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Excerpts from Reddy’s presentation to Texas doctors

On Jan. 2, Knapp Medical Center in Weslaco, Texas, was bought by a nonprofit foundation associated with Prime Healthcare Services, a fast-growing California-based hospital chain that is under federal investigation for aggressive Medicare billings.

Soon after, Dr. Prem Reddy, Prime’s founder and CEO and the foundation’s president, instructed Knapp’s doctors on how to boost their Medicare payouts using the same controversial strategies that have made his company the target of federal scrutiny.

According to an hour-long recording of his presentation, Reddy encouraged the doctors to augment their patients’ charts with multiple secondary diagnoses for what he called “comorbid conditions.” Medicare pays hefty treatment bonuses worth thousands of dollars per case for treating patients who suffer from specified “major complications and comorbidities,” federal records show.

Reddy also urged the doctors to find reasons to admit Medicare patients to the hospital rather than treating them as outpatients, saying the Medicare payouts would triple.

More than two years ago, two California congressmen asked Medicare to investigate Prime, saying they suspected the chain was committing a form of Medicare fraud called “upcoding,” or exaggerated diagnoses. Millions may have been lost, the lawmakers wrote in a letter. On Jan. 2, Prime disclosed to health care regulators in Rhode Island that it is facing a U.S. Justice Department probe over its billing practices.

But Reddy denied improprieties in connection with the Medicare billings that have attracted investigators’ attention – rates for a form of blood poisoning called septicemia that were triple the national average and for a rare form of malnutrition called kwashiorkor that were nearly 70 times California’s state average.

Reddy, an Indian-born physician who has become a multimillionaire health care entrepreneur, told the Texas doctors that Medicare’s billing rules were a game “devised by bureaucrats.” Physicians need to “understand the rules of the game and improve our scores,” he said.

In a letter in response to a request for comment, Prime lawyer Anthony Glassman said Reddy’s presentation “focused on complex clinical information,” including “evolving Medicare reimbursement models for physicians and hospitals.”

“Dr. Reddy was not instructing his doctors on methods for cheating Medicare,” the lawyer wrote.

Here are excerpts, including some audio clips, of Reddy's remarks.

‘Scratching the surface’

Early on, Reddy encouraged the physicians to diagnose their patients with complications called “comorbid conditions” that qualify for thousands of dollars of Medicare bonus payments. He urged them to avoid secondary diagnoses that don’t qualify for the payout.

“I am just only scratching the surface of giving you how what you write in the charts is going to make a lot more difference going forward, both for doctors and for the hospital. …

“For example, I am a cardiologist, So I can tell (you) atrial fibrillation (an irregular heartbeat) should be a comorbid condition, but they (Medicare) removed it a few years ago, three years ago.

“But atrial flutter (an abnormal heart rhythm) is still a comorbid condition. ...

“So now knowing the rules of the game of atrial fibrillation, you now know how to document it.

“For surgeons, for example, each time you write “post op” (short for “post-operative,” a term that means following an operation), it’s a complication (for Medicare billing purposes).

“Let’s say you wrote ‘post op. fever.’ It’s a complication. If you wrote ‘fever,’ it’s not a complication. Now, (if) you wrote ‘post op. bleeding,’ it’s a complication – the word for that is ‘post hemorrhagic anemia. …’

“It’s the same thing, but how do you document is important.

“Anything ‘post op.,’ ‘post op. ileus’ (bowel obstruction) is a complication, but if you write the ileus, it’s not a complication. So remember some of these things. …

“Because that’s really important for you to understand. Because your future – and not monetarily, monetarily is only a small part – but quality-wise, your perception, your reputation in the community is dependent on it.”

‘The negative side’

Reddy blamed the Service Employees International Union, which represents many Prime workers and has butted heads with Prime over labor contracts, for persuading California Attorney General Kamala Harris to block Prime’s purchase of Victor Valley Community Hospital in San Bernardino County.

“Some circumstances which I am going to tell on the negative side of Prime Healthcare Systems. I tried to buy a not-for-profit hospital in California, but the attorney general did not give her consent.

“It’s a lady.

“Because we are in a big legal fight with the union called SEIU. Thank God you don’t have to deal with unions! SEIU is a very big union and how they do recruitment of the employees is not by going to the employees.

“They intimidate owners, whether it’s a hospital system or a system of nursing homes, so they do what is called a corporate campaign.

“In the corporate campaign, they pull out some of the (company’s health care) data and twist it and create a big sensation and have their political friends write to all kinds of agencies trying to bring focus so that the employer, the owner, gets intimidated and says, ‘OK, I’ll sign with you.’ … So you’re giving up all your hospitals to the union.”

Addressing septicemia rates

Reddy claimed his hospital chain’s high septicemia rates – triple the national average, according to an SEIU computer study – were legitimate. Two Democratic California congressmen, Rep. Henry Waxman of Los Angeles and former Rep. Fortney Stark of Fremont, had cited the septicemia rates in advocating for a probe of Prime.

“True, we have high incidence of septicemia because we diagnose septicemia. …

“Septicemia has seven criteria, but if you diagnose them early and treat them aggressively early on, you save lives.

