MEMORANDUM

TO:
T. Michael O'Mara, Esq. on behalf of
The Board of Trustees, Cookeville Regional
Medical Center

FROM:
Harvey A. Yampolsky, Esq.
Ronald L. Wisor Jr., Esq.

RE:
Cookeville Regional Medical Center - Compliance Review Report

DATE:
July 10, 1998

This report is furnished in connection with this firm's compliance review of certain aspects of the operations of Cookeville Regional Medical Center (the "Hospital"). pursuant to the scope of work outlined by the Hospital, this report is organized into three sections which parallel the issues we were asked to address: (1) an analysis of the results of a coding, compliance review undertaken, at our direction, by HealthCare Consultants of America, Inc. ("HCCA"); (2) recommendations for ensuring compliance with the federal anti-kickback and Stark physician self-referral laws; and (3) recommendations on the measures needed to implement an effective corporate compliance program at the Hospital.

Given the specific issues we were retained to review, we were not able to survey and evaluate every issue which might be raised at a hospital like Cookeville Regional Medical Center. We have reviewed the results of the HCCA coding, review, as well as certain types of documents submitted to us by the Hospital. including organizational charts, Policy and procedure manuals, contracts and leases with physicians and other referral sources, third party payer contracts, survey reports, internal audit reports. consultants reports and employee grievances. In addition, we visited the Hospital on February 10-11, 1998 and met with Select staff members in an effort to assess the Hospital's compliance with the anti-kickback and Stark laws and the extent to which there is a corporate compliance program in place at the Hospital.

Based upon our review of the issues specified in our scope of work (see above), it appears that the Hospital is a well-run facility staffed by a management team. a medical staff, and employees who are committed to providing quality care in compliance with all applicable laws. Although this report focuses on certain areas where we believe that the Hospital may be able to improve upon its current performance. we want to emphasize the degree to which we were impressed by the Hospital's current policies, procedures, and practices.

Coding Review Analysis

HCCA's coding review involved an analysis of the Hospital's selection of diagnosis related grouping ("DRG") codes for 150 inpatient admissions of Medicare beneficiaries during a three year period ending in August 1997.¹ HCCA disagreed with the Hospital's DRG selection in only six cases, or four percent of the sample reviewed. Of those six cases, it was HCCA's opinion that four cases (or 2.7 percent of the entire sample) involved selection of a DRG code that provides a higher payment rate than the DRG code that HCCA believes more accurately reflects the service furnished to the patient. Based upon our conversations with consultants, we believe the typical error rate is closer to 15-20 percent o the cases reviewed. Thus, the Hospital's DRG code selection error rate is well within industry norms and appears to reflect the fact that the Hospital has procedures in place to prevent improper billing for inpatient services. In particular, we commend the Hospital for retaining the consulting firm of Birman & Associates to conduct concurrent coding reviews of each DRG code selected by Hospital staff for Medicare and TennCare hospital stays. We believe it is unusual for a Hospital to make this commitment to assure coding accuracy.

Footnote 1. HCCA had randomly selected 150 cases for review, consisting of 50 inpatient from each of the previous three years. The HCCA report to us is attached as Exhibit A.

In addition, we utilized data furnished to us by the Hospital for the first six months of 1997 in order to analyze the incidence of complicated and uncomplicated DRGs for the 18 sets of DRGs that we believe that the government most likely will focus its attention upon as it proceeds with its nationwide "DRG creep" investigation.² The government seems to have concluded that these pairings of DRGs are the most susceptible to manipulation. Based upon our review of the Hospital's selection of those DRGs. however, we did not identify any area requiring additional analysis, with the possible exception of the Hospital's use of DRG 79, with respect to which HCCA disagreed with one coding decision and which is a Focus of close government scrutiny.

Footnote 2: The government defines "DRG creep" as the practice of billing using a DRG code that provides a higher payment rate than the DRG code that accurately reflects the service furnished to the patient.

The analysis compared the Hospital's incidence of complicated and uncomplicated DRGs for the 18 pairings against a normative figure drawn from all providers filing claims with the Medicare program. The norm used reflects the average plus one additional standard deviation. Because the normative figures that have are based on 1995 data. that fact represents a significant limitation on this analysis. The results of the analysis are listed below in Table 1.
 

The average deviation for the 16 pairings that generated results showed that the Hospital's incidence of complicated DRGs was. on average, 12.5 percent below the norm. Even when those DRG pairings that involved very few cases are removed from the analysis because they might have an inappropriately disproportionate effect on the results, the Hospital still had, on average, 0.5 percent fewer complicated services than the norm.

