Ignorance Is Bliss, While It Lasts

REBECCA BUSCH

Wilfred E. Ernster II — known as Junior in his family — grew up in the family business of selling supplies to healthcare providers. His father, a recognized philanthropist and well-respected family man, started his original company in 1915. As the eldest son, Junior took over the family business and in 1965 started a new enterprise, Med Supplies R Us, to replace the flagging original company. He founded it with his two adult sons, Wilfred III and Earl.

Wilfred III and Earl grew up in the family business, like their father did, and they enjoyed the perks of being members of a wealthy family with a dynasty of sorts to preserve. They were used to seeing their parents get dressed up to go to fundraising events on the weekends, and they thought nothing of being featured in the society page of the local paper. They were raised to run a company that was the lifeline of a community and to be active in philanthropic causes. This was the norm in the Ernster family, and the sons knew they were expected to continue it.

Med Supplies R Us enjoyed progressive growth pretty much right out of the gate, which pleased Junior because he wanted to provide a solid, grounded business to secure the livelihood of future generations of Ernsters. He took the company public in 1979, but the goals of the public offering were not achieved and the company reverted to a privately held entity in 1984. In the same year Junior retired and passed his interest on to his sons: Wilfred III became president and Earl became chief executive officer. The pressure to manage growth while maintaining the family's reputation in the healthcare industry and the philanthropic community was now the responsibility of the third generation. To continue growing Med Supplies R Us, the brothers initiated a series of acquisitions.

Under the direction of the brothers, Med Supplies R Us became one of the leading manufacturers and distributors of healthcare products in the United States, and its inventory included medical and surgical supplies, durable medical equipment and other day-to-day items for patient care. The company's catalog offered more than 150,000 items. Med Supplies R Us had more than 3,500 employees, $1.9 billion in annual sales, 60 distribution sites, a new 200,000-square-foot corporate headquarters and a 250,000-square-foot warehouse in Utah. The company experienced a significant surge in sales of protective gear following the September 11, 2001, terrorist attacks.

During this time, employer- and government-sponsored healthcare incentive programs grew in popularity and offered rich benefits to employees and beneficiaries. Med Supplies R Us enjoyed growth from these wellness initiatives because they provided coverage for the products that the company sold. However, the political climate for healthcare continued to change and evolve, and pressure was placed on all market players to manage costs. Med Supplies R Us started to feel the weight of these ongoing and new rules.

No Experience Necessary

William Bering graduated from college in 1984 — a difficult year because many graduates were entering the workforce but there were not enough jobs for everyone. A family friend of the Berings reached out to the Ernsters and asked if Wilfred III or Earl could find an entry-level job for William. He landed an interview and was hired to work in the sales department. William, happy to have a job, was eager to please, worked exceptionally hard and did as he was told. He was fresh out of college with no healthcare experience, so Med Supplies R Us provided him with all of his training. Over the years he climbed up the company ladder and was eventually promoted to executive vice president of sales. His lifelong dedication to the Ernster family for giving him his opportunity created a blind spot in William's judgment. He never would have imagined that he could be ordered to do something wrong.

William eventually married and had three children. As his responsibilities at work increased, he started to relieve his stress after work with coworkers at the local pub. The pressure was nevertheless taking its toll on the home front. Out of concern, William's wife asked her brother, Timothy, a well-known local attorney, for advice and if he could reach out to her husband.

During a family gathering on Thanksgiving, Timothy pulled William aside and asked how everything was at work. William candidly discussed how he was finding it difficult to manage the multitude of client relationships on behalf of Med Supplies R Us. He discussed a pattern of commissions and rebates among various sets of parties to others and explained how some delays in third-party commissions were upsetting their support vendors, suppliers and providers. The process was simply becoming overwhelming.

“I always have to manually figure out what percentage of the income we received as a result of this buyer and that referral agent.” Timothy quietly listened to his brother-in-law describe the problems at work. When William was finished, Timothy simply stated, “William, we gotta talk.”

Timothy understood that William was unknowingly describing a series of illegal kickbacks. These occurred in the sale of medical supplies and equipment to providers who then billed Medicare, Medicaid and private insurance companies for the items — plus the cost of the various inducements they paid to the hospitals and other public officials. Understanding such inducements is critical in the complex world of healthcare, and if someone does not have past experience or proper training, they can easily become confused.

Unbeknownst to many individuals, hospital executives have to submit cost reports to Medicare, which must include all their sources of revenue and documentation of expenses. These reports affect the reimbursement rates received from the government. Inducements from suppliers like Med Supplies R Us become a problem if they are not documented as revenue. A second concern is the undue influence they can cause in the purchase of noncompetitive goods. These unnecessary or unjustified purchases can result in higher expenses submitted to Medicare and Medicaid.

