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Successful financial testimonystrategies in healthcare litigation– from an expert witness perspective

D. MICHAEL COSTELLO, CPA, ABV, ASA, CFE, CFF

FALL INSTITUTE2011

HFMA Georgia Chapter

D. Michael CostelloCPA, ABV, ASA, CFE, CFF

Principal | mikecostello@decosimo.com

Mike Costello's experience includes extensive consulting work and testimony in tax, accounting, financial, economic, and business issues of commercial litigation, with emphasis on business valuation, economic damage and forensic accounting issues in the healthcare industry. Mike has been retained in healthcare litigation involving a physician practice breakup, a breach of contract case involving a hospital chain, a wrongful termination suit involving a hospital, an economic damages case involving a lease of an image-guided radiotherapy system and a breach of contract case involving a home health agency. His business valuations have been used and upheld in various courts, including the Tennessee Court of Appeals, and in connection with buy-and-sell transactions.

Identify the most common litigation issues faced by healthcare entities

Discuss fraud schemes that have occurred within healthcare entities

Discuss the use and importance of financial information in the litigation process

SESSION OBJECTIVES –

Understand the roles and requirements that CPAs must adhere to in providing litigation support services and serving as expert witnesses

Litigation contingencies – understand GAAP requirements for reporting and disclosure

SESSION OBJECTIVES –

What are the typical types of cases you might see in a healthcare environment?

Suits brought by physicians or physician groups

Post merger dispute cases

Compliance cases brought by a governmental agency

Medical malpractice

TYPICAL CASES IN HEALTHCARE

Prescription drug lawsuits

Contract disputes

Product liability

Medical class action

TYPICAL CASES IN HEALTHCARE

EMTALA cases

Health care fraud

Federal False Claims under Medicare and Medicaid

Stark or Anti-kickback cases

TYPICAL CASES IN HEALTHCARE

Fraud schemes are in abundance. What will they think of next?

A social worker uses seniors' insurance information to submit phony claims.

A physician illegally prescribes painkillers to patients.

A man copies a co-worker's insurance information to file prescriptions for a dangerous and addictive painkiller.

A chiropractor prescribes more than $1.5 million worth of medically unnecessary back braces to senior citizens.

FRAUD SCHEMES

After a recent visit to the ophthalmologist, a BCBS member received her EOB and noticed services listed that she didn't receive.

She called the BCBS Anti-Fraud Hotline number listed on her EOB.

The BCBS Corporate and Financial Investigations department found that this ophthalmologist had been billing improperly for other patients as well.

The ophthalmologist was contacted by BCBS, who then refunded BCBS for all of the improperly billed services.

CASE STUDY: SOCIAL WORKER

Through an investigation by CFI and the FBI, it was learned that a social

worker billed for services when she was out of the country or on

vacation, as well as for an individual who had died.

For years, the social worker engaged in fraudulent billing practices that

included back-dating services to exhaust previous years' benefits.

She was also billing for services for an entire family when she only saw

one or two family members, inflating her billing amounts to cover co-

pays and billing for more hours than in a normal work day.

She was sentenced to 24 months incarceration and was also ordered to

pay $276,794 in restitution to BCBS and four additional private insurers.

CASE STUDY: SOCIAL WORKER

A county sheriff received information that a dentist was illegally prescribing hydrocodone, oxycodone and diazepam for his patients and other individuals.

The sheriff contacted the Federal Bureau of Investigation and requested their assistance.

The FBI then contacted the Corporate and Financial Investigations department at Blue Cross Blue Shield to investigate the claims submitted to the BCBS for these drugs.

The felony charges were punishable by 10 years to life in prison and up to a $14 million dollar fine.

CASE STUDY: ILLEGAL PRESCRIPTIONS

An individual pleaded guilty in U.S. District Court in connection with a $4.65 million home health care fraud scheme and faced up to 10 years in prison and a maximum $250,000 fine.

The individual admitted to billing Medicare for home health care visits that were medically unnecessary or never provided. He worked as the office administrator and ran the company's day-to-day operations.

He also admitted to a scheme that paid cash kickbacks to Medicare beneficiaries in exchange for their Medicare ID numbers and signatures on documents that falsely indicated they received services from the firm.

The scheme also relied on physical therapists and physical therapy assistants who signed documents required to bill Medicare.

CASE STUDY: HOME HEALTH FRAUD

Certified Fraud Examiners’ Report to the Nation – Asks these fraud preventions questions to help eliminate fraud:

Is ongoing anti-fraud training provided to all employees of the organization?

Is an effective fraud reporting mechanism in place?

FRAUD PREVENTION QUESTIONS

To increase employees’ perception of detection, are the following proactive measures taken and publicized to employees?

Is possible fraudulent conduct aggressively sought out, rather than dealt with passively?

Does the organization send the message that it actively seeks out fraudulent conduct through fraud assessment questioning by auditors?

Are surprise fraud audits performed in addition to regularly scheduled fraud audits?

Is continuous auditing software used to detect fraud and, if so, has the use of such software been made known throughout the organization?

PROACTIVE MEASURES

Is the management climate/tone at the top of honesty and integrity?

