Introduction

Rising Cost Change America’s Health Care System

191 (Peak 138) 79

Gross Domestic Product

1950 2002
15%
4.4%

44
Tremendous inefficiency
million and poor service. 1960 1965 1980
 Problem
Medicare Billing Procedures and The Rise of Managed Care

HMO
Health Management Organization

1983
changed its
1990s
Medicare payment
reimbursement were adjusted
Reduces non essential and marginally beneficial medical treatment
method downward
by limiting reimbursement for it.

470
Diagnosis- 90% 70% 1970s 85% 1990s
Related Groups Hospital Cost Fee-for-Service Managed Care
(DRGs).

raising charges to private Treatment decisions could be second-guessed by

upcoding insurance bureaucrats who approved payments.
patients

The hospital industry was ailing because of the introduction of DRGs by Medicare and the
rise of managed care.
 Action Taken
The Rise of Columbia/HCA

1987
Texas investor agreed to back 1990
Scott in starting a new hospital COLUMBIA HOSPITAL
company.
CORPORATION
COLUMBIA HOSPITAL
CORPORATION
1994
Went public
Columbia absorbed five competing hospital chains

2 EL PASO 199 94
HOSPITAL

He used the hospitals he owned as hubs

He gave local physicians part He consolidated the El ­Paso market
to other health services including a
ownership of the hospital by buying a third hospital nearby
psychiatric hospital, diagnostic centers,
and closing it.
and a cancer treatment center.
 Action Taken
How Columbia/HCA Work?

Use lower-quality items that cost less.

Hospital administrators were focused
on quarterly earnings and given
Refinanced the facility's debt with ambitious targets, typically revenue
cheaper capital. growth of 15%to 40% per year.

Aggres­sive Medicare billing

Columbia/HCA tried to increase revenues as

well as cut costs. One way was by creating Bold marketing. Unique to the industry
incentives for doctors. Many Columbia/HCA Medical Homecare was a sales force that prospected for
hospitals were 15 to 20% physician-owned. new business.
 Action Taken
Resistance & Crisis

Columbia/HCA had to back out of

30 pending deals.

False reports and claims for 35

facilities.

7%
Average profit
15-20%
Higher that at
590
Facilities
“government investigation are matter-of-fact in
competing chains health cae”
 Action Taken
New Course in a Sea of Troubles

He ended annual
bonuses for hospital
administrators

Undid the equity

relationships of
physicians in hospitals

Sold the home health

care business

Stopped the national

branding campaign

Changed billing
procedures

Increased audits and

compliance reports on
Medicare billings
Action Taken
New Course in a Sea of Troubles

1. 40 hospitals dropped Columbia/HCA from their names

1997 2. Share prices dived from a high of $45 in 1997 to a low of

$17 in 1998
3. $267 million in back taxes for wrongful deductions the
company had made.
4. Whistle-blowers emerged from within and filed lawsuits
under the False Claims Act, which allows workers to bring
fraud charges against em­ployers on behalf of the U.S.

2000 1. $840 million in criminal fines, civil restitution, and other

penalties to settle Medicare fraud charges
2. $745 million in civil penalties while not admitting
wrongdoing
3. $95 million criminal fine, pleading guilty to fraudulent
pneumonia upcoding, false billing, and giving kickbacks to
physicians for referring patients

2003
1. $631 million in civil penalties and damages.
2. Nine former employees received a total of $152 million
as their share.
3. $250 million settlement to Medicare and Medicaid.
 Medicare Changes Its Billing Procedures

Medicare in 1983 changed its reimbursement method. The Hospital a lump sum based on one of 470 illness
categories – diagnosis-related groups (DRGs). This coding system was intended to lower Medicare payouts by
giving hospital an incentive to cut the cost of treatment, and they did so. But within 2 years Medicare payments
began to creep up again. The incentive for hospital was to spend less on patients and cut short their stays.
However, shorters hospital stays led to a big rise in outpatient procedures and follow up care.
Specialized software is used to ensure medicare is billed maximum rates.
No set of codes can never neatly classify all illness and the range of their severity.
This condition engage in upcoding.
Most of 1980s and 1990s Medicare payment were adjusted downward in anticipation of inflated billings from
hospitals. During this time medicare covered less than 90 percent of hospital cost, so hospitals made up the
difference by raising charges to private patients.
 The Rise of Managed Care

Managed care reduces non essential and marginally beneficial medical treatment by limiting
reimbursement for it.