However, we did note three complicated DRGs that appeared at rates that exceeded
the norm to what might be seen as a significant degree. They were Transuretheral Prostatectomy with complications (DRG 336 - 32.9 percent above the norm), Respiratory Infections (DRG 79 - 18.8 percent above the norm), and Respiratory Signs & Symptoms with complications (DRG 99 - 15.5 percent above the norm). As you may know, allegations concerning DRG 79 upcoding currently are the subject of a national investigation being undertaken by the Office of the Inspector General of the Department of Health and Human Services ("OIG").

By and large, however, it would appear that the sample taken by HCCA should have identified any problems in these areas if such a pattern existed. Eight DRG -9 services were reviewed (5.67 percent of the sample), with HCCA agreeing with seven of those services. Six DRG 336 services were reviewed (4.26 percent of the sample). HCCA did not disagree with any of these services. However, only one DRG 99 service was reviewed, by HCCA. Although this service represented less than one percent of the sample, the Hospital had just 17 DRG 99 cases in the first six months of 1997.

Based on this information, we have little in the way of recommendations to make regarding additional studies. The Hospital may wish to consider asking HCCA to review an additional 15 DRG 79 services. We offer this suggestion because the government is focusing on that DRG at present. Further, the Hospital has a high number of services in this area, and its proportion of the complicated service exceeded the norm by 18.8 percent. Moreover. although HCCA disagreed with only one of the eight DRG 79 cases it examined, this one disagreement equates to 12.5 percent of the DRG 79 sample.

It is important to note, however, that the analysis contained above or compares the Hospital's figures to expected norms. Variations, even significant variations, from such norms routinely occur where no inappropriate coding has occurred.

2. Anti-Kickback and Stark Law Recommendations

The Hospital's compliance with the anti-kickback and Stark laws comprised a significant component of our review. In particular, we examined the Hospital's relationships with its referral sources, as well as its arrangements with providers and suppliers which regularly receive referrals from the Hospital. While we did not uncover any clearly abusive arrangements, we did find a number of technical compliance issues which require corrective action. After some background on the applicable laws, a discussion of those issues follows.

A. The Relevant Legal Standards

The federal anti-kickback law is a broad prohibition against the offer, solicitation, payment or receipt of anything of value (direct or indirect, overt or covert, in cash or in kind) which is intended to (1) induce the referral of a patient for an item or service that is reimbursed by a federal health care program, including Medicare and Medicaid, or (2) induce the purchase, order or lease of such items or services. The law has been interpreted broadly by several courts to apply to situations where only one purpose of a payment is to induce referrals, notwithstanding that there are other, legitimate purposes for which the payment is made as well. A violation of the law can be prosecuted as a felony or can be the basis for civil money penalties and exclusion from the Medicare and Medicaid programs.

In order to address the problems created by the broad language of the anti-kickback law, several exceptions have been added by statute and by the so-called "safe harbor" regulations issued by the OIG. Among the more noteworthy exceptions are payments made pursuant to bona fide employment relationships and personal service contracts, office space leases and equipment leases that meet certain detailed requirements.⁴

Footnote 4. The key elements of the safe harbors for personal service contracts and space and equipment leases are virtually identical. They are: (1) the contract (or lease) must be in writing and signed by the parties; (2) the contract must specify the services to be provided or the premises or equipment covered; (3) if the services, space or equipment will be provided on a part-time basis, then the contract must specify the schedule when the services will be provided or when the space or equipment will be available: (4) the term of the contract must be for not less than one year, (5) aggregate payments under the contract must be set in advance, consistent with fair market value in arm's-length transactions and not determined in a manner that takes into account the volume or value of referrals for which payment may be made by a federal health care program.

The federal physician self-referral law, commonly known as the Stark law, prohibits a physician from making referrals for certain "designated health services" when those services are (1) furnished by an entity with which the physician has a financial relationship. and (2) reimbursed by Medicare or Medicaid. The designated health services covered by the law are:

Clinical laboratory services;

Physical therapy services;

Occupational therapy services;

Radiology services (including magnetic resonance imaging, computerized axial tomography scans, ultrasound and radiation therapy services and supplies);

Durable medical equipment and supplies;

Parenteral and enteral nutrients, equipment and supplies;

Prosthetics, orthotics and prosthetic devices;

Home health services;

Outpatient prescription drugs;

Inpatient and outpatient hospital services.

The penalties for violating the Stark law include forfeiture of any reimbursement for services rendered based on an unlawful referral. civil fines and exclusion from Medicare and Medicaid. Thus, unless an exception applies, physicians who have an ownership interest or compensation arrangement with the Hospital are prohibited from referring patients to the Hospital for inpatient services, outpatient services or any of the other designated health services set forth above. Note that a prohibited referral under the Stark law includes the establishment or certification of a care plan for services furnished by the Hospital's home health agency.⁵

Footnote 5. We note that Tennessee law also includes a self-referral prohibition. See Tenn. Code Ann. § 63 3-6-601 et seq. Unlike the Stark law, however, the Tennessee law does not cover compensation arrangements but, instead, is limited to referrals to entities in which the physician is an owner or investor. To our knowledge, there are no physicians who hold an ownership or investment interest in the Hospital or in any entities owned by the Hospital. Thus, based on the information that we have received from the Hospital, it appears that the Tennessee self-referral prohibition does not apply to the Hospital.

