A Global Reach with a Local Perspective
FALL
INSTITUTE
2011
HFMA Georgia Chapter
D. MICHAEL COSTELLO, CPA, ABV, ASA, CFE, CFF
Successful financial testimony
strategies in healthcare litigation
– from an expert witness perspective
www.decosimo.com
D. Michael Costello
CPA, ABV, ASA, CFE, CFF
Principal | mikecostello@decosimo.com
Mike Costello's experience includes extensive consulting work
and testimony in tax, accounting, financial, economic, and
business issues of commercial litigation, with emphasis on
business valuation, economic damage and forensic accounting
issues in the healthcare industry. Mike has been retained in
healthcare litigation involving a physician practice breakup, a
breach of contract case involving a hospital chain, a wrongful
termination suit involving a hospital, an economic damages
case involving a lease of an image-guided radiotherapy system
and a breach of contract case involving a home health agency.
His business valuations have been used and upheld in various
courts, including the Tennessee Court of Appeals, and in
connection with buy-and-sell transactions.
SESSION OBJECTIVES –
 Identify the most common litigation issues faced by
healthcare entities
 Discuss fraud schemes that have occurred within
healthcare entities
 Discuss the use and importance of financial
information in the litigation process
SESSION OBJECTIVES –
 Understand the roles and requirements that CPAs
must adhere to in providing litigation support
services and serving as expert witnesses
 Litigation contingencies – understand GAAP
requirements for reporting and disclosure
TYPICAL CASES IN HEALTHCARE
What are the typical types of cases you might see in a
healthcare environment?
 Suits brought by physicians or physician groups
 Post merger dispute cases
 Compliance cases brought by a governmental
agency
 Medical malpractice
TYPICAL CASES IN HEALTHCARE
 Prescription drug lawsuits
 Contract disputes
 Product liability
 Medical class action
TYPICAL CASES IN HEALTHCARE
 EMTALA cases
 Health care fraud
 Federal False Claims under Medicare and Medicaid
 Stark or Anti-kickback cases
FRAUD SCHEMES
Fraud schemes are in abundance. What will they think of
next?
A social worker uses seniors' insurance information to
submit phony claims.
A physician illegally prescribes painkillers to patients.
A man copies a co-worker's insurance information to file
prescriptions for a dangerous and addictive painkiller.
A chiropractor prescribes more than $1.5 million worth of
medically unnecessary back braces to senior citizens.
CASE STUDY: SOCIAL WORKER
After a recent visit to the ophthalmologist, a BCBS
member received her EOB and noticed services listed
that she didn't receive.
She called the BCBS Anti-Fraud Hotline number listed
on her EOB.
The BCBS Corporate and Financial Investigations
department found that this ophthalmologist had been
billing improperly for other patients as well.
The ophthalmologist was contacted by BCBS, who
then refunded BCBS for all of the improperly billed
services.
CASE STUDY: SOCIAL WORKER
Through an investigation by CFI and the FBI, it was learned that a
social worker billed for services when she was out of the country or
on vacation, as well as for an individual who had died.
For years, the social worker engaged in fraudulent billing practices
that included back-dating services to exhaust previous years'
benefits.
She was also billing for services for an entire family when she only
saw one or two family members, inflating her billing amounts to cover
co-pays and billing for more hours than in a normal work day.
She was sentenced to 24 months incarceration and was also ordered
to pay $276,794 in restitution to BCBS and four additional private
insurers.
CASE STUDY: ILLEGAL PRESCRIPTIONS
A county sheriff received information that a dentist was
illegally prescribing hydrocodone, oxycodone and
diazepam for his patients and other individuals.
The sheriff contacted the Federal Bureau of
Investigation and requested their assistance.
The FBI then contacted the Corporate and Financial
Investigations department at Blue Cross Blue Shield to
investigate the claims submitted to the BCBS for these
drugs.
The felony charges were punishable by 10 years to life
in prison and up to a $14 million dollar fine.
CASE STUDY: HOME HEALTH FRAUD
An individual pleaded guilty in U.S. District Court in connection
with a $4.65 million home health care fraud scheme and faced up
to 10 years in prison and a maximum $250,000 fine.
