in the 10% range were achievable and increased as the census rose.

Hospice providers who achieved significant scale were able to negotiate volume discounts on the purchase of pharmaceuticals, durable medical equipment and medical supplies. In addition, they were in a better position to enter into favorable contracts with private insurers HMOs and pharmacy benefit managers. Finally, large hospice operations were able to spread certain fixed costs (corporate overhead, IT infrastructure, and marketing spending) over a large patient population.

Controlling Operating Costs

In 2003-2004, Odyssey struggled to adequately control their pharmaceutical costs. In many locations, they were paying local rates. In 2004, Odyssey completed an extensive project whereby a national formulary plan and an electronic drug adjudication system was implemented. This system provided better visibility and control over the drug side of the business. Odyssey also completed a switch-over to a new internal management IT infrastructure. The new software and hardware system, obtained from the McKesson healthcare consulting firm, and dubbed the "Horizon" system, was intended to improve the clinical and billing systems. It provided management at Odyssey better real-time visibility into the day-to-day operations of the firm, such as drug usage rate, patient length of stay and Medicare Cap accrual issues. Perhaps more importantly, the system helped to prevent errors in claim preparation, thereby avoiding lengthy delays in Medicare reimbursements.

Odyssey's Marketing Strategies

Products/Services Strategy

In order to be certified by Medicare, marketers of hospice services were required to offer specific core and non-core services. However, marketers at certain for-profit hospices recognized the value of differentiating their services to appeal to certain types of referrers. Hospices were beginning to differentiate themselves by specializing in services for specific diagnoses. For example, some facilities began to invest in the durable medical equipment necessary to care for cancer patients with acute symptoms and a need for continuous care.

The Impact of Fixed Pricing on Odyssey's Target Market Strategy

With over 90% of their revenues obtained from Medicare and Medicaid, all hospice operators worked under a fixed pricing system. Thus, the revenue function for a hospice operator was linear--a fixed per diem payment over time. The cost function, however, was not linear. The cost of a marginal day of care was relatively high at the onset of care, when there were initial costs of learning about the patient's background, and when the hospice developed a plan for facilitating the move to a hospice environment. Similarly, costs were relatively high in the days immediately prior to death. Between the high costs at the start and at the end of the period of care, costs were lower (Huskamp, et. al., 2001). This pattern of cost was the same regardless of diagnosis. The important implication of the linear revenue function and the U-shaped cost function is this: Longer lengths of stay would yield higher profits. Further, a patient's diagnosis served as a predictor of length of stay: Cancer patients tended to be referred late and have relatively short stays. In contrast, non-cancer patients tended to have longer lengths of stay. For these reasons, there had been a natural tendency of for-profit hospices to target non-cancer patients for admissions.

Managing Patient Length of Stay

Patient length of stay appeared to have the most impact on net patient revenue. For each patient, if length of stay was only a few days, the high costs were spread over fewer days of care, which increased patient care expenses as a percentage of net patient revenue. Consequently, profitability was negatively impacted. Clearly, the ideal scenario for a for-profit hospice was to have each patient stay as long as possible so that the patient care expenses were spread over more days, positively impacting profitability. Thus, Odyssey was faced with a challenge of managing the type and number of their patients in an environment where they were expected to take on all types of cases.

Driving Admissions Growth through Personal Selling

By May 2004, Odyssey had added 17 new hospice sites in just the past 12 months. To assist in ramping up the patient counts in these nascent programs, Odyssey dedicated an increasing share of its operational budget to establish personal selling teams to call on the various referring entities. In some cases, the teams specialized by type of client, such as nursing homes and cancer centers. These referral representatives were referred to as "Community Education Reps" or CERS. In 2004, Odyssey employed more than 200 CERs. They had over 70 hospice sites, with the number of CERs per site fluctuating between 2 and 6 depending on the market conditions of each individual site. Compensation plans were geared around numbers of referrals and types of patients obtained. In January 2004, the compensation plan was modified. Base salaries were set slightly higher than market (i.e., other hospices in each area). Bonuses were established to be awarded after each quarter based upon growth over the previous quarter.

AN UNFAVORABLE TURN OF EVENTS

An Earnings Miss

In February of 2004, Odyssey released its earnings for the fiscal fourth quarter of 2003. While the numbers for 2003 came in on target, Odyssey management advised investors that their earnings estimates for the fiscal year 2004 were being lowered. The primary drivers of Odyssey's reduced profit outlook included:1) higher than anticipated costs in the form of newly acquired hospices, 2) greater pharmacy and salary expenses, and 3) greater than anticipated costs in the form of Medicare cap accruals (give-backs to Medicare, their primary source of revenues). It appeared that the prodigious growth rate of the company had finally outstripped its management's ability to effectively control operations. The market was caught off guard by this negative announcement from the industry high-flier. The stock price lost over a quarter of its value in a single day. (Yu, 2004).