Like the anti-kickback law, the Stark law also includes a number of exceptions. In fact, the law contains exceptions for bona fide employment relationships,⁶ personal service contracts,⁷ and space and equipment leases⁸ that are similar to the anti-kickback safe harbors.

Footnote 6. The Stark Law exception for bona fide employment relationships requires
employment for identifiable services and remuneration that is (1) consistent with fair
market value; (2) not determined in a manner that takes into account the volume or value of referrals by the physician; and (3 ) provided pursuant to an agreement which would be commercially reasonable even if no referrals were made to the employer.

Footnote 7. The Stark Law exception for personal service contracts contains the same
elements as the corresponding anti-kickback safe harbor, but also requires (1) that the
agreement cover all the services to be provided by the physician, and (2) that the
aggregate services contracted for not exceed those that are "reasonable and necessary for the legitimate purposes of the arrangement." -

Footnote 8. The Stark Law exceptions for space and equipment leases contain the same
elements as the corresponding anti-kickback- safe harbor, but further require that (1)
space or equipment leased not exceed that which is reasonable and necessary and be used "exclusively by the lessee when being used by the lessee;" and (2) the lease be commercially reasonable even if no referral were made between the parties.

B. Medical Directors

In 1992, the OIG issued a Special Fraud Alert identifying suspect hospital incentive programs used to induce physician referrals to hospitals. The practices targeted in this Fraud Alert included such "hidden incentives" as the over-compensation of medical directors. Moreover, the payment of compensation to physicians also creates a financial relationship for purposes of the Stark law which must qualify for an exception. Accordingly, we reviewed the Hospital's medical director agreements to determine if they reflected fair market value for the services being provided and complied with the other requirements of the anti-kickback safe harbor and Stark law exception for personal service agreements.

The Hospital currently eight medical directors under agreement. Those medical directors are listed in Table 2.

Table 2: The Hospital's Medical Directors
 

Medical Director	Position	Monthly Payment	Expected Hours Per Month
Alex Case, MD.	Cardiac Care Unit and Cath Lab	None	Not specified
Tina Dudney, M.D.	Respiratory Therapy	$1,500	8 hours
Lorraine Macdonald, M.D.	Diabetes Education Program	$1,000	Not specified
Michael McCormack, M.D.	Medical Intensive Care Unit	$2,500	8 hours
Upper Cumberland Cardiology, P.C.	Cardiac Rehabilitation	$2,000	Not specified
James McKinney, M.D.	Physical Therapy	$1,000	Not specified
William Taylor, M.D.D.	Highland Rim Home Health	$650	Not specified
Richard Williams. M.D.	Sports Medicine	$1,200	Not specified

As a threshold matter, we note that only two of the medical director agreements specify
the number of hours per month which the physicians are expected to devote to their duties. The inclusion of such hours is a technical requirement of the personal services safe harbor and Stark law exception. It also is an important tool in evaluating the fair market value of the compensation being paid to the physicians. As a general rule of thumb, we typically recommend medical director compensation at a rate of $100 to $125 per hour for primary care physicians and $125 to $200 per hour for specialists, subject to local market variations.

Given these benchmarks, we note that the $2,500 monthly fee paid to Dr. McCormick, which equates to an hourly rate of $312.50, may be high relative to fair market value, unless special circumstances can justify the rate. We also note that the duties specified in the medical director agreement with Upper Cumberland Cardiology, P.C. mostly relate to direct patient care services for which the group may bill patients and third party payers. The Hospital should ensure that the group performs non-reimbursable, administrative services adequate to justify its $2,000 monthly fee.

In order to conduct such an analysis, it is essential that the medical directors furnish the Hospital with documentation of their time spent on medical director functions. During our review, however, we learned that the Hospital's current recordkeeping practices are inconsistent. In fact, the contract with Dr. Williams was the only medical director agreement which required the maintenance and submission of time and duty records to the Hospital. We understand that the Hospital intends to implement this requirement as the other medical director agreements come up for renewal. In the meantime, however, without such records it will be difficult for the Hospital to verify for itself -- or for outside auditors or investigators -- that the compensation paid to medical directors reflects fair market value. We also note that, to the extent that the Hospital is required to submit information on the time spent by its medical directors on its Medicare cost report, the Hospital is required to have an adequate basis for the information it supplies.