The individual admitted to billing Medicare for home health care
visits that were medically unnecessary or never provided.
He worked as the office administrator and ran the company's dayto-day operations.
He also admitted to a scheme that paid cash kickbacks to
Medicare beneficiaries in exchange for their Medicare ID numbers
and signatures on documents that falsely indicated they received
services from the firm.
The scheme also relied on physical therapists and physical
therapy assistants who signed documents required to bill
Medicare.
FRAUD PREVENTION QUESTIONS
Certified Fraud Examiners’ Report to the Nation – Asks
these fraud preventions questions to help eliminate
fraud:
 Is ongoing anti-fraud training provided to all
employees of the organization?
 Is an effective fraud reporting mechanism in place?
PROACTIVE MEASURES
To increase employees’ perception of detection, are the
following proactive measures taken and publicized to
employees?
 Is possible fraudulent conduct aggressively sought out,
rather than dealt with passively?
 Does the organization send the message that it actively
seeks out fraudulent conduct through fraud assessment
questioning by auditors?
 Are surprise fraud audits performed in addition to regularly
scheduled fraud audits?
 Is continuous auditing software used to detect fraud and, if
so, has the use of such software been made known
throughout the organization?
PROACTIVE MEASURES
 Is the management climate/tone at the top of honesty
and integrity?
 Are fraud risk assessments performed to proactively
indentify and mitigate the company’s vulnerabilities
to internal and external fraud?
 Are strong anti-fraud controls in place and operating
effectively, including the following?
PROACTIVE MEASURES
 Does the internal audit department, if one exists, have
adequate resources and authority to operate effectively
and without undue influence from senior management?
 Does the hiring policy include the following (where
permitted by law)?
 Past employment verification
 Criminal and civil background checks
 Credit checks
 Drug screening
 Education verification
 References check
PROACTIVE MEASURES
 Are employee support programs in place to assist
employees struggling with addictions,
mental/emotional health, family or financial
problems?
 Is an open-door policy in place that allows
employees to speak freely about pressures,
providing management the opportunity to alleviate
such pressures before they become acute?
 Are anonymous surveys conducted to assess
employee morale?
TOP 5 REASONS ATTORNEYS USE
FINANCIAL EXPERTS
Here are the top 5 issues for which attorneys use
financial experts:
 Financial Statement Misrepresentations
 Economic Damages Calculations
 Fraud Detection and Response
 Valuation
 Bankruptcy, Insolvency and Reorganization
 Family Law
FORENSIC ACCOUNTING
Forensic accounting generally involves:
 The application of specialized knowledge and
investigative skills possessed by CPAs
 Collecting, analyzing and evaluating evidential
matter
 Interpreting and communicating findings in the
courtroom, boardroom or other legal/administrative
venue
FORENSIC KNOWLEDGE
Fundamental forensic knowledge includes:
 Professional responsibilities and practice management
 Laws, courts and dispute resolution
 Planning and preparation
 Information gathering and preservation (documents,
interviews/interrogations, electronic data)
 Discovery
FORENSIC ACCOUNTING SKILLS
The specific skills being requested by those engaging forensic
accountants include:
 Analyze and interpret financial statements and information
 Testifying
 Knowledge of relevant professional standards
 Audit evidence
 Fraud detection
 Asset tracing
FORENSIC ACCOUNTING SKILLS
Analytical characteristics are critical to the forensic
accountant’s ability to provide value-added services in
engagements calling for more than simply auditing
skills and problem-solving abilities.
However, in forensic engagements, the accountant
must be able to get at the records required to analyze,
which is generally an issue. Information may be
gathered through interrogatories, depositions or by
court order.
FORENSIC ACCOUNTING SKILLS
Sometimes basic financial information is not
obtainable.
That is when the forensic accountant is vital. In cases
where it is not possible to gather the records needed,
the pieces of the financial puzzle must be put together.
Forensic accounting and expert testimony involves the
recreation of financial information where little, or
perhaps no financial information exists.
