Auditor "shocked" by massive billing schemes at rural hospitals

Rural hospitals across the country are closing at the highest rates in decades. Since 2010, 83 have shuttered. Desperate to stay open, some hospitals got caught up in dubious billing schemes. In March, CBS News investigated questionable billing at rural hospitals in Georgia and Florida.

Insurance companies reimburse rural hospitals at higher rates to help keep critical healthcare in those communities. Those higher rates have made rural hospitals attractive targets for schemes that have generated nearly half a billion dollars in allegedly fraudulent billing.

In 2016, Missouri state auditor Nicole Galloway began examining the finances of several rural hospitals in her state. One was Putnam County Memorial, a 15-bed hospital in Unionville, Missouri, struggling to keep its doors open.

"We were shocked….When we started to look at the financial records and notice that tens of millions of dollars were coming through, I remember sitting down at the table with my audit staff and, you know, I just said we gotta dig deeper on this," Galloway told CBS News' Jim Axelrod. 

Her team discovered a management company called Hospital Partners had swooped in weeks before Putnam was about to close, promising to turn it around. They made deals with labs around the country to funnel billing for blood tests and drug screens through Putnam, which collects higher reimbursement rates as a rural hospital. Putnam kept about 15 percent; most of the money was wired back to the labs and the management company.

"Essentially the hospital appeared to act as a shell company for these questionable lab billings," Galloway explained. "In a six-month period, the hospital funneled through about $92 million in revenues. To put that in perspective, the previous year their total revenues were $7.5 million."

And it wasn't just happening at Putnam. According to court filings reviewed by CBS News, insurance companies are now attempting to claw back nearly a half a billion dollars they paid rural hospitals across the country with similar billing arrangements which they call "fraudulent." They all declined our requests for an interview so we sat down with Jason Mehta, a former federal prosecutor who specialized in healthcare fraud.

"The question's gonna be did the laboratories intend to cheat? Did they intend to trick? Did they mislead the insurance companies? Because simply making extra money isn't a crime in and of itself. It's the question of, was someone tricked? Was some deceived?" Mehta said.

Insurance companies say one way labs deceived them was paying kickbacks to healthcare providers for specimens they could then bill at the higher reimbursement rates. CBS News obtained a voicemail of a lab representative soliciting samples from a rehab center in California. 

"He would send about, as soon as you guys sent 300 samples he would just send you $100,000 right then and there," the representative is heard saying on the message.

"If I heard that message and we were talking about Medicare money, I would be very, very concerned and I would be opening an investigation immediately," Mehta said. "In my experience, some of the most sophisticated actors in this space, some of the ones that....get the most amount of money from the healthcare programs, are those that know exactly where the line is, and skirt right up to that line."

What Mehta told us could cross the line is a key finding of Nicole Galloway's audit.

"Several months after the questionable lab billings had started, there was no operating lab in the hospital," she said.

Which begs the question, how could they be billing for lab tests if there was no lab in the hospital?

In March, Blue Cross Blue Shield filed a $60 million lawsuit against Hospital Partners, alleging their arrangement with labs was a "fraudulent scheme." Hospital Partners is suing Galloway, claiming she had no right to audit Putnam.

"They (Hospital Partners) are pushing back on us but I will tell you that will not stop me from doing my job on behalf of taxpayers," Galloway said.

In a statement, Hospital Partners said "Putnam County Memorial Hospital is authorized by law to assign and bill for clinical laboratory testing provided at a reference lab." On Tuesday, the Missouri Attorney General's office told "CBS This Morning" it is actively investigating this matter.