HMO is an organization that includes an insurer and a network of physician, hospitals. And services such
as lab. Corporation enter contracts with HMO under which they pay a fix monthly or annual fee per
employee in return for full range of medical care.
As recently as the late 1980s, about 70% of insured employees were in older fee-for-service plans, but by
the late 1990s, almost 85% of them were in some kind of managed care plan.
The rise of managed care and the imposition of DRGs by Medicare made cost-cutting the hammer of
change.
Physicians traditional authority and the sanctity of the doctor-patient rela¬tionship were circumscribed in
managed care where treatment decisions could be second-guessed by insurance bureaucrats who
approved payments.
These competitive forces in the health care industry led to the predatory incarnation of HCA known as
Columbia/HCA Healthcare Corporation
 The Rise of Predator

Columbia/HCA was the inspiration of a brilliant and hardworking entrepreneur named Richard L. Scott. In 1977 Scott
graduated from law school and joined a Dallas law firm, where he worked on acquisitions and public offerings for
health care corporations.
He soon startled the industry by lining up financing and offering $3.9 billion to buy Hospital Corporation of America,
then the nation's largest hospital corpo­ration.
Then, late in 1987 a Texas investor agreed to back Scott in starting a new hospital company. At the time, the hospital
industry was ailing. Because of the introduction of DRGs by Medicare and the rise of managed care, both the number
and length of hospital stays had declined.
Setting up a Dallas office for the new company he named Columbia Hospital Corporation, he wrote 1,000 letters to
hospitals around them by applying a hard-nosed business discipline the country offering to buy them. but eventually
he bought two weak performing El Paso hospitals.
With the two hospitals in hand, Scott began to inject the strategies that he would use to revolutionize the industry:
1. he gave local physicians part ownership of the hospital
2. Second, he consolidated the El ­Paso market by buying a third hospital nearby and closing it.
3. He used the hospitals he owned as hubs to other health services including a phychiatrics hospital, diagnostic
centers, and a cancer treatment center.
Scott soon bought more hospitals. At Columbia 1990 Columbia went public, Between 1990 and 1994, Columbia
absorbed five competing hospital chains, bringing in 199 more hospitals and 96 surgical centers. After HCA merger in
1994, the company’s name became Columbia/HCA.
 How Columbia/HCA Worked

1. Refinanced the facility's debt with cheaper capital.

2. use lower-quality items that cost less.
3. Hospital administrators were focused on quarterly earnings and given ambitious targets, typically revenue growth of
15 percent to 40 percent per year.
4. Columbia/HCA tried to increase revenues as well as cut costs. One way was by creating incentives for doctors. Giving
them equity in the hospitals was a central tactic, and many Columbia/HCA hospitals were 15 to 20 percent
physician-owned.
5. Another method of raising revenues was aggres­sive Medicare billing.
6. Scott introduced bold marketing. Unique to the industry was a sales force that prospected for new business.
 Resistance and Crisis
In 1995 alone, Columbia/HCA had to back out of 30 pending deals when state regulators and civic groups that Scott's
opponents had lobbied rose in opposition.

Then in March, federal authorities began a sweeping

investigation into Medicare billing fraud at
Columbia/HCA.

In late July they summoned him to a meet­ing and forced

his resignation.
 A NEW COURSE IN SEA OF
TROUBLES
Thomas Frist, Jr., was picked to succeed Scott.
He ended annual bonuses for hospital administrators, undid the equity relationships of physicians in hospitals, sold the home
health care business, stopped the national branding campaign, changed billing procedures, and increased audits and
compliance reports on Medicare billings.

He changed the firm's name. The new name, HCA-The

Healthcare Company, dropped the word Columbia, disowning
Scott's legacy.
 A NEW COURSE IN SEA OF
TROUBLES
The slow torture by investigation and prosecution of HCA petrified the health care industry. Companies pulled back
from aggressive Medicare code interpre-tation. The sight of HCA twisting in the wind, in the words of one observer,
"scared them into under-billing."22 Instead of upcoding, the industry lobbied for higher payments, and in 2000
Congress re¬sponded by raising reimbursements in the DRG codes." Whereas in the past Congress had squeezed
payments in anticipation of upcoding, it now made them more generous to compensate for the wave of timidity
sweeping industry billing practice.
As part of its 2000 criminal plea, HCA signed an agreement requiring it to set up an ethics and com­pliance program to
be overseen by the Department of Justice until 2009.
WHITHER CORPORATE
HEALTH CARE?