Are fraud risk assessments performed to proactively indentify and mitigate the company’s vulnerabilities to internal and external fraud?

Are strong anti-fraud controls in place and operating effectively, including the following?

PROACTIVE MEASURES

Does the internal audit department, if one exists, have adequate resources and authority to operate effectively and without undue influence from senior management?

Does the hiring policy include the following (where permitted by law)? Past employment verification Criminal and civil background checks Credit checks Drug screening Education verification References check

PROACTIVE MEASURES

Are employee support programs in place to assist employees struggling with addictions, mental/emotional health, family or financial problems? 

Is an open-door policy in place that allows employees to speak freely about pressures, providing management the opportunity to alleviate such pressures before they become acute?

Are anonymous surveys conducted to assess employee morale?

PROACTIVE MEASURES

Here are the top 5 issues for which attorneys use financial experts:

Financial Statement Misrepresentations Economic Damages Calculations Fraud Detection and Response Valuation Bankruptcy, Insolvency and Reorganization Family Law

TOP 5 REASONS ATTORNEYS USE FINANCIAL EXPERTS

Forensic accounting generally involves:

The application of specialized knowledge and investigative skills possessed by CPAs

Collecting, analyzing and evaluating evidential matter

Interpreting and communicating findings in the courtroom, boardroom or other legal/administrative venue

FORENSIC ACCOUNTING

Fundamental forensic knowledge includes:

Professional responsibilities and practice management

Laws, courts and dispute resolution

Planning and preparation

Information gathering and preservation (documents, interviews/interrogations, electronic data)

Discovery

FORENSIC KNOWLEDGE

The specific skills being requested by those engaging forensic

accountants include:

  Analyze and interpret financial statements and information

Testifying

Knowledge of relevant professional standards

Audit evidence

Fraud detection

Asset tracing 

FORENSIC ACCOUNTING SKILLS

Analytical characteristics are critical to the forensic accountant’s ability to provide value-added services in engagements calling for more than simply auditing skills and problem-solving abilities.

However, in forensic engagements, the accountant must be able to get at the records required to analyze, which is generally an issue. Information may be gathered through interrogatories, depositions or by court order.

FORENSIC ACCOUNTING SKILLS

Sometimes basic financial information is not obtainable. That is when the forensic accountant is vital. In cases where it is not possible to gather the records needed, the pieces of the financial puzzle must be put together. Forensic accounting and expert testimony involves the recreation of financial information where little, or perhaps no financial information exists.

 

FORENSIC ACCOUNTING SKILLS

In one case, we took bank statements, emails having financial information and other lists created by the parties to form up basic financial statements.

The key in such a case is to communicate findings in a credible way. If no other records exist, then the records produced by a forensic accountant are all that are available. If no other records are produced, then the basic statements are given great weight in a court of law.

FORENSIC ACCOUNTING SKILLS

A valuation review in a lawsuit between a neurosurgery group and a hospital.

  An identity theft fraud case involving a trusted

individual in a physician practice.

A bet-the-company breach of contract suit filed by a supplier against a hospital group.

A physician practice break up dispute.

 

RECENT CASES –

Termination. Either Party may terminate this Agreement upon one-hundred twenty (180) days’ prior written notice to the other Party. Should CLIENT terminate this agreement within the initial term, then a lump sum payment of $50,000 and associated software license fee paid by PLAINTIFF/SERVICE PROVIDER to a third party. Upon the termination of this Agreement, CLIENT shall continue to pay professional fees to PLAINTIFF/SERVICE PROVIDER in respect of funds received by CLIENT within (90) days following the date of termination or expiration of this agreement in respect of accounts previously assigned to PLAINTIFF/SERVICE PROVIDER.

TERMINATION

Excerpt from the lease that was at issue: [i]n the event there is an action or inaction with respect to reimbursement which results in the… ($7,500.00) rental payment being commercially unreasonable to the Lessee, the parties shall obtain an updated third party valuation as to the fair market value and commercial reasonableness of the rental payment. In the event that valuation does not support a change to the… ($7,500.00) amount, the per Case payment shall be the greater of the valuation amount or… ($5,500.00). Thereafter, the appropriateness of the rental payment may be evaluated at the request of either party by an independent valuation expert mutually agreeable to the parties; provided, that in no event will the rental payment amount be less than… ($5,500.00), unless such amount would result in a commercially unreasonable result in operation of Hospital department. The cost of the valuation shall be borne by the requesting Party.

LEASE VALUATION

The Employee’s Salary plus the Bonus shall be full payment to the Employee for all services rendered by Employee to the Employer under this Agreement. Notwithstanding any provisions to the contrary herein, Employee’s Salary and Bonus will be paid to Employee to the extent the Employer has available cash flow. Any amounts not paid to Employee will be paid to Employee as soon as Employer has available cash flow.

PAYMENT OF COMPENSATION

The AICPA defines litigation services as:

“consulting services that ordinarily involve pending or potential formal legal or regulatory proceedings before a trier of fact in connection with the resolution of a dispute between two or

more parties.”

