In a lawsuit, a former hospital executive says Prime Healthcare Services urged doctors to admit emergency room patients to the inpatient wings if they were covered by Medicare or private insurance. Credit: Monica Lam/California Watch

Prime Healthcare Services will pay $65 million to settle a federal whistleblower lawsuit that accused the fast-growing California hospital chain of engineering a wide-ranging Medicare fraud scheme.

The settlement, announced Friday by federal prosecutors in Los Angeles, requires Dr. Prem Reddy, Prime’s founder and the alleged architect of a scheme to pump up its Medicare billings, to pay $3.25 million of the settlement out of his own pocket.

Prime also must abide by a five-year “corporate integrity agreement” that requires the company to hire independent consultants to verify its Medicare billings, records show.

Federal scrutiny of Prime’s billing practices began after a 2011 investigation by The Center for Investigative Reporting that highlighted multimillion-dollar anomalies in the chain’s billings to the federal Medicare program.

Prime, headquartered in San Bernardino County, is among the nation’s largest hospital chains. With an affiliated nonprofit foundation, it runs 45 hospitals in 14 states. In agreeing to the settlement, the company did not admit wrongdoing.

“There was no finding of improper conduct or wrongdoing of any kind by Prime Healthcare,” the company said in a statement.

“Prime Healthcare’s exemplary record of clinical quality care was never in question. This matter dealt with the technical classification of the category under which patients were admitted and billed.”

The whistleblower lawsuit was filed in 2011 by Karin Berntsen, a nurse and risk management director at Prime’s Alvarado Hospital in San Diego County. She claimed personal knowledge of the chain’s efforts to boost its bottom line with false billings and improper hospital admissions. In 2016, the government joined her as a plaintiff in the lawsuit, which was filed under the federal False Claims Act.

In its series “Decoding Prime,” CIR reported that the chain was reaping millions of dollars in Medicare bonus payments by claiming to treat large numbers of elderly patients for a long list of rare medical conditions. Experts said the billings defied credulity.

For example, at its Shasta Regional Medical Center in the Northern California city of Redding, Prime over two years billed Medicare for treating more than 1,000 senior citizens for kwashiorkor, a nutritional disorder usually seen among starving children during African famines. Experts said it appeared Prime was engaged in a form of Medicare fraud called upcoding, in which a computerized Medicare bill is padded with payment codes to qualify for bonus treatment payments.

Citing billing data, CIR also reported that Prime transferred an unusually high number of Medicare patients from its emergency rooms to its hospital beds, gaining hundreds of millions of dollars in federal reimbursements. Customers without Medicare or insurance tended to be treated as outpatients, the data indicated.

After the stories were published, several members of Congress urged the U.S. Department of Health and Human Services to investigate Prime’s billings. In 2012, the FBI began its own probe, after Prime had publicized the medical records of a Redding patient in an effort to rebut CIR’s story about the reported kwashiorkor outbreak.

The state of California fined Prime $95,000 for violating the patient’s privacy, and Prime paid an additional $275,000 to settle a Health and Human Services lawsuit over the issue.

In her whistleblower complaint, Berntsen said said she got a first-hand look at Prime’s illegal practices after the company acquired Alvarado Hospital in 2010.

“Karin witnessed Prime and its corporate leaders quickly implement sweeping changes … that she knew were unlawful and potentially dangerous to patients,” said her lawyer, Marlan Wilbanks of Atlanta. Berntsen saw both upcoding and a systematic program of unnecessarily admitting Medicare patients to the hospital, Wilbanks said in a statement.

Berntsen protested but her complaints were ignored, her lawsuit says. After that, she “wore a wire” to hospital meetings to record evidence of the illegal conduct, her lawyer said.

The False Claims Act seeks to recoup federal funds that have been wrongly paid to government contractors. By law, whistleblowers split legal settlements with the government. Berntsen will receive $17 million, documents show.

The government joined the lawsuit against Prime to protect taxpayers, Acting Assistant U.S. Attorney General Chad Readler said in a statement.

“Charging the government for higher cost inpatient services that patients do not need, for higher-paying diagnoses than the patients have, wastes the country’s valuable health care resources,” he said.

Lance Williams can be reached at lwilliams@revealnews.org. Follow him on Twitter: @LanceWCIR.

Lance Williams is a senior reporter for Reveal, focusing on money and politics. He has twice won journalism’s George Polk Award – for medical reporting while at The Center for Investigative Reporting, and for coverage of the BALCO sports steroid scandal while at the San Francisco Chronicle. With partner Mark Fainaru-Wada, Williams wrote the national bestseller “Game of Shadows: Barry Bonds, BALCO, and the Steroids Scandal that Rocked Professional Sports.” In 2006, the reporting duo was held in contempt of court and threatened with 18 months in federal prison for refusing to testify about their confidential sources on the BALCO investigation. The subpoenas were later withdrawn. Williams’ reporting also has been honored with the White House Correspondents’ Association’s Edgar A. Poe Award; the Gerald Loeb Award for financial reporting; and the Scripps Howard Foundation’s Award for Distinguished Service to the First Amendment. He graduated from Brown University and UC Berkeley. He also worked at the San Francisco Examiner, the Oakland Tribune and the Daily Review in Hayward, California. Williams is based in Reveal's Emeryville, California, office.