FORENSIC ACCOUNTING SKILLS
In one case, we took bank statements, emails having
financial information and other lists created by the
parties to form up basic financial statements.
The key in such a case is to communicate findings in a
credible way.
If no other records exist, then the records produced by
a forensic accountant are all that are available.
If no other records are produced, then the basic
statements are given great weight in a court of law.
RECENT CASES –
 A valuation review in a lawsuit between a
neurosurgery group and a hospital.
 An identity theft fraud case involving a trusted
individual in a physician practice.
 A bet-the-company breach of contract suit filed by a
supplier against a hospital group.
 A physician practice break up dispute.
TERMINATION
Termination. Either Party may terminate this Agreement
upon one-hundred twenty (180) days’ prior written notice to
the other Party. Should CLIENT terminate this agreement
within the initial term, then a lump sum payment of $50,000
and associated software license fee paid by
PLAINTIFF/SERVICE PROVIDER to a third party. Upon the
termination of this Agreement, CLIENT shall continue to
pay professional fees to PLAINTIFF/SERVICE PROVIDER
in respect of funds received by CLIENT within (90) days
following the date of termination or expiration of this
agreement in respect of accounts previously assigned to
PLAINTIFF/SERVICE PROVIDER.
LEASE VALUATION
Excerpt from the lease that was at issue:
[i]n the event there is an action or inaction with respect to
reimbursement which results in the… ($7,500.00) rental payment being
commercially unreasonable to the Lessee, the parties shall obtain an
updated third party valuation as to the fair market value and
commercial reasonableness of the rental payment. In the event that
valuation does not support a change to the… ($7,500.00) amount, the
per Case payment shall be the greater of the valuation amount or…
($5,500.00). Thereafter, the appropriateness of the rental payment may
be evaluated at the request of either party by an independent valuation
expert mutually agreeable to the parties; provided, that in no event will
the rental payment amount be less than… ($5,500.00), unless such
amount would result in a commercially unreasonable result in operation
of Hospital department. The cost of the valuation shall be borne by the
requesting Party.
PAYMENT OF COMPENSATION
The Employee’s Salary plus the Bonus shall be full
payment to the Employee for all services rendered by
Employee to the Employer under this Agreement.
Notwithstanding any provisions to the contrary herein,
Employee’s Salary and Bonus will be paid to Employee to
the extent the Employer has available cash flow. Any
amounts not paid to Employee will be paid to Employee as
soon as Employer has available cash flow.
LITIGATION SERVICES DEFINED
The AICPA defines litigation services as:
“consulting services that ordinarily involve
pending or potential formal legal or regulatory
proceedings before a trier of fact in connection
with the resolution of a dispute between two or
more parties.”
LITIGATION SERVICES GUIDELINES
 AICPA Professional Standards
 AICPA Statement on Standards for Consulting
Services
 AICPA Consulting Services Special Report 03-1,
Litigation Services and Applicable Professional
Standards
LITIGATION SERVICES GUIDELINES
 AICPA Statement on Standards for Valuation
Services No. 1
 Uniform Standards of Professional Appraisal
Practice
 ASA Business Valuation Standards
 ASA Principles of Appraisal Practice and Code of
Ethics
LITIGATION SERVICES GUIDELINES
 ACFE Code of Ethics
 Federal and state regulatory standards
 AICPA Special Report 08-1, Independence, Integrity
and Objectivity in Performing Forensic and Valuation
Services
 AICPA Practice Aids
LITIGATION SERVICES GUIDELINES
The following professional standards are specifically
identified and explained in Special Report 03-1 –
 Rule 102, Integrity and Objectivity
 Rule 201, General Standards
 Rule 202, Compliance with Standards
 Rule 301, Confidential Client Information
 Rule 302, Contingent Fees
 Rule 101, Independence
 Rule 203, Accounting Principles
FORENSIC EXPECTATIONS
What does the public expect from forensic accountants?
