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Lawsuit about KHS audit revisits financial dispute

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    By Steven Mayer/ The Californian

    Former owners of Allied Management Group Dennis Demetre, second from right, and his wife, Lori Lewis, leave Los Angeles County Superior Court following Lewis' testimony on Wednesday. They are accompanied by their lead attorney, Richard J. Decker, left, and other members of the defense.

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BY STEVEN MAYER Californian staff writer smayer@bakersfield.com

A saga that has lasted six years, resulted in dozens of news stories, prompted the involvement of Kern County supervisors, caused significant changes to Kern's government-run HMO and precipitated the resignation of its highly paid CEO is now being aired in open court.

The long-awaited testimony in the multimillion-dollar lawsuit between Kern Health Systems and Allied Management Group-Special Investigation Unit began this week in Los Angeles County Superior Court.

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KHS vs. AMG: A timeline

Late 2007 -- Disputes develop between KHS and two groups of emergency room doctors over amounts KHS was paying for the physicians' services.

December 2007 -- KHS receives a letter from an attorney representing both physician groups claiming KHS was underpaying the groups. He cites "pervasive downcoding" of higher level claims at rates of between 71 percent and 85 percent.

Meanwhile, some at KHS conclude the physician groups were "upcoding" many claims, or padding the allowable cost for services.

Spring 2008 -- Settlement attempts fail.

April 28, 2008 -- KHS Chief Executive Carol Sorrell signs first contract with AMG.

May 2008 -- KHS makes it first payment of several hundred thousands dollars to AMG. Emergency Medical Services Group files lawsuit against KHS for underpayment of claims. KHS countersues.

Sept. 12, 2008 -- Dennis Demetre and Lori Lewis marry in Nevada.

2009 -- The Californian begins what would become an extensive series of investigative stories involving KHS and AMG.

June 2009 -- KHS to date has paid AMG more than $7 million.

December 2009 -- The Californian breaks the story of a $7.6 million audit. KHS board chairman says he was unaware of the millions being spent.

Jan. 14, 2010 -- KHS Chief Financial Officer Dave Shaffer announces his resignation in an emotional statement to the board. Shaffer blames enemies of KHS for attempting "to destroy a company."

Jan. 26, 2010 -- Kern County Board of Supervisors grills Sorrell in open session.

June 2010 -- AMG sold to the New York-based HMS Holdings for $26 million.

Early 2011 : KHS removes long-time corporate counsel Mark Wasser. Board of Supervisors change structure of the KHS Board.

June 2011 -- Sorrell resigns under pressure.

August 2011 -- KHS filed lawsuit against AMG.

-- Source: Californian research/reporting

Kern Health Systems, or KHS, manages hundreds of millions of dollars in Medi-Cal and other health care services for more than 100,000 poor or indigent Kern County residents. Created by the Board of Supervisors in the early 1990s and funded by taxpayer dollars, the government-run HMO was for much of its existence primarily self-governed.

The jury is expected to hear from as many as 46 witnesses. For more than two days this week, former KHS Chief Executive Carol Sorrell testified. Lori Lewis, a former executive employee with AMG and the wife of Dennis Demetre, the former head of the Los Angeles company, also testified. Demetre and Lewis are also named as defendants.

The trial could last into June.

After scouring Kern Health's spending records in late 2009, The Californian revealed KHS had been paying millions to Allied since spring 2008, with payments averaging some $20,000 per day over the course of a year. That revelation and a perceived lack of transparency within the organization's leadership would ultimately result in significant changes to the culture of governance and oversight at KHS.

Longtime CEO Sorrell resigned in June 2011, just weeks after withering criticism from some members of the Kern County Board of Supervisors, with Mike Maggard publicly calling for her ouster. She received a severance package worth more than $300,000.

AMG was hired by KHS to "audit" thousands of claims -- bills for medical services rendered by two groups of emergency room doctors. Sorrell and others at KHS believed the physician groups were systematically "upcoding" claims, or billing for more services than they provided or at rates higher than allowed.

In mid-April 2008, the dispute between KHS and the doctors began heating up. Ultimately, one of the groups sued KHS, asserting it improperly "downcoded" its payments to the group by millions.

Demetre, AMG's chief executive until the company was sold to HMS Holdings in June 2010, said in a signed declaration in the court file he was directly involved in negotiating AMG's contract with KHS.

"I was also involved and knew the number of AMG personnel actually performing the voluminous work necessary to perform ... the company's work for KHS."

Demetre estimated the number of workers on the project at more than 30, with many paid $265 per hour. Clerical workers were contracted at $45 per hour.

The lawsuit alleges that Demetre and Lewis, AMG's former chief operations officer, ran a "mere shell" corporation and "used assets of the corporation for their personal uses."

KHS also alleges Allied committed breach of contract by falsely representing the audit would be done by "appropriately educated and/or licensed individuals" and that actions were undertaken "with the intent to defraud."

But Demetre, in his written statement, noted that in April 2008, after AMG engaged in telephone communications with Sorrell and former KHS Chief Financial Officer Dave Shaffer, a contract proposal was prepared. A draft of the proposal was sent to KHS via email on April 25.

The same afternoon, "the contract proposal was emailed back to our Santa Ana offices bearing Carol Sorrell's signature," Demetre said.

Sorrell's quick acceptance of the terms of the contract, and the apparent lack of any protest over costs from KHS, even after massive bills soon began rolling in, may be central to AMG's defense.

"The evidence will show that AMG did exactly what KHS asked it to do under the consulting agreement, some even at its own expense," AMG's lead attorney, Richard J. Decker, said in his opening statement.

"KHS," Decker told the jury, "is not entitled to recover anything from AMG on its claims because KHS suffered no damage or loss resulting from anything AMG did or did not do."

