The interim CEO of Shawnee Mission Health feared he would go to jail over a kickback scheme involving doctors at his former job, according to court documents from a lawsuit brought by whistleblowers and the federal government.
Karsten Randolph was the chief financial officer of Park Ridge Health in North Carolina from 2011 to 2014. In the kickback scheme he was accused of participating in, doctors were paid exorbitant salaries and bonuses when they referred patients for expensive tests and procedures. Federal officials say the payments wasted money and undermined patient care.
The alleged scheme happened across 20 hospitals owned by Florida-based Adventist Health System, including Park Ridge and Shawnee Mission Medical Center.
In the end, nobody went to jail for it.
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Instead, Adventist Health paid $118.7 million in September 2015 to settle the whistleblower lawsuit — a record at the time for a suit of its kind. By then, Randolph had been transferred to the same job, CFO, at Shawnee Mission, which is about four times bigger than Park Ridge.
When former Shawnee Mission Health CEO Ken Bacon left last month, Randolph was tapped to lead the hospital until Sam Huenergardt arrives May 28.
Peter Chatfield, an attorney who represented the whistleblowers, said he wasn’t surprised that Randolph continued to rise through the Adventist system, despite his involvement in the kickback scheme.
“It shouldn’t be the kind of thing that’s happening, but in reality, that’s what happens a fair amount,” Chatfield said.
“At the end of the day, once the noise and the outrage that some of the Adventist community had about not wanting to be associated with people who act this way, once that sort of fades away, they have these experienced execs who know how the company works and in fact made more money for the company with what they did than they ended up paying to the government.”
Melanie Lawhorn, a spokeswoman in Adventist Health’s corporate office, said the nonprofit hospital chain made reforms after the settlement, including centralizing physician compensation, strengthening financial auditing and improving training.
“Karsten contributed significantly to those improvements,” Lawhorn said via email. “He is a man of integrity and an extremely valued leader within Adventist Health System. Our organization believes he has and will continue to have a tremendous and positive impact on Shawnee Mission Health.”
Lawhorn and a Shawnee Mission Health spokeswoman didn’t respond to requests to interview Randolph. Randolph didn't respond to messages left by phone and email Wednesday.
According to court documents, Randolph knew Adventist Health was running an illegal payment scheme for some time, but he didn’t report it to federal officials because the amount of money the company would have to pay back was “insane.”
Instead, the suit says, he tried to cover it up by asking other employees to "lose" internal documents.
The scheme alleged in the whistleblower suit started with executives like Randolph at Park Ridge and other Adventist Health hospitals paying physicians above-market rates, and in some cases, even paying off their debts or car leases.
The reward for Adventist Health came not from the direct patient care the physicians provided. The payoff instead came in the business created when those physicians referred patients for other services within the Adventist Health System.
If family practitioners ordered enough MRIs within the system, it would be worth overpaying them.
In addition to paying salaries well outside the norm, some hospitals allegedly paid bonuses to the doctors based on the total revenue they generated in direct care and the referrals.
The arrangement, according to government attorneys, violated a federal anti-kickback statute, the Medicare/Medicaid false claims act and a law called the Stark Statute that governs physician referrals.
Violations of those laws are somewhat common.
One legal expert called the Stark Statute “a tortured web of confusing standards” in 2016 congressional hearings, and a law firm called Krieg Devault compiled a list of dozens of financial penalties paid by medical providers across the country, some of them for self-reported violations and others from lawsuits.
But Adventist Health’s was the largest payout for a case involving hospital kickbacks at the time, and Jill Westmoreland Rose, a U.S. attorney in North Carolina who was involved in the case, said it should send a message to other medical providers.
“This type of financial incentive is not only prohibited by law, but can undermine patients’ medical care,” Rose said in a news release announcing the settlement.
The whistleblower suit also accused nine Adventist Health hospitals of overbilling Medicare.
Fear of jail time
According to the whistleblower suit, the kickback scheme started to fall apart in June 2012 when Kelly Pettijohn, Adventist Health’s CFO, sent an email to all of the CFOs and financial controllers at 20 Adventist hospitals.