As an attorney with experience in healthcare fraud cases, Timothy was able to see the red flags in William's story, even though William didn't. As a result of their conversation, Timothy initiated the appropriate representation for William as a relator (whistleblower) and had a relator action filed under seal against Med Supplies R Us.

Second Chance

My company specializes in investigating healthcare fraud cases and is located in the same town as Med Supplies R Us. I became involved with this case when the original complaint was about to be amended and refiled. The schemes proved to be much more complicated than anyone originally involved thought, and the investigators and experts had not been able to clearly identify and establish the processes that Med Supplies R Us's personnel were using to provide kickbacks to their customers. The Ernsters' lawyers had filed a motion to dismiss the healthcare fraud charges based on the plaintiff's failure “to allege the essential element of the materiality.” Also at issue was proving that executives at Med Supplies R Us were “knowingly and willfully executing or attempting to execute a scheme or artifice to defraud any of the money or property owned by or under the custody or control of any healthcare benefit program.” Therefore, I was contacted by William's attorneys and went to a meeting to get the full story.

I attended a formal interview with three different attorneys to help them understand how kickbacks are often paid and to get a clear picture of their case and needs. My terms were simple — I needed to interview William Bering myself, I needed to review all the original documents in the file and I had to be able to obtain critical documents as requested. The attorneys eagerly agreed, and I went straight to work.

My first step was to meet with William. During my interview with him, I focused on learning the business activities specific to Med Supplies R Us and the company's rebate process. William gave me insight into the financial transactions his employer had with hundreds of hospitals, skilled nursing facilities and hospices — basically any healthcare provider that might need to purchase medical and surgical supplies.

William was in a unique position to know how the individual transactions and rebates were processed for each entity, and I needed him to explain the processes as thoroughly as possible. The U.S. False Claims Act prohibits suppliers from providing remuneration to induce purchasing, and I hoped I could find a violation of the Act in Med Supplies R Us's history. The False Claims Act is specific in stating that if any insurance claim submitted by a healthcare provider to obtain reimbursement for medical and surgical supplies is tainted by unlawful remuneration, it is improper. I was going to dig for these improper transactions.

Med Supplies R Us had a huge inventory of items for sale, and, without a well-planned strategy, such an investigation could easily become daunting. Conveniently, the medical industry uses two coding systems for supplies, services and diagnoses — ICD (International Classification of Diseases) coding and CPT (Current Procedural Terminology) coding. Any supply billed to Medicare, Medicaid or a private payer must have an associated code. In this case, I ran reports of medical supplies and the list of codes, which provided a baseline for me to understand the actual dollars involved. A review of Med Supplies R Us, its respective clients and the volume of sales by a listing of products and their CPT codes, along with the dollars associated with rebates that Med Supplies R Us offered, demonstrated a shocking magnitude of products sold using illegal inducements.

Nitty-Gritty Fraud Examination

After my first meeting with William and a thorough review of the company's records, I held a series of extensive meetings with him and his team of lawyers. We reconstructed movements of the business operations, money flows, client communications, contract terms and employee and vendor compensation. The charts we created with these reconstructions clearly demonstrated that the Ernsters were providing monetary incentives during sales, contracts and product exchanges. However, I knew all of this movement needed to be translated for a jury to understand, with specific behaviors categorized. The illicit compensation I discovered fell into several categories, which I labeled bribes, donations, rebates and consignment kickbacks.

I applied the principles of fraud examinations during the course of this investigation, including conducting interviews, gathering and requesting documents, assembling evidence, writing up report findings and working with attorneys. My prediction was established when the documents provided sufficient evidence of kickbacks to a wide range of entities that Med Supplies R Us served. William was able to produce management reports that he both developed and distributed under the direction of the Ernster brothers. He provided copies of management memos with specific targets for sales and the budget for inducements to secure those sales. Further, he provided corporate memos with instructions on how to mask entertaining expenses as legitimate business expenses. I also interviewed other nontraditional industry experts, including headhunters who placed employees in the healthcare industry, to gain insight on employment practices.

The fraud theory I developed was “a complex set of kickback mechanisms that were developed to provide unwarranted illicit compensation to induce purchases that were not medically necessary.” My meetings with William helped me understand and chart specific workflows of the kickback mechanisms, defined by job function and job title. The work patterns identified how the inducements were incorporated into normal business operations. Further, this allowed me to make subsequent requests for data to measure the extent of damages and illicit inducements that were used to solicit and pay the kickbacks. I compared the description of the payments and their purpose to the guidelines published by the Centers for Medicare and Medicaid Services (CMS). The processes in place at Med Supplies R Us directly conflicted with CMS guidelines.

