Dignity Health: The Inpatient Bill for Outpatient Care

Dignity Health agreed to pay $37 million in its 2014 settlement over alleged hospital admission fraud. The government said patients who could receive outpatient care became inpatient claims at 13 hospitals in California, Nevada and Arizona. The alleged overcharges fell on taxpayers through Medicare and TRICARE, the military healthcare program. For someone who works in utilization review, hospital finance or billing, the question runs straight through the working day: who decided that this patient needed an inpatient stay?

The Justice Department announced the settlement on October 30, 2014. Dignity, formerly Catholic Healthcare West, was based in San Francisco and operated 39 hospitals across those states. The department counted it among the country’s five largest hospital systems. The allegations reached scheduled surgeries as well as admissions for common diagnoses.

What Dignity Health’s 2014 Inpatient Settlement Covered

The government described three kinds of inpatient billing. Each turned on whether the patient needed the hospital to admit them, with different procedures, periods and payment programs involved:

1. Scheduled cardiovascular procedures, 2006 through 2010. The government alleged that the hospitals billed Medicare and TRICARE for inpatient treatment when patients arrived for elective procedures such as stents and pacemakers that should have been billed as outpatient surgeries.
2. Elective kyphoplasty, 2000 through 2008. Four hospitals allegedly billed Medicare for inpatient kyphoplasty that should have been billed as an outpatient procedure. Kyphoplasty is a minimally invasive treatment for certain spinal compression fractures.
3. Common diagnoses, 2006 through 2010. The government alleged that patients with certain common medical diagnoses received medically unnecessary inpatient admissions when outpatient or observation care would have met their needs.

The distinction runs through all three categories: the government challenged the inpatient setting. A stent, a pacemaker or a spinal procedure reached the bill through an admission decision. That decision was where the alleged overcharge began.

Why Inpatient Status Changed the Bill

Hospitals generally receive substantially higher federal-program payments for inpatient admissions than for outpatient treatment. The Justice Department made that payment difference central to its account of Dignity: unnecessary admissions could cause substantial losses to the programs paying the claims.

Medicare uses different systems to pay for the two settings. Under its inpatient prospective payment system, the hospital’s payment reflects the stay’s diagnosis-related group, with diagnoses and procedures helping determine the group. Under its outpatient prospective payment system, services fall into ambulatory payment classifications, with integral items packaged into the primary service’s payment.

For a hospital insider, that puts the admission decision beside the chart and the bill. The Dignity allegations began with patients who could have received less costly care in another setting. The taxpayers’ bill followed the more expensive classification.

How a Kyphoplasty Sales Pitch Reached the Hospital Bill

A separate whistleblower complaint against Kyphon described how a device seller could promote inpatient status before a hospital submitted a claim. The whistleblowers alleged that Kyphon had its sales force promote kyphoplasty to hospitals for inpatient admission, though in most cases those admissions were medically unnecessary.

Another filing in the kyphoplasty cases alleged that sales representatives and reimbursement managers used a Hospital Economic Support Model to show hospitals how much they could make if every kyphoplasty went through as inpatient care. In that account, the financial premise came with the product: classify all the procedures as inpatient and the model showed the return.

The broader kyphoplasty cases began with a former reimbursement manager and a former regional sales manager at the device manufacturer. Their jobs explain why the sales pitch matters to a hospital billing case. Someone outside the hospital could know the instructions that eventually reached its claims. The Justice Department’s account of those settlements connects the vendor’s reimbursement advice to the hospitals’ inpatient bills.

What Hospital Billing Studies Add

Hospital payment manipulation can begin in management, clinical practice or coding. The systematic scoping review Hospital Manipulations in the DRG System, published in Asian Biomedicine in 2013, grouped the practices into those three areas. Its conclusion puts the responsibility in a wider frame: hospital managers working with DRG payment should understand that DRG creep reaches beyond upcoding.

That is a useful way to read Dignity’s admission allegations. The question reaches the people deciding on the care setting as well as the people turning the stay into a claim. A review that stops at the billing code can miss the decision that put the patient into inpatient billing in the first place.

RAND Health Care’s 2024 Methodologies to Measure Upcoding in Provider Settings found a practical gap across the literature: most studies measured broad patterns, while comparisons with medical records could test the coding more directly. For an insider who saw the admission decision, this is where firsthand knowledge has value. It can connect the payment pattern to what happened to a patient and to the instruction behind the claim.

Prime’s Admission Case Also Included Diagnosis Upcoding

The Prime Healthcare admission and upcoding settlement in 2018 also involved allegedly unnecessary inpatient admissions. The government described Medicare patients arriving at emergency departments at 14 California hospitals and a corporate effort to increase admissions. It also alleged that Prime falsified diagnoses, including complications and comorbidities, to raise Medicare payments, as the Justice Department’s announcement explains.

That comparison shows two places where the hospital’s account of a stay can raise the bill: the decision to admit and the diagnoses used to price the admission. Dignity’s settlement focused on the setting across its procedure and common-diagnosis categories. Prime’s case also reached the severity recorded for the stay.

Five Years of Independent Claim Review

Dignity entered a corporate integrity agreement with the Department of Health and Human Services Office of Inspector General. It committed the company to five years of significant compliance work and required independent review organizations to check the accuracy of claims for services provided to federal health care beneficiaries.

The Whistleblower’s Reward

A former Dignity employee brought the qui tam case. The Justice Department said the whistleblower would receive approximately $6.25 million from the settlement.

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. The connection between the decision inside the hospital and the claim outside it is the point of this case. A claim shows that a stay was billed as inpatient, while someone who worked inside the hospital may have seen why.

The Admission Decision You Saw

If you watched outpatient or observation care become an inpatient bill, speak with our whistleblower experts about who made that decision. Our experts build the case around the admission decisions and the claims they produced, and bring in whistleblower lawyers who know hospital admission cases. We stay beside you from that first account through the case’s resolution.