Feds close probe into Carolinas HealthCare System

The main entrance of Carolinas Medical Center, the flagship hospital for Carolinas HealthCare System.
The main entrance of Carolinas Medical Center, the flagship hospital for Carolinas HealthCare System. rlahser@charlotteobserver.com

The U.S. Department of Labor has closed its long-running investigation into Carolinas HealthCare System without taking enforcement action – but has reserved the right to bring a legal case against the massive hospital chain in the future.

The investigation began in late 2010, after Forsyth County whistleblower Joe Vincoli asked the Labor Department to examine whether Carolinas HealthCare’s ownership of a health benefits company poses a conflict of interest.

CHS co-owns MedCost, a for-profit company that administers health plans and contracts with hospitals and doctors’ offices to provide medical services. MedCost provides benefits to more than 20,000 employees who work for the Charlotte-based hospital system.

CHS officials have said they find nothing wrong with that arrangement. But Vincoli questions whether it has allowed the hospital system to take advantage of its employees.

The federal Employee Retirement Income Security Act, known as ERISA, prohibits most employers from using companies they own to provide health benefits for employees – unless they can show the Labor Department that they’re putting employees’ interests first.

But CHS officials contend they’re not governed by the federal law because of a provision that excludes governmental employers. CHS, one of the nation’s largest public hospital systems, is a governmental entity known as a “hospital authority.”

Documents and interviews suggest much of the Labor Department’s investigation focused on whether the hospital system is, in fact, a governmental agency as it claims.

In a Dec. 29, 2015, letter to attorneys for CHS, a regional director for the department wrote: “Although we believe that your arguments supporting CHS as a governmental entity, as CHS presently exists, may be incorrect … this is to advise you that at the present time we are closing our investigation of the Plan.”

The Labor Department said it may reconsider the matter once the U.S. Treasury Department finalizes regulations to help agencies determine whether retirement plans are governmental. The department also said it would make its findings and documentation available to “any interested party.”

“The mere fact that they’re closing the investigation of the plan does not give safe harbor to CHS,” said Chet Rabon, a Charlotte trial lawyer who concentrates on government fraud claims. “It cannot be counted as protection from any lawsuit.”

Accountable to public?

CHS – also called the Charlotte-Mecklenburg Hospital Authority – is a tax-exempt entity created by state law in 1943. It has the power of eminent domain, which means it can force property owners to sell at a fair market value to make room for hospital projects.

But critics contend that in other important respects, CHS doesn’t resemble a government agency. Board members aren’t appointed by elected officials, for instance, and they don’t set aside time for public comment at their meetings.

Any change to the hospital system’s official status as a governmental entity could have major consequences.

The system would be subject to ERISA requirements, for example, and might have to set aside millions more to satisfy employee pension obligations, according to Karen Handorf, a Washington, D.C., lawyer who represents participants of employee benefit plans.

CHS, the state’s largest hospital system, runs Carolinas Medical Center and about 40 other hospitals. Hospital officials declined to say whether they would make any changes in response to the Labor Department’s investigation.

But Amy Murphy, a spokeswoman for Carolinas HealthCare, said: “We are pleased and not surprised that the Department of Labor has closed the investigation.”

MedCost’s other owner – N.C. Baptist Hospital – has also been hit with conflict of interest allegations.

In 2009, Baptist’s employees sued the hospital, alleging that its choice of MedCost was not serving the best interests of employees.

As a preferred provider organization, MedCost is supposed to negotiate on behalf of employees to get discounts for medical services from hospitals and doctors’ offices.

But N.C. Baptist employees contended the hospital chose MedCost, its subsidiary, because it wanted its employees in a PPO that wouldn’t drive a hard bargain on treatment costs that employees pay at the hospital.

N.C. Baptist ultimately agreed to pay nearly $5.4 million to settle the suit. In 2014, the Labor Department ruled that N.C. Baptist had not shown that its use of MedCost was in the best interest of its employees.

“People assume their interests are being protected and looked out for,” Vincoli said. “And I think that’s naive, unfortunately.”

Medicare fraud alleged

In 2006 and 2007, Vincoli was N.C. Baptist’s director of managed care, a job that made him responsible for negotiating the hospital’s contracts with MedCost and other payers.

In 2009, he filed a federal lawsuit alleging that N.C. Baptist and Carolinas Medical Center have fraudulently obtained tens of millions of dollars from Medicare and Medicaid through their ownership of MedCost.

The suit contends that the two hospitals overstated their costs – and thereby extracted more money from Medicare – by using MedCost.

Officials for Carolinas HealthCare have declined to discuss the case. But Wake Forest Baptist Medical Center, which includes N.C. Baptist, has disputed the lawsuit’s claims. The case is still pending.

Alexander: 704-358-5060; @amesalex