Unfavorable Publicity: The Barron's Article

The last thing Odyssey needed on the heels of their February 2004 earnings announcement was to have an unfavorable article come out in a prominent business newspaper. Yet on April 12, 2004, Barron's featured an article by reporter Sandra Ward entitled: "Troubling Odyssey, Questions Arise About Hospice Company's Patient Care, Level of Medicare Payments". The article discussed the operational problems associated with Odyssey's tremendous recent growth. In addition, the article intimated that Odyssey may have been engaging in less-than-ethical marketing practices. Consider the excerpt below:

"There are also suggestions that some of Odyssey's strong growth is the result of providing a level of care and services below the standards set forth under government guidelines, including providing adequate bereavement services for patients' families. A son tells Barron's of Odyssey's ignoring calls from a nursing home as the staff sought the assistance of the hospice firm with which he'd contracted. Some former nurses and marketing representatives tell Barron's of patients being kicked out of Odyssey programs after 90 days upon being 'reevaluated' or because they required hospital care. Former staffers complain about lack of access to supplies, and caseloads that are heavier than industry norms. The company's CEO, David Gasmire, says Odyssey follows all federal guidelines."

The article went on to imply that Odyssey may have been skirting Medicare requirements for admission into hospice care:

"In a business almost entirely dependent upon Medicare for reimbursement for revenues, adherence to guidelines is crucial. People familiar with the Medicare system say that exceeding the reimbursement cap is very unusual and is considered a serious breach of accepted practice by the Centers for Medicare and Medicaid Services, as well as by the insurance intermediaries who handle Medicare claims. Such breaches raise red flags about admittance procedures and the possibility that ineligible patients are being accepted into hospice programs, which are supposed to admit only those whom doctors believe have no more than six months to live."

Toward the end of the article, the author highlighted the tension caused by the incursion of for-profit firms in a traditionally non-profit industry:

"In a business expanding as fast as the hospice industry and at a company expanding as quickly as Odyssey, growing pains are to be expected. Nonetheless, there is mounting concern within the industry that the quest to show profit growth and stock price gains can sometimes conflict sharply with the needs of dying patients and their families. Nonprofit hospices increasingly complain that they are shouldering a heavier burden than the for-profits--caring for a higher proportion of expensive-to-care-for patients and providing services that should be available at all hospices.

Says Dorothy Deremo, president and chief executive of Detroit-based Hospice of Michigan: 'For-profit organizations in health care have a different social contract: to deliver a return on investment and improve the equity of their stockholders. The social contract for the not-for-profit is.... to return value to our shareholders who are the patients, the families, and the community-at-large'".

Despite the intimations of the Barron's article, at the time of its publication, Odyssey was not under investigation by the U.S. Department of Health and Human Services' Inspector General's Office, the watchdog agency for the Centers for Medicare and Medicaid Services.

Odyssey's Operational Failure

Odyssey faced several significant organizational failures. Like many organizations that have faced rapid growth and the corresponding growing pains, Odyssey had focused its priority on growth. Odyssey's corporate documentation and training requirements had become secondary to the requirements of simply maintaining the day-to-day growth of the business. Unfortunately, this is a familiar story for many companies whose growth occurs rapidly and usually through acquisition. Odyssey had policies and procedures in place, but there was insufficient oversight to ensure that the established policies and procedures were followed.

In addition, during a period of rapid growth, many companies let training and employee development fall to the wayside. Odyssey was no exception. The lack of training and employee development was a major contributing factor to Odyssey's dilemma. Odyssey was growing exponentially, and due to resource limitations did not take the time to properly train or develop its employees.

Odyssey operates its business in a highly regulated industry. Record retention and internal reviews are an integral part of operating within government regulations. Odyssey was not aligned with the proper government agencies. In heavily regulated industries, companies often want to report errors immediately to the regulating agencies. The reason is simple: If the company reports the error, it illustrates to the regulatory agency that the company has control over its processes and regulatory requirements. Usually, in this scenario, the regulatory agency shows leniency on the reporting company.