It was revealed in court Wednesday that KHS is paying Sorrell thousands of dollars to testify. While the total remains unclear, she acknowledged under questioning being paid $8,000 for her pre-trial deposition. During his questioning, Decker suggested the total could easily exceed $10,000.

As Sorrell's testimony continued, it became clear that the concept of "random sampling" was an important theme for Stephen Clifford, the plaintiff's attorney representing KHS.

Sorrell testified that Demetre and AMG represented to her they were experts, and some were qualified to testify as expert witnesses should the dispute between KHS and the two doctors' groups go before a judge.

When the proposed contract was emailed to KHS, Sorrell testified this week, she asked CFO Shaffer to have Mark Wasser, KHS' attorney, review it. Shaffer also indicated he personally reviewed the contract, she said.

As of the day she signed the AMG contract, April 28, 2008, AMG had never mentioned the words "random sampling," Sorrell told the court.

"We had not discussed how they were going to do their review," she told the jury.

When Clifford pointed out wording in the contact that states, "AMG-SIU will provide client with a report of findings for each claim," Sorrell said she interpreted it to mean AMG would provide a report for the finding for each claim it reviewed, not necessarily that AMG would review every claim.

According to later testimony from Lewis, random sampling is often used in the industry when auditing huge volumes of claims. Rather than going to the expense of examining in detail tens of thousands of claims, auditors instead examine a much smaller percentage -- a random sample -- dramatically saving time and reducing the cost of the audit, while still providing an accurate outcome.

Yes, AMG had used random sampling before with other clients, Lewis said.

But Sorrell insisted, Lewis told the court this week, that each claim be reviewed by AMG.

"Carol was adamant you can't put a price on fraud ... that she had a $100 million war chest to go fight fraud."

Indeed, KHS's coffers have been historically large, with excess reserves often approaching $100 million.

Clifford also pressed Lewis about whether she was qualified to testify as an expert witness.

"I have never been an expert witness as defined by you lawyers," she said.

Clifford pointed out that during her pre-trial deposition, Lewis said she had previously testified as an expert witness.

"I did not know what that meant," she said. Besides, she noted, she was on pain medication during the deposition.

"Do you know today as you sit here in court the definition of an expert witness?" Clifford asked.

Lewis indicated the answer was no.

AUDIT COSTS SKYROCKET

On May 16, 2008, less than three weeks after Sorrell signed the contract, AMG sent its first bill.

It exceeded $267,000. Seventeen days later another bill arrived, this one in the amount of $351,853. In the first month, KHS was billed more than $618,000 from AMG -- and the amounts would grow even larger.

Public records obtained by The Californian indicate a check dated June 5, 2008 was paid to AMG in the amount of $618,889. Two weeks later, another was sent in the amount of $332,020. And two more checks the following month added up to more than $956,000.

In the first two months, taxpayer-funded Kern Health Systems had paid nearly $2 million to AMG with no end in sight.

The money, paid out over 12 months ending in May 2009, averaged more than $140,000 a week.

And yet, no one from KHS complained, Decker pointed out. Signals coming from KHS indicated all was well.

Sorrell testified that on June 26, 2008, she and several other KHS executives and employees met with Demetre, Lewis and two other AMG executives at KHS' posh Stockdale Highway offices.

Sorrell participated in a conference phone call to set up the meeting.

"Had you seen any bills from AMG prior to this phone call?" Clifford asked her.

"No," she answered.

"Had Mr. Shaffer reported any amounts to you as to what AMG was charging for its work?"

"No."

"By the end of June, would you have expected AMG to have been billing KHS for its work?"

"I -- I would assume -- I mean, now I know," said the former CEO.

Whether she should have known as CEO would become fodder for an explosion of criticism from the public and local leaders.

Sorrell testified there was no discussion of random sampling during the phone call or at the June 26 meeting.

She also testified that AMG informed KHS that of the claims it had examined to that point, more than 98 percent were determined to have errors, including upcoding.

According to Decker's opening statement however, evidence will show that in early 2010, AMG contracted at its expense with another company, MES, to do an abbreviated review of the claims sample.

"The evidence will show that there were numerous disagreements between the MES claims reviewers and the AMG reviewers about the level at which (one of the physician group's) claims should be coded, among other things, Decker said.

Coding claims is subjective, he told the jury, and differences of opinion between coders is not uncommon.

INVESTIGATIVE REPORTS

In December 2009, after The Californian broke the story of the $7.6 million audit, Sorrell characterized it as a necessary defense against a potential $10 million lawsuit from one of the groups of ER doctors.

In January 2010, Sorrell was summoned by the Kern County Board of Supervisors to answer questions in open session, including why members of her own board admitted they were unaware of the millions spent on the audit.

In a written statement Sorrell read aloud to the board, she acknowledged she was unaware of the financial bleeding for some time.

"KHS had no choice but to hire an outside agency that had the expertise and credentials to defend KHS in this lawsuit," she said of AMG. AMG had a reputation as "the best" so it was chosen without a competitive bidding process.

Following her statement at the well-attended meeting, supervisors not only expressed concern about the nearly $8 million spent on the unfinished audit; they wanted to know when Sorrell became aware of the rising cost and why someone at KHS didn't stop the hemorrhaging earlier.

Sorrell answered that for a period of time, she was not aware of the millions being paid to AMG because she was not signing the checks.

According to testimony Thursday, questions were raised about whether the contract with AMG was ever even reviewed by an attorney.

Wasser, the former KHS attorney, was asked whether he vetted the contract.

"Did you have any involvement in that contract negotiation to your memory?" Clifford asked.

"No. I never saw it," he answered.

"Before it was signed?"

"Correct. I did not see it until after it was signed."

The trial is expected to continue next week.

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