Successful financial testimony strategies in healthcare litigation – from an expert witness perspective

1. FALL INSTITUTE 2011 HFMA Georgia Chapter Successful financial testimonystrategies in healthcare litigation– from an expert witness perspective D. MICHAEL COSTELLO, CPA, ABV, ASA, CFE, CFF

3. SESSION OBJECTIVES – 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

4. 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

5. TYPICAL CASES IN HEALTHCARE 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

6. TYPICAL CASES IN HEALTHCARE • Prescription drug lawsuits • Contract disputes • Product liability • Medical class action

7. TYPICAL CASES IN HEALTHCARE • EMTALA cases • Health care fraud • Federal False Claims under Medicare and Medicaid • Stark or Anti-kickback cases

8. FRAUD SCHEMES 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.

9. CASE STUDY: SOCIAL WORKER 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.

10. 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.

11. CASE STUDY: ILLEGAL PRESCRIPTIONS 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.

12. CASE STUDY: HOME HEALTH FRAUD • 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.

13. FRAUD PREVENTION QUESTIONS 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?

14. PROACTIVE MEASURES 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?

15. 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?

16. 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

17. 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?

18. TOP 5 REASONS ATTORNEYS USE FINANCIAL EXPERTS 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

19. FORENSIC ACCOUNTING 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

20. FORENSIC KNOWLEDGE 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

21. FORENSIC ACCOUNTING SKILLS 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

22. 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.

23. 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.

24. 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.

25. RECENT CASES – 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.

26. TERMINATION 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.

27. LEASE VALUATION 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.

28. PAYMENT OFCOMPENSATION 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.

29. LITIGATION SERVICES DEFINED 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.”

30. LITIGATION SERVICES GUIDELINES AICPA Professional Standards AICPA Statement on Standards for Consulting Services AICPA Consulting Services Special Report 03-1, Litigation Services and Applicable Professional Standards

31. 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

32. 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

33. 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

34. FORENSIC EXPECTATIONS 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

35. LITIGATION CONTINGENCIES 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.

36. 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.

37. 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.

38. 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.

39. 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.

40. 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.

41. FASB EXPOSURE DRAFT 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.)

42. 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.

43. 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.

44. 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.

45. QUESTIONS?