“So for example, when we took over a hospital, a large inner city hospital in Los Angeles (an apparent reference to Centinela Hospital Medical Center in Inglewood), the mortality rate was something like 2 percent, which was not high but high enough.

“And after we’re done three years later … the mortality rate for septicemia is minus 28 percent.

“That means you could kill 28 more patients, and you would be normal.

“I’m not saying that – I’m just trying to make fun of that.

“So you could bring it (septicemia) down substantially by properly diagnosing and treating early.

“So, however, the union story says either the hospitals are inundated with bugs that are resistant to antibiotics …

“Or they will say we are committing Medicare fraud by diagnosing septicemia where there is no septicemia, so naturally, we get investigated by hundreds of agencies.”

‘Bad rumors’

California Watch reported that a Prime hospital in Redding had billed Medicare for treating extremely high rates of a form of malnutrition called kwashiorkor, which is usually seen in developing nations. The hospital ceased the practice after the story was published in 2011. Reddy said the diagnosis was required by Medicare billing software.

“So, similarly, they publish about having unusual nutrition condition called Kwashiorkor.

“None of our doctors really wrote Kwashiorkor in the charts. … The doctors would write protein deficiency, but protein deficiency will be coded if you go thru 3M (billing software) as Kwashiorkor.

“So it’s medically allowed … so we never (have) been sanctioned, we never had any negative from the agencies. But there’s a publication out there, we diagnose with Kwashiorkor …

“But that was done in only one hospital. So those are the bad rumors that were circulating.”

‘We fight every case’

Reddy said that when Medicare’s Recovery Audit Contractor Program, an entity that provides financial oversight, objects to a Medicare billing, Prime appeals – and always wins.

“As chairman and CEO, I will tell you that so far, we have not paid a single penny and as a matter of fact, on our RAC (Recovery Audit Contractor) audits, we never lose a case yet. We fight on every case and we win. It’s all in your documentation. …

“What happens is, RAC denies (a billing) … and then you appeal it to Medicare intermediary (also called the “fiscal intermediary,” another part of Medicare’s oversight system) and they deny it too … and then you appeal.

“The second appeal goes to an administrative law judge, a lay person.

“For the lay person, all you have to say is, ‘The physician who (has) actually seen and examined the patient has documented (the) patient needed hospitalization because of these comorbid conditions.’ …

“So you have ‘hypertensive heart disease.’ Or ‘diabetes uncontrolled,’ or ‘diabetic – other conditions’ – neuropathy (nerve damage), vasculopathy (disorder of the blood vessels), nephropathy (kidney disease).

“Elderly patients have all these, you know, comorbid conditions.

“You know, sometimes I am reading many of these reports from the administrative law judges. Whatever they think (of a) condition, they think it’s a serious condition. …

“That means, the more the better.

“And they’ll say, ‘This patient has too many conditions to do it as an outpatient. He should be admitted.’

“So every judgment to date has been in our favor.

“And in your hospital, whatever has been refused you have not appealed and are letting it go, and you are probably losing, I don’t know, $600,000 to $1 million per year, which we’re going to appeal on your behalf.”

‘More inpatients’

Reddy urged the doctors to find ways to admit more Medicare patients to the hospital. Outpatient care doesn’t pay, he said.

“Outpatient reimbursement for Medicare and Medicaid is small, negligible compared to inpatient. For example, that’s not the reason to admit a patient, but it is a knowledge tool you have to assess.

“For example, in your hospital, if you are treating a patient (as an) outpatient, for Medicare, reimbursement is about 10 percent of your billing charges. Whereas, if it is inpatient, it is 30 percent. So just remember it is three times different.

“If it is Medicaid, it is even worse – your hospital’s Medicaid reimbursement outpatient is 6 percent, whereas inpatient is 25 percent. I am giving you just rough numbers.

“Let me give you a practical example. A 75-year-old patient came to the ER (emergency room), came in with chest pain and has multiple comorbid conditions.

“If we admit this patient for observation, you are performing an EKG (electrocardiogram test) and discharging the patient and lab tests, EKG stay overnight – you could do for every case like that, pretty much. What would you think the Medicare reimbursement would be for that stay, approximately? Anybody?

“$300 to $500 ...

“Medicare doesn’t reimburse for the stay, zero, so (Medicare) he pays you for EKG, $10- $15, so three EKGs, three (times) $15, and then a lab maybe $30, OK, an X-ray, chest, keep adding small numbers, it never comes to more than $400-$500.

“Whereas inpatient, the same patient, same treatment, you could justify because of comorbid conditions – the reimbursement would be – anybody know? $3,500 …

“So there is unfair pricing for inpatient versus outpatient, so either Medicare has to change it and improve it or we have to learn how to cope with that kind of disparity.”

‘Not profitable

Knapp Medical Center is a charity hospital, and it was acquired by the nonprofit Prime Healthcare Services Foundation. Reddy, president of the foundation, said the hospital’s bottom line was a concern.

“I am only here trying to keep this hospital going. When they were trying to sell this hospital, the board – I don’t know if they know all of the factors – they were saying, ‘This is a very profitable hospital.’

“And I believe, ‘Oh, it is a profitable hospital.’

“But really, when you look at the numbers, you do lose about a few million dollars a year. So it’s definitely not a profitable hospital.”

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