U.S. Department of Justice Launches Probe Into Medical Suppliers’ Contracts With Hospitals
The Department of Justice recently subpoenaed more than a dozen medical supply companies in what "appears to be a wide-ranging" criminal investigation into whether hospitals and other providers are fraudulently overcharging Medicare and other public health programs for products used in medical services, the New York Times reports. The investigation, which also is expected to include a number of hospitals nationwide, focuses on whether the medical supply industry's use of rebates, discounts, barter arrangements and refunds to hospitals and other providers results in government-sponsored health care plans being charged higher prices for products than what hospitals actually are paying. According to the Times, the investigation appears to be focused on Texas-based Novation, which negotiates medical supply contracts for thousands of hospitals and other providers nationwide. Novation, which is owned by about 2,200 hospitals and care centers that use its services, is responsible for about $20 billion per year in medical products and services sold under its contracts.
Novation's business practices have been the subject of scrutiny in recent years, but the current criminal investigation seems to be the first to name Novation, according to the Times. Other health care industry organizations that have been subpoenaed include Becton, Dickinson, the world's largest maker of medical needles and syringes; drug makers Merck, Bristol-Myers Squibb and Genentech; G.E. Healthcare, the medical equipment unit of General Electric; and Cardinal Health, which distributes and manufactures drugs and medical supplies.
The Times reports that federal codes cited in a copy of the subpoenas imply that 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." People in the medical supply industry familiar with the investigation said that the subpoenas are related to records of payments made by suppliers to Novation and hospitals and other facilities that use Novation contracts. A former executive at Novation said that the HHS Office of Inspector General also is seeking information on the nature of payments that suppliers make to Novation, in addition to how Novation selects the companies to which it awards contracts and what Novation does with the payments it receives from suppliers.
According to the Times, suppliers generally are not allowed to make gifts or payments to purchasing agents for providers that receive Medicare money because such arrangements might violate antikickback laws. Novation is an exception and is allowed to accept payments from suppliers as long as they do not exceed the so-called "safe harbor" limit of 3% of suppliers' sales through Novation contracts. The "safe harbor" exception was established under federal antikickback laws "specially for hospital purchasing groups," the Times reports. Industry records signal that some payments might have exceeded the "safe harbor" limit or have been of a different nature not allowed under Novation's exception.
A Novation official has confirmed that the company received a federal subpoena asking for related documents. Jody Hatcher, Novation's senior vice president, said, "This matter is in the very early stages. Novation will fully cooperate with the U.S. attorney's office to provide the requested documents." However, Hatcher said that "subpoenas can be issued without any finding of misconduct." He added, "It would be misleading to state or imply that Novation, or any of its constituents or vendors, has violated any of the statutes" referenced in the subpoenas.
A spokesperson for Shannon Ross, criminal chief of the U.S. attorney's office in Dallas, who signed the subpoenas, declined to comment on the investigation. Most of the companies that received subpoenas also declined to comment, other than to say they would cooperate with investigators.
University HealthSystem Consortium, which formed Novation in 1998 with partner VHA, said the organization had not been subpoenaed but would "assist Novation in responding to the subpoena that they have received." The Times reports that industry executives expect many of the hospitals that contract with Novation to receive subpoenas in the coming weeks (Williams Walsh, New York Times, 8/21).