Bribes, Donations, Rebates and Consignments

Although the basic principle of bribery ran through all of Med Supplies R Us's transactions, the kickbacks that materialized varied among the company's clients. One instance I uncovered involved a county official who influenced the purchase of inventory for a local public medical center. Med Supplies R Us sent “corporate rebates” to a corporation that then laundered the funds and paid them to the county commissioner.

Another mechanism for the kickbacks came in the form of “donations.” The Ernster brothers created a foundation arm of Med Supplies R Us with the explicit purpose of providing contributions to charitable organizations and scholarships, but instead the foundation submitted donations to foundations of hospitals that purchased supplies from Med Supplies R Us. These hospitals filed pricing and data reports that did not show the offset donated funds from the foundation. A parallel to understand this practice would be an independent consultant who submits a bill for travel expenses. The client reimburses the consultant for expenses, but then the consultant submits his tax return with a deduction for the travel costs — not documenting that the expenses were actually reimbursed. It is a form of double dipping. After the exchange between the foundations, the hospitals' purchasing departments directed doctors and nurses to be partial toward Med Supplies R Us's products.

The third scheme the Ernsters employed was the rebate. Rebates done properly are completely legal and often occur in healthcare; a manufacturer issues rebates after the sale and distribution of one of its products. However, the executives at Med Supplies R Us used the rebate account to submit payments to hospitals as an inducement for additional sales. Then the hospitals and other medical providers reported the full, unrebated cost to the government or private insurers, thus giving the appearance of paying a higher price in their cost reports. The medical providers were awarded a higher rate of reimbursement because they were claiming higher operating costs. The reality is the rebates should have been treated as revenue to provide a realistic account of what the hospital or clinic actually paid for the medical supplies.

Finally, Med Supplies R Us had a program to grant consignment kickbacks to some customers. This involved a very layered and complex arrangement that in essence resulted in on-demand loans to clients. The Ernsters created open-ended loans or on-demand loans that equaled 8.5 percent of total amount of purchases a provider committed to make. Providers are required to disclose and record fixed prices so discounts or refunds like this can be recorded properly. In this case, again, the open agreements resulted in medical providers recording higher-than-actual prices.

All of these kickback schemes had the same result: The hospitals submitted inflated costs for their supplies to insurers. As a result, Med Supplies R Us provided hospitals a mechanism to receive inflated reimbursements from Medicare, Medicaid and private insurance companies. Med Supplies R Us benefited from higher sales activity from these providers.

William Bering no doubt had his hands full in managing such a complex set of relationships and accounting procedures. Working for a family that was accustomed to a lavish lifestyle and a philanthropic edge to contribute can be difficult. The amount of work William had to juggle could probably drive anyone to drink. I also learned from my interviews with industry headhunters that all of Med Supplies R Us's employees were handpicked and groomed to perform this type of work.

At the conclusion of my investigation, the plaintiff submitted an amended complaint that defined and outlined the kickback mechanisms in place at Med Supplies R Us. This allowed William's attorneys to properly allege the “essential element of the materiality” required to file healthcare fraud charges.

The final outcome was a civil settlement for $120 million and a five-year corporate integrity agreement (CIA) with Med Supplies R Us. A CIA is a public document that outlines the obligations that an entity agrees to as part of a civil settlement in exchange for the Office of Inspector General's (OIG) agreement not to exclude the entity from participation in Medicare, Medicaid or other federal healthcare programs. CIA settlements often include civil monetary penalties and subsequent reviews for ongoing compliance. Med Supplies R Us's participation in the CIA agreement helped both the company and the Ernsters avoid criminal prosecution. It is common to find healthcare organizations agreeing to CIAs in civil settlements.

About the Author

Rebecca S. Busch, R.N., M.B.A., CFE, CCM, CPC, CHS-III, CRMA, CICA, FIALCP, FHFMA, is CEO of Medical Business Associates and the author of Healthcare Fraud Audit and Detection Guide, 2nd edition (John Wiley & Sons, 2012); Electronic Health Records: An Audit and Internal Control Guide (John Wiley & Sons, 2008); and Personal Healthcare Portfolio (Author, 2010). Ms. Busch is an instructor at Florida Atlantic University in healthcare fraud examination, risk management and compliance. She is also an inventor and holds seven U.S. design patents focused on efficacy, risk and revenue management for the pharmaceutical industry, plus a U.S. patent on an electronic health record case management system focused on efficacy, risk and revenue management for direct and indirect providers of patient care.