BUSINESS/FINANCIAL DESK | August 21, 2004, Saturday

WIDE U.S. INQUIRY INTO PURCHASING FOR HEALTH CARE

By MARY WILLIAMS WALSH (NYT) words
Late Edition - Final , Section A , Page 1 , Column 6 


Summary:

The Justice Department has opened a broad criminal investigation of the medical-supply industry, apparently to determine whether hospitals and other medical care providers are fraudulently overcharging Medicare and other federal and state health programs for a wide array of goods -- from rubber gloves to drugs to X-ray machines.

More than a dozen medical-supply companies recently received federal subpoenas in what appears to be a wide-ranging investigation into the way suppliers market products to clinics, hospitals and nursing homes that serve Medicare and Medicaid patients, and whether those institutions properly account for the purchases.

Industry executives expect many hospitals to receive similar requests in coming weeks.

The central issue, according to current and former industry executives, is whether the industry's use of rebates, discounts, barter arrangements and refunds to hospitals and other medical centers means that Medicare and Medicaid are being charged higher prices for products than the hospitals are actually spending.

The investigation appears to be centered on the medical-supply industry's dealings with Novation, a company in Irving, Tex., that is an industry leader in negotiating the contracts that thousands of hospitals, clinics, nursing homes and other facilities use to buy drugs and other supplies.

About $20 billion a year in medical products and services are sold under contracts arranged by Novation, which is owned by about 2,200 of the hospitals and care centers that use its services.

They include well-known medical centers like New York-Presbyterian Hospital, Yale-New Haven Health Services and Baylor Health Care System in Dallas.

Because Novation is the link between thousands of health facilities on one side, and hundreds of medical goods and services companies on the other, the scope of the federal investigation appears to be broad.

A Novation official confirmed this week that the company was recently served with a federal subpoena demanding that it produce documents.

''This matter is in the very early stages,'' Novation's senior vice president, Jody Hatcher, said in an e-mail reply to a reporter's questions.

''Novation will fully cooperate with the U.S. attorney's office to provide the requested documents.'' Mr. Hatcher did not characterize the type of documents sought.

Mr. Hatcher also cautioned against drawing any inferences from the subpoena's references to various sections of the United States Code that deal with health care offenses.

''These subpoenas can be issued without any finding of misconduct,'' he said.

''It would be misleading to state or imply that Novation, or any of its constituents or vendors, has violated any of the statutes you referenced.''

Hospitals and clinics are financed with public money to a great degree, through programs like Medicare that reimburse many of the costs they incur in treating patients.

If a hospital submits an erroneous cost report to Medicare, it can receive a larger reimbursement than it is due.

If this is done knowingly, it can constitute Medicare fraud, which can carry fines and a 10-year prison sentence.

The federal investigation came to light after one medical products company, Becton, Dickinson, disclosed last week in its quarterly financial report that it had been served with a subpoena.

Becton, Dickinson, the world's largest maker of medical needles and syringes, said in the report that it believed its transactions with Novation had ''fully complied with the law,'' that it would cooperate and that it was not currently a target of the investigation.

Some of the other big companies to be served with subpoenas are the drug makers Merck, Bristol-Myers Squibb and Genentech; the G.E. Healthcare medical equipment unit of General Electric, and Cardinal Health, a big manufacturer and distributor of drugs and medical supplies.

Based on the federal codes cited in a copy of one of the subpoenas, investigators are seeking evidence of health care fraud, conspiracy to defraud the United States, theft or bribery involving programs receiving federal funds, obstruction of investigations and other possible violations.

The subpoena was signed by Shannon Ross, criminal chief of the United States attorney's office in Dallas.

A spokeswoman for that office declined to discuss the subpoenas or to confirm that an investigation was in progress, citing longstanding policy.

Most of the companies also declined to discuss the matter, other than to say that they would cooperate with investigators.

Novation's primary business is to pool the purchasing volume of about 2,200 hospitals, as well as thousands of nursing homes, clinics and physicians' practices, and to use their collective power to negotiate contracts with suppliers at a discount.

In many cases, the contracts offer special rebates to hospitals that meet certain purchasing targets.

Although Novation is not well known outside the industry, it wields formidable power because it can open, or impede, access to a vast institutional market for health products.

Novation's business practices, which were the subject of an investigation in 2002 by The New York Times, have drawn criticism from several parties, including the antitrust subcommittee of the Senate Judiciary Committee.

The practices under scrutiny include questionable payments in the awarding of contracts and incomplete accounting of the rebates paid to hospitals and other medical centers.

The chairman and ranking member of the subcommittee, Mike DeWine, Republican of Ohio, and Herb Kohl, a Wisconsin Democrat, have been monitoring Novation and other companies involved in the group purchasing of health products.

In hearings, they have expressed concerns about possible abuses and have publicly called on companies in the industry to adopt heightened ethics policies or risk tighter regulation.

The subcommittee is expected to hold another hearing on the issue next month.

Novation has also been attacked by other companies, in past testimony to the subcommittee and through civil suits brought by small medical suppliers that accused it of freezing them out of a big share of the market for medical products.

Novation was created in 1998 as a joint venture of two networks of nonprofit hospitals, VHA Inc. of Irving, Tex., and University HealthSystem Consortium of Oak Brook, Ill.

VHA, the larger of the two networks, holds the larger stake in Novation.

Those yearly distributions, as well as the rebates to hospitals that meet their purchasing contract targets and certain in-kind contributions, effectively lower the hospitals' purchasing costs.

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Summarized by Copernic Summarizer