In addition. we note that the agreements with Dr. MacDonald and Dr. McKinney allow for termination without cause after the end of the initial one-year term. This provision may not comply with the one-year term requirement of the anti-kickback safe harbor and Stark law exception for personal service contracts under an interpretation recently issued by the Health Care Financing Administration ("HCFA"). More specifically, on January 9, 1998, HCFA published its proposed regulations on the Stark law. In the preamble to those regulations, HCFA indicates that to qualify for the personal services exception to the Stark law, a contract may have a termination clause, provided that it allows for termination for "good cause" only and that the parties do not enter into a new agreement within the originally established one-year time period.⁹ In addition, the preamble to the Stark regulations states that a personal service contract must be renewed in at least one year increments, so that it is always an agreement that provides for a term of at least one year.

Footnote 9. According to HCFA, this interpretation reflects its belief that "Congress included the one year requirement with the intention of excepting stable arrangements that cannot be renegotiated frequently to reflect the current volume or value of a physician's referrals."

Presumably, these interpretations apply equally to the identical one-year term requirement contained in the anti-kickback safe harbor. In light of these recent interpretations of the personal services exceptions, we recommend that the Hospital amend its contracts with Dr. MacDonald and Dr. McKinney to provide for: (1) termination for good cause only; and (2) clear language stating that upon expiration of each term, the contract is automatically renewed for an additional one-year term.

We also note an additional technical requirement in the Stark law's personal services exception which requires that all separate arrangements between the Hospital and the physician incorporate each other by reference. Thus, if there are any additional compensation arrangements between the Hospital and any of the medical directors, such as office space leases or payments for EKG interpretations, they must be referenced in the medical director agreement.¹⁰

Footnote 10. By the same token, the medical director agreement must be referenced in the documents embodying the other arrangement. We believe that compliance with this
requirement is easily achieved through a schedule or exhibit that lists all of a physician's
compensation arrangements with the Hospital and is attached to each agreement which
they execute with the Hospital.

Based on the above observations, we recommend that the Hospital:

Review all medical director activities and amendments to ensure that the compensation provided is commensurate with the services they supply;

Confirm that the medical directorships provided for by contract reflect legitimate needs of the Hospital;

Ensure that all medical directors maintain accurate records of the time spent fulfilling their obligations under their contracts;

Review any existing time records to determine if the time actually spent by the medical directors to date is consistent with the expectations listed in the agreements; and

Revise any medical director contracts that do not have terms required under the federal anti-kickback law safe harbor and Stark law exception for personal service contracts.

C. Physician Recruitment and Employment Agreements

We also reviewed the Hospital's physician recruitment program for compliance with the anti-kickback and Stark laws. That program includes three physicians who have been hired as full-time employees of the Hospital. Based upon our review of their employment agreements, it appears that the arrangements with those three physicians fully comply with the anti-kickback and Stark law exceptions for bona fide employees.

The other component of the Hospital's recruitment program involves a variety of incentives which are intended to encourage physicians in certain practice areas to relocate to Central Tennessee and join the Hospital's medical staff. The incentives offered to physicians typically consist of an income guarantee, a loan for office and equipment expenses, and an allowance or payment for moving expenses. In our discussions with Hospital staff, we were told that the use of these incentives is limited to efforts aimed at encouraging physicians from outside the local area to establish a practice in Cookeville. In addition, the recruitment documents that we reviewed did not (1) include a requirement that the physicians refer patients to the Hospital, nor (2) determine the amount of remuneration offered based on the number of patients referred to the Hospital. As a result, the vast majority of recruitment arrangements that we reviewed do not raise any significant anti-kickback or Stark law issues.

One possible exception relates to the agreement that was entered into with Dr. Williams earlier this year. In particular, that agreement provides for a four year income guarantee. In a 1993 proposed anti-kickback safe harbor, however, the OIG limited its protection of recruitment subsidy payments to a three-year period. Thus, there will be no protection under the safe harbor regulations to the anti-kickback law because the income guarantee arrangement with Dr. Williams extends to four years. Since protection is available for shorter term guarantees, we recommend that the Hospital limit the term of its income guarantees to physicians to three years.

Another potential compliance issue relates to the amounts owed to the Hospital by Dr. MacDonald and Dr. Gotcher for sums that were advanced to them during the years 1991 through 1995. More specifically, the recruitment agreements for those two physicians provided that their income guarantees for those years would take the form of a loan from the Hospital. Pursuant to the terms of their agreements, Dr. MacDonald now owes the Hospital $74,753.41 and Dr. Gotcher owes the Hospital $78,941.16.