LITIGATION SERVICES DEFINED

AICPA Professional Standards

AICPA Statement on Standards for Consulting Services

AICPA Consulting Services Special Report 03-1, Litigation Services and Applicable Professional Standards

LITIGATION SERVICES GUIDELINES

AICPA Statement on Standards for Valuation Services No. 1

Uniform Standards of Professional Appraisal Practice

ASA Business Valuation Standards

ASA Principles of Appraisal Practice and Code of Ethics

LITIGATION SERVICES GUIDELINES

ACFE Code of Ethics

Federal and state regulatory standards

AICPA Special Report 08-1, Independence, Integrity and Objectivity in Performing Forensic and Valuation Services

AICPA Practice Aids

LITIGATION SERVICES GUIDELINES

The following professional standards are specifically identified and explained in Special Report 03-1 –

Rule 102, Integrity and Objectivity Rule 201, General Standards Rule 202, Compliance with Standards Rule 301, Confidential Client Information Rule 302, Contingent Fees Rule 101, Independence Rule 203, Accounting Principles

LITIGATION SERVICES GUIDELINES

What does the public expect from forensic accountants?

To follow the highest standards of professional ethics

To communicate in a manner that is not misleading

To perform ethically and competently, with impartiality, objectivity and independence

To not perform an assignment with bias, not advocate the cause

or interest of any party or issue, not accept assignments that include the reporting of predetermined opinions or conclusions and not perform an assignment in a grossly negligent manner

FORENSIC EXPECTATIONS

Finally, what are the rules for litigation contingencies? The SEC appears to be increasing its scrutiny of compliance with financial statement disclosure rules regarding potential court losses.

The heightened attention is intersecting with a three-decades-old treaty for lawyers and accountants forged by the AICPA and the American Bar Association.

LITIGATION CONTINGENCIES

The point is that companies need to do what it takes to see that those things are properly evaluated and properly reported in the financial statements.

The treaty is not part of generally accepted accounting principles, and it’s generally accepted accounting principles that have the last word.

And if a company does not fairly present its financial statements because the treaty has impeded dialogue with the auditor—that is not something the SEC will look favorably on.

LITIGATION CONTINGENCIES

Both FASB and the SEC have been raising a concern that the present system is broken or, if not broken, not working optimally when it comes to financial statement presentation of litigation contingencies.

From FASB’s perspective, they are looking at whether they need to revise the standard. From the SEC’s perspective, they are looking at whether compliance with the present standard should be enhanced. And it so happens that all of this is coming together in this financial reporting season.

LITIGATION CONTINGENCIES

Here’s the nut of the problem.

FASB, to its credit, wants investors and other users to get the best possible information that financial statements can convey.

But when it comes to reporting on litigation, the company can do itself a lot of damage if it’s too transparent.

LITIGATION CONTINGENCIES

If, for example, a company says in its financial statements, “We expect to lose this case, and we expect the jury to award damages of $50 million to the plaintiff,” that’s information that would, if candidly presented, be available to the world at large including the plaintiff.

 

It would immediately establish a floor in settlement discussions and could potentially be used as self-created evidence against the company that prepared the financial statements.

That’s the core problem.

 

LITIGATION CONTINGENCIES

The actual terms of the standard are pretty basic. If you are in a situation where you should disclose litigation, the standard asks for an estimate of the possible loss or range of loss or a statement that such an estimate cannot be made.

 

The standard also asks the preparer to evaluate the probability of losing and to reasonably estimate, if possible, the amount that would be lost. The key thing about all of that is that it involves forward-looking predictions as to how litigation would come out. Predicting the outcome of litigation can be horrifically difficult. And it creates even more of a problem if such forward-looking predictions become available to the other side in the litigation.

LITIGATION CONTINGENCIES

There’s an exposure draft on the table.

It is generally viewed as an improvement over an earlier exposure draft though not yet perfect.

FASB has received more than 380 comment letters, and the FASB staff is working through them. (FASB has produced a podcast outlining the proposed changes.)

FASB EXPOSURE DRAFT

There is a feature of the pending exposure draft which has caused a fair amount of angst. And that feature calls upon companies to disclose the amount accrued, if any, in connection with a litigation contingency.

 

The reason that is causing such angst is that an accrual in this context is a forward-looking prediction and, if a company has accrued, then it has presumably come to a determination that it is probably going to lose and that the amount of its loss can be reasonably estimated. And the biggest problem that lawyers are having with the exposure draft is that, in calling for disclosure of that accrual, the exposure draft is basically asking companies to publicly confess in their financial statements that they believe they will lose and to set forth the amount that they expect to pay.

FASB EXPOSURE DRAFT

Who needs to be paying attention to this?

  The accounting department within the company.

In-house lawyers at the company.

Outside lawyers will want to pay attention because they are often called upon by the auditor to provide information regarding litigation contingencies.

Auditors of financial statements will want to pay attention.

 

FASB EXPOSURE DRAFT

It’s probably a bigger problem for public companies because public companies face a greater likelihood of massive class-action litigation, but the standard applies to both public companies and private companies, so it’s an issue for everyone.

  The downside of noncompliance can be significant.

And that’s a big reason why companies now are working so hard to get it right.

 

FASB EXPOSURE DRAFT

QUESTIONS?