The email indicated that while the corporate office expected certain physician practices to be money losers, it was going to start sending out internal reports that showed the “contribution margins” those practices brought in through referrals.
Pettijohn followed that up with a spreadsheet with the contribution margins.
The spreadsheet went to all of the hospital administrators, and Park Ridge’s president, Jason Wells, forwarded it on “to several midlevel management employees” at his facility.
Randolph knew from the beginning that the spreadsheet was trouble, according to the lawsuit. It essentially proved that the Adventist Hospitals were buying referrals.
Randolph “told Wells to ask all employees to whom he had forwarded the spreadsheet to ‘lose them,’” the suit said.
Instead, several of the employees became whistleblowers and worked with the government to expose the scheme.
One of the whistleblowers was Melissa Church, the executive director of physician services for Park Ridge Health.
According to court records, she was present for a 2012 meeting with Randolph and Park Ridge chief of staff David Manly during which Randolph expressed concern that the bonuses the hospital was paying to a group of psychiatrists had gotten out of hand.
The contracts would have to be changed, Randolph said, according to the suit, or “he would be at risk of going to jail” because they were clearly “not commercially reasonable.”
It was one of multiple times that Church said Randolph told her he was worried about going to jail over the physician pay.
“Despite knowing that these payments are improper, (Randolph) has said he has no intention of reporting the issue to CMS (the Centers for Medicare and Medicaid Services) because the amount of money due to the government would be ‘insane,’” the lawsuit said.
When asked about that part of the suit, Lawhorn said she had nothing more to share.
“Our organization has moved past this,” Lawhorn said. “We don’t believe singling (Randolph) out based on unsubstantiated comments made several years ago and pulled out of context is helpful or accurate. The most important thing I want to relay is that (Randolph) is a valued member of our leadership team, Shawnee Mission Health, and the surrounding community.”
Some aspects of the suit remain current.
Under federal law, hospitals can require physicians who work for them to refer patients for services within the same health system. But they must allow exceptions when the patient wants to go elsewhere or the physician believes it’s in the patient’s best interest to go elsewhere.
According to the whistleblowers and the government, the Adventist Health hospitals applied “undue pressure” on their doctors to dissuade them from referring patients to facilities outside Adventist Health.
The suit specifically mentioned a policy at Shawnee Mission Medical Center.
“Defendant Shawnee Mission requires its physicians to fill out an ‘exception report’ every time they refer a patient to a service outside of the hospital,” it said.
Lawhorn said Shawnee Mission Health still uses the exception reports, but they’re meant only to gather data, not to pressure physicians to keep patients in-house.
“I am aware that Shawnee Mission Health does track referrals to see when they trend out of network, so that they can identify any gaps in specialties and ensure they are providing the services their patients need and want,” Lawhorn said.
Under federal whistleblower laws, Chatfield’s clients got 15 to 25 percent of the settlement. The rest went to the federal government and a couple of states that joined in the suit based on their Medicaid payments to the hospitals involved. Kansas was not one of them.
Chatfield said the payout could have been bigger, but Adventist Health did its own investigation, admitted some violations and came to the bargaining table after the suit was filed.
At the time, an Adventist Health spokeswoman characterized that as a self-disclosure, but Chatfield said that’s not quite right given that the disclosure came after the suit.
“They got the benefits of self-disclosure in terms of the reduced liability and a sort of discount from the federal government,” Chatfield said. “But I’ve never considered it a true self-disclosure.”
Adventist Health, which operates 46 hospitals nationwide, was bringing in revenue of about $6 billion to $7 billion in the final years of the physician referral scheme, which began in the late 1990s, according to court records.
Based on his experience as a whistleblower attorney, Chatfield said he wasn’t surprised that the fortunes of the company and the people involved in the scheme have continued to rise since the settlement.
In a previous case, he represented people who came forward to report Medicare overbilling fraud at Columbia/HCA, another large hospital chain.
That case ended in $1.7 billion in fines for the company but no punishment for its CEO, a man named Rick Scott. He’s now governor of Florida.
“Being fast and loose and hyper-aggressive in white-collar crime or fraud gets treated much differently than what happens with other kinds of crime,” Chatfield said. “A lot of times people end up being rewarded.”