(CN) - Health care giant Kaiser took more than $4 million in fraudulent discounts on hospital services, and used its "confidential" relationship with a "re-pricing" company to try to legitimize it, the hospital claims in court.
The Queen's Medical Center sued Kaiser Foundation Health Plan and Stratose Inc. fka Coalition America Inc., in Honolulu Federal Court.
Honolulu-based Queen's Medical Center, a nonprofit acute care facility, is the largest private hospital in Hawaii, with more than 1,200 physicians on staff.
In 1996, the hospital signed an agreement with Kaiser to provide medical services to members of Kaiser's health plans at discounted rates. The agreement was to expire on Dec. 31, 2011, according to the complaint.
Kaiser, based in Oakland, Calif., is one of the largest nonprofit managed health care companies in the United States, with more than 8 million members in nine states and the District of Columbia.
The hospital claims that Kaiser knew that once the agreement expired, it owed the hospital payment in full for services it provided to its members, unless the parties reached a new agreement.
In late 2011 and early 2012, the hospital and Kaiser had discussions, during which Kaiser acknowledged that it was no longer entitled to discounts once the agreement expired, according to the complaint.
The hospital claims it agreed to continue to provide services to Kaiser's members in the absence of a new written contract, but only in exchange for full payment of the billed charges.
It claims that Kaiser never objected to the undiscounted pricing before accepting the hospital's services, and continued to send patients to Queen's Medical Center after the agreement expired.
"For instance, during the course of discussions, a meeting was held on or about Dec. 13, 2011," the complaint states. "In addition to speaking about proposed terms for a new written contract, plaintiff's employees further stated to defendant Kaiser that if no written agreement was reached between plaintiff and defendant Kaiser to replace the expiring services agreement, then defendant Kaiser would need to pay 100 percent of billed charges for all services provided by plaintiff to defendant Kaiser's patients. In response, Kaiser's employees stated that they understood that no discounts would be available to Kaiser in the absence of a new written contract."
Nevertheless, the hospital says, Kaiser continued to pay discounted prices after the agreement expired, claiming it was entitled to discounts due to its relationship with a re-pricing company.
"Throughout the discussions between plaintiff and defendant Kaiser, defendant Kaiser intentionally omitted and failed to disclose a purported relationship with defendant Stratose, a 're-pricing' service that defendant Kaiser later asserted it had contracted with back in 2007, long before discussions between plaintiff and Kaiser began," the complaint states.
"Throughout the discussions between plaintiff and defendant Kaiser, defendant Kaiser intentionally omitted and failed to disclose its plan to deduct millions of dollars worth of discounts from its payments for plaintiff's services. Defendant Kaiser failed to disclose that it would deduct discounts based upon its purported relationship with a 're-pricer', defendant Stratose."
In January and February this year, Kaiser paid the hospital for nearly 100 percent of the billed charges, but soon started sending it forms that claimed Kaiser was entitled to discounts, according to the complaint.
"However, beginning in or about March 2012, well after plaintiff had begun providing medical services to Kaiser patients without a written contract in place, Kaiser suddenly failed and refused to pay 100 percent of billed charges, as agreed," the complaint states. "Instead, Kaiser began to pay less than 100 percent of billed charges, typically paying only 80 percent or less. These underpayments resulted in a significant shortfall in compensation paid to plaintiff for its services."
When the hospital sought an explanation for the underpayments and the "re-pricing forms" coming from Atlanta-based Stratose, Kaiser failed to respond or provide documents explaining its relationship with Stratose, the hospital claims.
"On or about Aug. 30, 2012, defendant Kaiser responded, in writing, refusing to provide a copy of its contract with Stratose, stating that the contract is 'proprietary and confidential,' and that plaintiff's attempts to obtain a copy for the purpose of verifying millions of dollars worth of discounts 'could be construed as attempting to interfere with Kaiser's contractual relations with Stratos [sic]," the complaint states.
Kaiser showed Queen's a letter that claimed it purportedly was entitled to discounts based on Stratose's relationship with a third party, which had signed a PPO agreement with The Queen's Medical Center, the hospital says.
"In other words, the letter from defendant Stratose stated, in essence, that defendant Kaiser had purchased the discounts that were taken on plaintiff's services from defendant Stratose," the complaint states. "Defendant Stratose, in turn, purportedly accessed these discounts through (nonparty) HMN, an entity that signed a PPO agreement with plaintiff back in 2005."
The hospital claims that neither Kaiser, nor Stratose are entitled to discounts under its agreement with HMN.
"To the contrary, defendant Kaiser and defendant Stratose are attempting to perpetrate a scheme that is known in the healthcare industry as a 'silent PPO' arrangement," the complaint states. "In a silent PPO arrangement, an insurer, re-pricer, or other entity attempts to use a series of complex, often 'proprietary' or 'confidential' contracts to take improper discounts on medical services for which the entity taking the discounts is not in fact eligible."
Queens says that Kaiser refused to provide it with copies of its contract with Stratose, or any other documents that could justify the discounts.
It claims that Kaiser owes it more than $4 million in underpayments.
Queen's seeks compensatory, punitive and treble damages for breach of contract, intentional and negligent misrepresentation, fraud, fraudulent concealment, RICO violations, deceptive trade practices, unjust enrichment and tortious interference with contract.
It is represented by Crystal Rose with Bays Lung Rose & Holma, of Honolulu.
Read the Top 8
Sign up for the Top 8, a roundup of the day's top stories delivered directly to your inbox Monday through Friday.