In subsequent years, however, the Hospital entered into recruitment agreements that release certain physicians from the obligation to repay their income guarantee loan if the physician remains an active member of the medical staff for a specified period of time. Although the recruitment agreements with Dr. MacDonald and Dr. Gotcher do not provide for such loan forgiveness, they essentially have requested that the Hospital release them from their obligation to repay their income guarantee loans.

We believe that this request raises significant compliance issues for the Hospital. The forgiveness of Dr. MacDonald and Dr. Gotcher's loan obligations would create a financial relationship between them and the Hospital for which no apparent exception to the Stark law exists. There also is a significant risk that the Hospital's decision to forgive these loans could be construed as an inducement to these physicians for the referral of patients in violation of the anti-kickback law. For these reasons, we recommend that the Hospital not forgive the loan obligations of Dr. MacDonald and Dr. Gotcher, but instead reach an agreement with them on mutually acceptable repayment terms.

D. Marketing Assistance

The Hospital provides marketing assistance to a number of physicians on the medical staff. To the extent that these services are provided as part of the package of benefits offered to new physicians under a recruitment agreement, we do not believe that they raise any significant compliance issues. We were told, however, that marketing assistance, including the development of brochures and payment for the costs of print advertisements, occasionally is provided to other physicians who are not new to the medical staff. We believe that there is a risk that this assistance could be viewed as an inducement for referrals to the Hospital in violation of the anti-kickback law.

E. Office Space Leases

Office space is leased to physicians at the Hospital’s professional building. The rent charged under those leases is standardized at $9.25 or $10.50 per square foot, depending on the date when the lease was executed. We were told that the current rental rate (i.e.. $10.50) was recently instituted to match an increase in the market rent for comparable space in Cookeville and the surrounding community. However, the form Lease Agreement that we were furnished appears to meet all of the other requirements of the anti-kickback safe harbor and Stark law exception for rental arrangements.

F. EKG Readers

A number of physicians are paid by the Hospital for performing professional interpretations of electrocardiograms ("EKGs"), stress tests, and echocardiograms. These compensation arrangements constitute a financial relationship between the Hospital and the participating physicians for purposes of the Stark Law which must qualify for an exception. Therefore, we recommend that the Hospital execute written agreements with each physician that:

Specifies the services to be provided; covers all of the services to be provided by the participating physicians to the Hospital and/or incorporates by reference all separate arrangements between the Hospital and the physician; has a term of at least one year (and termination only for cause); provides for compensation that is set in advance, does not exceed fair market value, and does not vary with the volume or value of the physician' s referrals to the Hospital; and is signed by the parties.

G. Pathology Contracts

The Hospital has an exclusive contract with a group of pathologists that (1) pays the physicians $4,800 per month for supervision of the Hospital's clinical laboratory, and (2) allows the physicians to bill third party payers, including Medicare and Medicaid, for all professional pathology services performed at the Hospital. This same pathology group also has a contract with the Hospital that provides for the physician's use of the Hospital's clinical laboratory for community-based testing. Under the terms of this latter agreement, the Hospital bills Medicare and Medicaid for all outside clinical laboratory testing brought to the Hospital, and pays the pathologist 25 percent of the revenue collected from such billings. For commercially insured and private pay patients, the pathology group bills the payers for the tests and pays the Hospital in accordance with an agreed upon fee schedule.

Percentage of revenue payments generally raise significant issues under the antikickback law. In this case, the government might infer that the payment to the pathologists of 25 percent of the revenue from community testing was intended to reward them for bringing this business to the Hospital. Conversely, if the 75 percent retained by the Hospital exceeds the fair market value of the facilities and services provided by the Hospital, then there is a risk that the arrangement may be viewed as an inducement to the Hospital for the exclusive contract awarded to the pathology group for inpatient services.

In light of these risks, we recommend that the agreement with the pathology group for community testing be modified to provide for a fixed rate of payment to the Hospital that reflects the market value for the services and facilities provided.

H. Emergency Room Contract

A similar issue is raised in connection with the Hospital's agreement for physician staffing of the emergency room. Under the terms of the Hospital's agreement with the Volunteer Medical Group, P.C., the Hospital receives (1) 4.5 percent of the gross professional fee billings as compensation for its billing and administrative services, and (2) 43 percent of the gross billings as compensation for uncollected charges incurred by the Hospital in connection with the delivery of services in the emergency room. Under this arrangement, there is a risk that the fees retained by the Hospital could be interpreted as compensation to the Hospital from the Volunteer Medical Group in return for the emergency room contract.

During our interviews of hospital staff members, we were told that the emergency room fee arrangement was based upon a historical analysis of the uncollected charges incurred in connection with the operation of the emergency room. While this may be true, it does not entirely eliminate the risk. In order to achieve safe harbor protection, the Hospital would need to amend its contract with the Volunteer Medical Group to a fixed fee arrangement based upon the fair market value of the services and facilities furnished by the Hospital.

