Medicare rejections under scrutiny

WASHINGTON — California lawmakers are questioning whether an auditing company in which San Francisco investor Richard Blum, the husband of Sen. Dianne Feinstein, has a major financial stake is rejecting Medicare claims at California rehabilitation hospitals to reap millions of dollars in profits at the expense of patient care.

The company, PRG-Schultz International, has a contract with the Centers for Medicare and Medicaid Services, the overseer of the Medicare program, to check payments in California for mistakes. Its only pay is a bounty of up to 30 percent on the "overcharges" it identifies.

The California Hospital Association raised concerns in November that PRG-Schultz was targeting rehabilitation hospitals that cared for Medicare patients after knee- or hip-replacement surgery. The hospital association said PRG-Schultz has reviewed thousands of cases dating as far back as 2002 and has rejected nearly all as medically unnecessary.

Her husband's business interests in PRG-Schultz have proved awkward for Feinstein, the state's Democratic senior senator, as the hospital association turns to Congress for relief.

Feinstein's press aide, Scott Gerber, said the senator played no role in the legislation creating the auditing program and did not intervene to help PRG-Schultz get the three-year contract in 2005.

On Thursday, after questions, Feinstein sent a letter to the Centers for Medicare and Medicaid Services that called the hospital association's concerns "potentially serious." She asked program administrators to investigate.

Feinstein did not mention her husband's interest in PRG-Schultz, which she lists in her annual financial-disclosure reports.

California House members soon will follow with a joint letter asking for an investigation.

The auditing program was set up as a demonstration project initially focusing on the three highest-cost Medicare states: California, New York and Florida. Separate contractors are used for each state. PRG-Schultz is the only for-profit contractor, and Medicare administrators think it has been the most controversial because it alone has zeroed in on rehabilitation hospitals.

On the brink of financial collapse when it won the contract two years ago, PRG-Schultz has found the job to be enormously lucrative. Government figures indicate it had rejected $105 million in California Medicare overcharges as of Sept. 30, the end of the 2006 fiscal year.

Medicare managers said they could not release figures for how much PRG-Schultz was claiming as commissions, saying the information was proprietary. But based on bounties of 28 percent that were used in establishing the program, PRG-Schultz's entitlement could be up to $29.4 million.

The California Hospital Association said in a letter to Medicare administrators in November that PRG-Schultz should be suspended for improperly applying Medicare rules and using unqualified personnel.

PRG-Schultz declined to comment. But officials of the Centers for Medicare and Medicare Services defended PRG-Schultz, saying it's applying rules on medically necessary admissions that probably have been ignored in California for years.

A call to Blum Capital Partners — of which Blum is board chairman — asking for comment was not returned.

PRG-Schultz reported a first-quarter profit this year of $1.5 million, compared to a $10 million loss for the same period in 2006.