U.S. Believes O.C.’s FHP Overcharged It

FOUNTAIN VALLEY —  The Justice Department has claimed that health maintenance giant FHP International Corp. may have overcharged as much as $15 million on its health-benefit contracts for federal employees over a five-year period, FHP disclosed Thursday.

The government notified the Fountain Valley-based company in April that it believes FHP may have violated provisions of the federal False Claims Act, the legal tool the government uses to prosecute contractors making false or fraudulent claims.

As a result of the Justice Department’s notice, FHP has set up a $45-million reserve fund in case it is required to pay additional charges, including possible triple damages.

The company said it may also face claims that it overcharged the government in other years. A spokeswoman said it was too early to determine the extent of any possible additional claims.

The company currently provides health benefits to more than 150,000 federal employees in nine states, including California, and Guam.

A former Justice Department official said the agency has been increasingly using the tool as a way to implement the Clinton administration’s high-priority commitment to root out fraud and abuse in the health-care industry.

Westcott W. Price, FHP’s chief executive, said the government’s claim took the company by surprise. He said another agency questioned the company’s charges nearly three years ago during a routine audit. An FHP spokeswoman said that the company challenged assumptions made by government actuaries in its response to auditors and maintains that it didn’t overcharge the government.

FHP heard nothing further from a government agency until receiving the Justice Department’s notice, Price said. “I was surprised that after all this time we got a letter like that,” he said.

Price said the government has not indicated that it is investigating possible fraud by the company and hasn’t filed any formal action. He said FHP is trying to negotiate with the government to avoid litigation.

Debra Cohn, special federal counsel in charge of health-care fraud, wouldn’t confirm that the agency is looking at FHP and said it doesn’t comment on open cases.

“As a general matter, the Department of Justice is investigating more health-care fraud cases and bringing more health-care prosecutions in both civil and criminal cases,” Cohn said. “And with the growth of managed care, we are looking more at managed-care cases.”

Stuart Gerson, a lawyer who represents health-care providers and other companies in false claims cases brought by the government, said government officials are “particularly interested in assuring that services are actually being provided and best prices are being received in contracts, so that managed care does what it says it’s going to do, which is produce efficiencies at a lower cost.”

The government is now recovering more money on false claims by the health-care industry than it is recovering in similar claims by defense contractors, said Gerson, a former assistant attorney general during the Bush administration.

Questions about possible overcharging by FHP arose during an audit of the company’s federal contracts from 1987 through 1991 by the Office of Personnel Management, which administers the health benefits program for government workers ranging from postal employees to administrators, the company said. Auditors apparently have questioned whether FHP complied with a requirement that it provide health-care benefits to federal employees at the lowest rates that it charges other customers.

A company spokeswoman said that rate setting is an extremely complicated process involving a host of factors such as demographics and levels of benefits in a given community. She said the company disagrees with the government’s calculations.

In setting up the reserve fund, FHP also took a $45-million charge against its quarterly earnings. Tom Snow, a financial analyst at Buckingham Research in New York said the action “came out of the blue.”

The company reported a loss of $11.7 million, or 9 cents a share, on $1.1 billion in revenue for the period. Income before the charge amounted to $17 million, or 40 cents a share.

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FHP International Corp.

In the third quarter ended March 31, FHP International reported a loss of $11.7 million on revenue of $1.1 billion. According to the company, its earnings were affected by its decision to add $45 million to its reserves pending the result of a government investigation that it allegedly overcharged for health-care services provided to federal employees. Figures in millions of dollars, except per-share data:

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3rd qtr. 3rd qtr. 9 months 9 months 1995 1996 1995 1996 Revenue $1,001 $1,061 $2,910 $3,082 Net income (loss) 21.8 (11.7) 51.7 2.9 Per share (loss) 0.49 (0.09) 1.21 0.39

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Source: FHP International Corp.

Researched by JANICE L. JONES / Los Angeles Times