I. Purchasing Discounts

The government has stated that it believes that supplier discounts that are tied to the number or amount of purchases may violate the anti-kickback law under certain circumstances. During our review, we uncovered a number of agreements that contained these kinds of discounts, including agreements for the purchase of medical equipment and supplies from Baxter, Berlex, Hewlett-Packard, Hill-Rom, Mallinckrodt Medical and Pfizer. In order to benefit from the protection afforded by the applicable safe harbor for discounts, the Hospital should confirm that:

The discounts are earned on purchases made within a single fiscal year;

The Hospital claims the discounts in the fiscal year in which they are earned or in the following year;

The Hospital fully and accurately reports the discounts in the applicable cost reports; and

The Hospital is able to furnish, on request, the invoices from the sellers disclosing the discounts.

3. Compliance Program Recommendations

The remainder of this report sets forth our recommendations on actions which need to be undertaken in order to implement an effective corporate compliance program for the Hospital. In general terms, compliance programs are designed to demonstrate to government authorities that a hospital has made an institutional commitment to adhering to all relevant laws as a matter of everyday practice. The specific elements which a hospital must consider in developing and implementing an effective compliance program are set forth in the United States Sentencing Guidelines for Organizations and in a set of model guidelines for hospitals recently published by the OIG and attached to this report as Exhibit B. In summary, an effective hospital compliance program should include, at a minimum, the following seven elements:

(1) the development and distribution of written standards of conduct, as well as written policies and procedures that promote the hospital's commitment to compliance and that address specific areas of potential fraud;

(2) the designation of a compliance officer and other appropriate bodies, such as a corporate compliance commitee;

(3) the development and implementation of regular, effective education and training programs for all affected employees;

(4) the maintenance of a process, such as a hotline, to receive complaints, and the adoption of procedures to protect the anonymity of complainants and to protect whistleblowers from retaliation;

(5) the development of a system to respond to allegations of improper activities and the enforcement of appropriate disciplinary action against employees who have violated internal compliance policies, applicable laws or federal health care program requirements;

(6) the use of audits to monitor compliance and assist in the reduction identified problem areas;

(7) the investigation and remediation of identified systemic problems and the development of policies addressing the non-employment or retention of sanctioned individuals.

In addition. the OIG guidelines state that "every effective compliance program must begin with a formal commitment by the hospital's governing body to include all of the applicable elements" in its compliance program. Exhibit C to this report contains a corporate resolution for this purpose that we recommend be adopted by the Hospital’s Board of Directors.

We also recommend that the Hospital assess the attitudes of employees on compliance issues prior to the implementation of the compliance program. An employee survey for this purpose is attached as Exhibit D. The purpose of this assessment is to establish a baseline of the Hospital culture as it relates to ethics, quality of care and compliance. We further recommend that an identical survey be conducted approximately one year after implementation of the Hospital’s compliance program. Because the Sentencing Guidelines require an effective compliance program, a comparison of the "before" and "after" survey results is a useful way of measuring the extent to which the compliance program has had the intended effect.

Our analysis of the measures needed to effectively implement the essential elements of an effective compliance program at the Hospital follows.

A. Standards of Conduct and Written Policies and Procedures

Every compliance program must contain written standards of conduct for the organization that have been endorsed by its senior management or governing body. This element is crucial to demonstrating the hospital's commitment to compliance and to deterring fraud and abuse. Presently, the Hospital has a two page Code of Ethics Statement that was furnished to us as part of the Billing Department Policy and Procedures Manual. This Statement speaks in very general terms about the Hospital's commitment to its patients, and contains one brief sentence about "fair billing practices." The Statement is silent with respect to several critical areas of risk to the Hospital, such as DRG upcoding and financial incentives that reward practitioners for referrals or otherwise violate the anti-kickback law.

As the next step in implementing its compliance program, the Hospital should develop much more comprehensive standards of conduct that clearly articulate the Hospital's commitment to compliance and integrity in all of its operations. Moreover, it is important that the standards be written in such a fashion that all employees can understand their full meaning. Every employee should have his or her own personal copy of the standards of conduct.

Because the standards of conduct are not meant to be a detailed list of specific rules, but rather a statement of fundamental guidelines, it also is essential that the Hospital have in place more specific written policies and procedures that address the significant compliance issues faced by Hospital personnel on a daily basis. On this score, we note that the Hospital presently has in place an effective policy for preventing billing in violation of the Medicare "72 hour rule," which prohibits a hospital from billing for outpatient services performed within 72 hours of an inpatient admission and which has been the subject of intense government scrutiny in recent years.