 To follow the highest standards of professional ethics
 To communicate in a manner that is not misleading
 To perform ethically and competently, with impartiality,
objectivity and independence
 To not perform an assignment with bias, not advocate the
cause or interest of any party or issue, not accept
assignments that include the reporting of predetermined
opinions or conclusions and not perform an assignment
in a grossly negligent manner
LITIGATION CONTINGENCIES
Finally, what are the rules for litigation
contingencies? The SEC appears to be increasing
its scrutiny of compliance with financial statement
disclosure rules regarding potential court losses.
The heightened attention is intersecting with a threedecades-old treaty for lawyers and accountants
forged by the AICPA and the American Bar
Association.
LITIGATION CONTINGENCIES
The point is that companies need to do what it takes
to see that those things are properly evaluated and
properly reported in the financial statements.
The treaty is not part of generally accepted
accounting principles, and it’s generally accepted
accounting principles that have the last word.
And if a company does not fairly present its financial
statements because the treaty has impeded dialogue
with the auditor—that is not something the SEC will
look favorably on.
LITIGATION CONTINGENCIES
Both FASB and the SEC have been raising a concern
that the present system is broken or, if not broken,
not working optimally when it comes to financial
statement presentation of litigation contingencies.
From FASB’s perspective, they are looking at
whether they need to revise the standard. From the
SEC’s perspective, they are looking at whether
compliance with the present standard should be
enhanced. And it so happens that all of this is
coming together in this financial reporting season.
LITIGATION CONTINGENCIES
Here’s the nut of the problem.
FASB, to its credit, wants investors and other users
to get the best possible information that financial
statements can convey.
But when it comes to reporting on litigation, the
company can do itself a lot of damage if it’s too
transparent.
LITIGATION CONTINGENCIES
If, for example, a company says in its financial
statements, “We expect to lose this case, and we expect
the jury to award damages of $50 million to the plaintiff,”
that’s information that would, if candidly presented, be
available to the world at large including the plaintiff.
It would immediately establish a floor in settlement
discussions and could potentially be used as self-created
evidence against the company that prepared the financial
statements.
That’s the core problem.
LITIGATION CONTINGENCIES
The actual terms of the standard are pretty basic. If you
are in a situation where you should disclose litigation,
the standard asks for an estimate of the possible loss or
range of loss or a statement that such an estimate cannot
be made.
The standard also asks the preparer to evaluate the
probability of losing and to reasonably estimate, if
possible, the amount that would be lost. The key thing
about all of that is that it involves forward-looking
predictions as to how litigation would come out.
Predicting the outcome of litigation can be horrifically
difficult. And it creates even more of a problem if such
forward-looking predictions become available to the
other side in the litigation.
FASB EXPOSURE DRAFT
There’s an exposure draft on the table.
It is generally viewed as an improvement over an
earlier exposure draft though not yet perfect.
FASB has received more than 380 comment letters,
and the FASB staff is working through them. (FASB
has produced a podcast outlining the proposed
changes.)
FASB EXPOSURE DRAFT
There is a feature of the pending exposure draft which
has caused a fair amount of angst. And that feature calls
upon companies to disclose the amount accrued, if any,
in connection with a litigation contingency.
The reason that is causing such angst is that an accrual
in this context is a forward-looking prediction and, if a
company has accrued, then it has presumably come to a
determination that it is probably going to lose and that
the amount of its loss can be reasonably estimated. And
the biggest problem that lawyers are having with the
exposure draft is that, in calling for disclosure of that
accrual, the exposure draft is basically asking companies
to publicly confess in their financial statements that they
believe they will lose and to set forth the amount that
they expect to pay.
FASB EXPOSURE DRAFT
Who needs to be paying attention to this?
 The accounting department within the company.
 In-house lawyers at the company.
 Outside lawyers will want to pay attention because
they are often called upon by the auditor to provide
information regarding litigation contingencies.
 Auditors of financial statements will want to pay
attention.
FASB EXPOSURE DRAFT
 It’s probably a bigger problem for public companies
because public companies face a greater likelihood
of massive class-action litigation, but the standard
applies to both public companies and private
companies, so it’s an issue for everyone.
 The downside of noncompliance can be significant.
And that’s a big reason why companies now are
working so hard to get it right.
QUESTIONS?