THE DEPARTMENT OF JUSTICE INVESTIGATION

Odyssey Receives Notice

In late September of 2004, Odyssey Healthcare received a one-page letter from the Department of Justice informing them that they were looking into Odyssey's patient certification (admissions), patient referral, coordination of benefits, and billing practices, as well as for claims for payment submitted to Medicare dating from January 1, 2001. At that time, the qui tam complaints were sealed and Odyssey had little information about the specifics of the complaint. Despite the lack of specifics, Odyssey made the announcement of the DOJ investigation at its earning announcement on October 18, 2004. They did not wish to speculate on the impact of the investigation on Odyssey's future operations or financial results

The False Claims Act and Qui Tam (Whistleblower) Provisions

Medical fraud is an increasing problem in the United States today. Medical fraud or abuse approaches 10% of all health care expenditures, or roughly $100 billion dollars. To combat this increasing problem, the Justice Department has used the False Claims Act as their primary tool. However, the federal government cannot hope to uncover all instances of fraud without the help of the common citizens. In order to promote the participation of private citizens in its battle on fraud, the government gives them the standing to file civil suit on the federal government's behalf by the FCA's qui tam, or whistleblower's provisions.

Qui tam is short for "qui tam pro domino rege quam pro se ipso in hac part sequitur", which is Latin for "he who brings the action for the king as well as himself". When a private citizen files a qui tam case, it is submitted as a "sealed document" (that is, not to be seen by anyone but the claimant and the government) to the Department of Justice, who studies the case and decides if it will take up the case for further investigation. The government has up to 120 days from the time they receive the sealed complaint to decide whether or not to intervene. If the government decides to intervene, it literally takes over the case from the claimant, who essentially loses all control over the proceedings. However, the claimant still stands to be rewarded between 15% and 25% of the total amount recovered by the government, as well as attorney's fees and expenses. This type of reward provides additional incentive for ordinary citizens to "blow the whistle" when they see a firm engaging in fraudulent activity. If the Department of Justice does not choose to intervene, the private citizen can still move ahead on their own to investigate the case.

The False Claims Act covers virtually all forms of fraudulent behavior except tax fraud. The Act prohibits:

* Knowingly presenting, or causing to be presented to the Government a false claim for payment;

* Knowingly making, using, or causing to be made or used, a false record or statement to get a false claim paid or approved by the government;

* Conspiring to defraud the government by getting a false claim allowed or paid;

* Falsely certifying the type or amount of property to be used by the Government;

* Certifying receipt of property on a document without completely knowing that the information is true

* Knowingly buying government property from an unauthorized officer of the Government; and

* Knowingly making, using, or causing to be made or used a false record to avoid, or decrease an obligation to pay or transmit property to the Government.

The False Claims Act can be applied to a broad variety of situations. Subcategories of medical fraud that are pertinent to hospice care include:

* Double-billing,

* Use of untrained personnel to provide services,

* Forgery of physicians' signatures,

* Kickbacks for referrals and other activities,

* Services provided without the medical necessity,

* Fraudulent cost reports, and

* Inadequate care

(False Claims Act, 1986)

Odyssey's Response

In October of 2004, it was hard to imagine things being much worse for the management team at Odyssey Healthcare. The firm was rife with problems ranging from negative publicity to federal investigations. This list does not even include the significant challenges of effectively operating a rapidly growing business. Some of the more significant questions they faced included:

What circumstances have led to this DOJ investigation?

Why would the Department of Justice send a letter to Odyssey with such little information regarding the offense?

What types of misconduct would come under the purview of the False Claims Act?

If the investigation turned up some form of misconduct, can Odyssey be held responsible for the behavior of a few rogue employees?

What, if anything, could Odyssey do to promote a corporate culture where the ethical issues were better balanced with its business objectives?

What business measures should Odyssey take to avoid this type of investigation?

What types of specific operational practices under the following categories should Odyssey put in place to avoid any further investigation by the United States Department of Justice?

a. training

b. written standards or policies

c. disclosure program

d. internal compliance audits

REFERENCES

False Claims Act. (Amended 1986). Hospice Association of America (2005). Website, March 2005.

Huskamp HA, Buntin MB, Wang V, Newhouse JP (2001). Providing Care at the End of Life: Do Medicare Rules Impede Good Care? Health Affairs, 20:204-211.

National Hospice and Palliative Care Organization (NHPCO) Report (2005). Hospice Facts and Figures.

Shattuck Hammond Partners (2004. The US Healthcare Industry: Focus on the Hospice and Palliative Care Industry. Summer 2004.

Ward, Sandra (2004). Troubling Odyssey. Barron's. April 12, 2004, p. 20--22.

Yu, Roger (2004). Inquiry Targets Hospice Operator Odyssey Healthcare, Inc.. The Dallas Morning News. October 19, 2004.

John Newbold, Sam Houston State University

Laura Sullivan, Sam Houston State University