In several other areas, however, we found the Hospital's written policies and procedures to be limited and, in some important areas, lacking. In particular, much of the Billing Department Policy and Procedures Manual appeared to be a collection of specific responses to discreet issues, rather than a comprehensive outline of the process for developing and submitting claims for reimbursement to Medicare, Medicaid and other third party payers. We recommend that this Manual be revised to explain more comprehensively the billing process. with particular attention on issues of medical necessity, the standards for selecting and documenting diagnosis and procedure codes.' and the communications process between the billing department and clinical staff. Other written policies and procedures which we recommend the Hospital develop include the following:

Safeguards against inappropriate laboratory billing, including billing for services not performed or incorrectly coded;

Proper classification and allocation of costs on Medicare cost reports;

Safeguards against violation of the anti-kickback and Stark laws;

A prohibition on unlawful beneficiary inducements, including the provision of free items or services and the routine waiver of copayments or deductibles;

Guidelines for the marketing department that address anti-kickback and beneficiary inducement concerns;

A comprehensive policy on discharge planning and patient freedom of choice in the selection of post-hospital providers;

A more detailed policy on the provision of emergency services and the Hospital's obligations under the Medicare patient dumping law;

Billing requirements applicable to the transfer of Medicare patients to other hospitals;

Billing standards for physician services (especially evaluation and management code selection for the emergency room);

Bad debt and credit balance practices and procedures;

A document retention policy; and

Making compliance duties an element in the performance evaluations of managers and supervisors. A helpful discussion of the issues which should be addressed in many of these policies and procedures is contained in the OIG guidelines attached at Tab B (age Federal Register pages 8991-899' ).

B. The Compliance Officer

The second key element of an effective compliance plan is the designation of a compliance officer. The compliance officer should be a high-level official within the Hospital with direct access to the CEO or Board of Directors. The specific duties of the compliance officer should include:

Overseeing implementation of the compliance program;

Reporting to compliance committee, CEO and Board of Directors;

Reviewing and revising the Hospital's procedures to conform to changes in the law;

Developing and executing training programs for the Hospital's staff on compliance issues;

Ensuring that independent contractors and agents retained by the Hospital are aware of its compliance policies;

Coordinating efforts with the Hospital's human resources staff to prevent employment of sanctioned individuals or entities;

Assisting financial management staff in monitoring internal practices;

Implementing policies to encourage confidential reports of problems or suspected violations; and

Conducting internal investigations in response to any such reports and adopting appropriate corrective actions.

We understand that the Hospital has already established a compliance committee. Such committees, are an important part of an effective compliance program, and can provide valuable assistance to the compliance officer in analyzing policy options and working with the Hospital's clinical and financial departments in developing policies and procedures that promote compliance.

C. Education and Training

Although standards of conduct and written policies and procedures are necessary vehicles for communicating with employees on compliance issues, the government has come to view periodic training as another essential element of an effective corporate compliance program. Based on our review, it appears that the Hospital needs to develop a more effective system of staff education and training. We were told, for example, that there is no formal training program for personnel in the Billing Department. We also learned that the Marketing Department has not received any training on the restrictions imposed on its activities by the anti-kickback law and the beneficiary inducement provisions of the Health Insurance Portability and Accountability Act of 1996 ("HIPPA").

We recommend an initial round of training for all employees at the time the new compliance program is instituted. In addition to informing employees of the legal requirements applicable to their activities, training at this stage enables the Hospital to (1) inform employees of the Hospital's commitment to ethical conduct and the importance of compliance, and (2) introduce employees to the new compliance program.

In addition to the initial training, the Hospital will need to establish an ongoing program to assure appropriate training of all new employees., as well as periodic retraining for all Hospital employees on compliance issues and corporate ethics. We generally recommend a minimum of one to three hours of basic annual training, for all employees, and additional, more intensive and targeted training for managers and employees involved in coding, billing, cost reporting and marketing. Training should be mandatory for all employees, and attendance should be a part of an employee's job performance evaluation. In appropriate cases, failure to comply with training requirements may be the basis for disciplinary action by the Hospital.

Of course, the level of training should be commensurate with the employee's responsibilities; for example, the training for clinical staff might emphasize appropriate documentation and the anti-kickback and Stark laws, while financial staff might receive periodic training in areas such as proper DRG coding and refunds of credit balances. Training sessions should be documented, and the Hospital should retain attendance lists and copies of materials distributed to staff.

D. Developing Effective Lines of Communication

The Hospital's compliance program also must include a mechanism for employ.-o-s to report suspected illegal conduct to the compliance officer without fear of retaliation. Such communications may include (1) reports of suspected fraud, waste, or abuse, or (2) requests for clarification of appropriate procedures or relevant legal requirements. We understand the

Hospital's Human Resources Department presently has a system in place for receiving employee complaints. The Hospital may be able to utilize this same system as a mechanism for receiving compliance-related reports and inquiries from employees and agents of the Hospital. The compliance officer should maintain a record of all reports received, including the nature of any investigation and the results.

