Hospital Links With Related Firms Can Conceal Unreasonable Costs and Increase Administrative Burden

GAO audited five hospitals in California and Nevada to identify non-arm's-length transactions and to determine the impact of these transactions on Medicare and Medicaid. At each hospital, GAO: (1) determined who owned or controlled the hospital; (2) reviewed the hospital's organizational structure; (3) identified non-arm's-length transactions between the related organizations; (4) analyzed non-arm's-length transactions to determine the impact on Medicare and Medicaid; (5) presented preliminary findings to the appropriate paying agents; and (6) reviewed the cost report adjustments made by the intermediary and the recovery of overpayments.

In these studies, GAO found that the Government pays more than the reasonable cost of health care for the elderly and the poor. Hospital owners can inflate their costs, and thereby their Government reimbursement, by dealing in non-arm's-length transactions with affiliated entities. By using complicated transactions with related agencies, one hospital inflated its costs; by forming a separate hospital management company, another hospital increased reported costs and concealed them from easy scrutiny. One hospital's equipment lease transactions with a related organization increased hospital costs. Other cases of overreimbursement were cited because hospital costs were not adequately evaluated. Concealing related organizations and non-arm's-length transactions make it difficult to identify unallowable costs by the Medicare paying agents and States. GAO had to invest considerable time and effort to identify the hospital's related organizations and analyze their transactions. Without a similar emphasis, intermediaries are not likely to discover the impact of such transactions on Government reimbursement. Although this report addressed only related organization transactions in hospitals, other types of providers such as nursing homes, home health agencies, renal dialysis facilities, cost-basis paid health maintenance organizations, and others can be involved in such transactions.