In addition, the Hospital should adopt written confidentiality and non-retaliation policies that are distributed to all employees to encourage the reporting of potential fraud.

E. Discipline and Employment Practices

An effective compliance program also should include enforcement of the Hospital's standards of conduct through appropriate and consistent disciplinary mechanisms. The Hospital should adopt uniform procedures for imposing discipline on employees who violate the standards of conduct or applicable federal and state laws. These guidelines should be in writing and incorporated into the Hospital's compliance manual.

The compliance program also must provide for hiring procedures that will assure that untrustworthy individuals are not given positions of authority within the Hospital. In this regard, we note that the Hospital's Human Resources Department currently has procedures in place for conducting background checks on new employees, which include contacts with the appropriate licensing agencies, enforcement agencies and data banks. We also recommend that the Hospital's employment application specifically require the applicant to disclose any criminal conviction or exclusion action. The Hospital's policies should prohibit the employment of individuals who have been recently convicted of a criminal offense related to health care or who are listed as debarred, excluded or other-wise ineligible to participate in federal health care programs.

F. Auditing and Monitoring

A compliance program will not be effective if it remains static. Thus, the Hospital will need to monitor the effectiveness of its compliance program through periodic audits conducted by internal or external auditors experienced in the application of federal and state laws, regulations, and policies. The building blocks of this process are already in place at the Hospital. For instance, all Medicare and TennCare claims for inpatient Services currently are reviewed by an outside consulting firm, and last year the Hospital retained another outside consulting firm to conduct a comprehensive review of the Hospital's charge master for outpatient services. In addition, the Hospital's "nurse auditor" conducts an almost daily internal review of the Hospital's charges for inpatient services, observation says and same day surgery, in order to ensure that they are supported by the documentation contained in the patient medical records. We commend the Hospital for undertaking these audit programs and recommend that they be incorporated into its compliance pro-ram. Other suggested areas for audit include:

Compliance with the anti-kickback and self-referral laws;

72 hour rule compliance;

CPT/HCPCS coding, including comparisons of the evaluation and management code selection of the emergency department physicians against regional and/or national averages;

Marketing practices;

Matters highlighted by past internal or external audits;

Special alerts published by the OIG, fiscal intermediaries, or carriers;

and conformance by all departments with the requirements of the compliance program.

In addition to periodic audits, the OIG also has recommended that hospitals document their efforts to comply with the law. For example, when the Hospital seeks additional information or clarification from HCFA, a fiscal intermediary, or a carrier, it should retain copies of all relevant correspondence and notes of oral information. These records can be valuable in demonstrating that the Hospital has made a good faith effort to obtain accurate information and had a basis for relying on that information.

G. Responding To Detected Offenses and Initiating Corrective Action

Finally, an effective compliance program must provide for prompt and consistent responses to violations that come to the attention of management. In particular, any overpayments that are identified must be promptly refunded to the appropriate payer regardless of whether or not a demand for repayment has been made. However, since voluntary disclosure cannot be considered a Guarantee against further criminal, civil, and administrative actions by government agencies, any contemplated disclosure should be undertaken after careful evaluation with counsel.

In evaluating the Hospital's compliance with this requirement, we noticed that in November 1996 the Hospital became aware of the fact that it had been billing Medicare inappropriately for the services of nurse practitioners and physician assistants in the emergency room. The Hospital responded appropriately by refunding the over payment. However, 11 months elapsed before the final refund check was sent to the Medicare intermediary. While this may have been a reasonable interval of time in the past, according to the OIG guidelines, the government now expects that Hospitals should take no more than 60 days to resolve such matters. We expect that the implementation of a corporate compliance program will help the Hospital to keep abreast of the government's changing expectations.

If there are any questions concerning our recommendations, or if we can provide the Hospital with any additional information, please do not hesitate to contact Harvey Yampolsky at (202) 857-6149 or Ron Wisor at (202) 857-6067.

NOTE:  The following exhibits and attachments are not online.  If you would like copies, e-mail me at Cnorm@aol.com.  Give your name (real or otherwise) and a mailing address.

> Executive Summary  - Similar to the main report's introductory discussion.  Available in the Herald-Citizen's online archives.

> Discussion of findings from review of medical charts from Cookeville Regional Medical Center.

> Excerpts from Federal Register - Publication of the OIG Compliance Program Guidelines for Hospitals.

> Recommended Board of Directors resolution for implementation of a fraud and abuse compliance plan. - As if fraud needed to be implemented.

> Recommended Employee Compliance Survey.