Prime Healthcare: Admission Quotas and a More Expensive Diagnosis

Prime Healthcare and its chief executive agreed to pay $65 million in 2018 to settle allegations of unnecessary inpatient admissions and diagnosis upcoding at 14 California hospitals. After joining a whistleblower’s case, the government filed a complaint describing a business that allegedly measured emergency physicians by how many patients they admitted, discouraged observation care and graded hospitals against admission quotas. In the government’s account, a patient became a revenue target before the claim ever reached Medicare.

A Corporate Push to Admit Emergency Patients

The Prime Healthcare admission and upcoding settlement covered an alleged corporate push to admit Medicare patients whose care belonged in a less costly outpatient or observation setting. The admission allegations covered 2006 through 2013. The government’s amended complaint describes how that push allegedly reached the emergency department.

According to the complaint, Prime’s chief executive told physicians to raise inpatient admissions of insured patients to 20 to 30% of the emergency department census. For uninsured patients, the alleged instruction went the other way:

The alleged admission standard changed with the patient’s coverage. The government said hospital report cards highlighted facilities meeting the admission quota in yellow as “best practices.” Those below it appeared in red as “needs improvement.” Physicians also faced rankings based on admission percentages and average length of stay. In that account, the report card rewarded the volume of admissions.

The complaint reached the tools physicians used, too. It alleged that Prime altered cellulitis admission guidelines by removing alternatives to inpatient care and leaving “severe” open to interpretation. It also alleged that Prime presented its admission criteria forms as industry-accepted Milliman Care Guidelines. A management preference could arrive at the bedside looking like a clinical standard.

One alleged example involved a stable patient whose care called for a colonoscopy at Garden Grove Medical Center. The government said neither inpatient admission nor observation was necessary, yet the hospital collected $6,642 from Medicare for an inpatient stay. That is where the corporate-policy allegation meets an actual bill.

Why Admission Status Was Worth the Pressure

Hospital admission fraud exploits the difference between inpatient and outpatient payment. Medicare pays acute care hospitals through separate inpatient and outpatient systems. Observation care falls on the outpatient side, even when the patient occupies a hospital bed.

In its analysis of short hospital stays, the Inspector General found that Medicare paid three times as much, on average, for a short inpatient stay as for a short outpatient stay in fiscal 2014. The admission label could change the payment for care that should have remained outpatient.

The government’s allegation against Prime connected the target to claims: hospitals sought inpatient reimbursement for patients whose necessary services should have been provided under observation. The decision at the emergency department door carried through to the bill taxpayers paid.

Diagnosis Upcoding Raised the Price of the Stay

Prime’s diagnosis upcoding allegations covered 2006 through 2014. The Justice Department’s settlement announcement described falsified diagnosis information, including complications and comorbidities, used to increase Medicare reimbursement.

The financial effect of hospital DRG upcoding reaches the payment for the entire stay. Medicare groups inpatient stays by the principal diagnosis and other features of the care. Many groups have different severity levels depending on secondary diagnoses. A complication or comorbidity can move a stay into a higher-paying group, and a major complication can move it higher again. Coders know those distinctions as CC and MCC.

As the Inspector General explains, the most complicated qualifying secondary diagnosis generally determines the stay’s severity level. An added diagnosis can raise the payment without another procedure or another day in the hospital.

The two Prime allegations reached different decisions: admitting a patient to inpatient care, and describing the patient’s conditions to Medicare. In the government’s account, the first inflated the level of care billed and the second inflated the severity reported.

What the Performance-Improvement Role Could See

A director of performance improvement brought the qui tam case. That role connects a health care fraud case to people who review care, rather than only to the people who submit bills.

A review in Asian Biomedicine, Hospital Manipulations in the DRG System: A Systematic Scoping Review, published in 2013, divided hospital manipulation into corporate, clinical and coding practices. Management decisions, patient care and the coded claim each have a place in that framework.

The coding history can be revealing. Journal of AHIMA‘s 1999 article Honest Mistake or Fraud? Meeting the Coding Compliance Challenge describes an audit trail containing the original codes, the codes billed and the codes after billing. It also calls for recording what changed and why.

Those versions let a reviewer see when a diagnosis entered the claim and the explanation for it. The article puts coding alongside clinical consistency and resource use, including length of stay and charges. In a case about admission pressure and diagnosis changes, the useful connection is between what management asked for, what the patient needed and what the hospital ultimately billed.

The Wider Coding Trend Leads Back to the Chart

The Inspector General’s hospital severity review found that 54% of Medicare stays billed at the highest severity level in fiscal 2019 reached that level because of a single diagnosis. That finding shows how much can ride on the accuracy of one entry in the chart.

The same review found that high-severity stays had grown more common while their average length declined. It called for targeted reviews, including closer examination of medical records for inconsistent diagnoses. The Centers for Medicare & Medicaid Services declined that recommendation.

The Prime allegations reach further into the business: the instructions, the admission criteria, the physician rankings and the particular care billed. That is the detail an employee who knows the operation can bring to the conversation.

The Settlement Divided Payment Between Prime and Its CEO

Prime agreed to pay $61,750,000, and its founder and chief executive agreed to pay $3,250,000. The Department of Justice announced the resolution on August 3, 2018, after joining the whistleblower’s case in 2016.

The whistleblower’s reward was about $17.2 million of the settlement. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.

Other Hospital Cases Follow the Admission Decision

Community Health Systems agreed to pay $98,150,000 in 2014 over allegations that included a corporate effort to increase emergency department admissions across 119 hospitals. The government alleged that patients who needed outpatient or observation care instead generated inpatient claims. That is the same management-to-admission connection at the center of Prime’s admission allegations.

Oroville Hospital‘s $10,250,000 settlement in 2024 brought admission incentives and diagnosis coding together again. The government alleged that physicians received bonuses based on admissions and that claims carried false systemic inflammatory response syndrome diagnoses. The alleged incentive took a different form, but it reached the same decisions: whether to admit and how to describe the patient on the claim.

Prime’s Practice-Acquisition Settlement Was a Separate Case

Prime Healthcare’s practice-acquisition kickback settlement totaled $37.5 million in 2021. It concerned separate allegations, including overpaying for a physician’s practice and surgery center to obtain referrals. That is a different question about why a hospital buys a physician practice and what the price purchases. The Justice Department’s announcement of that settlement called the earlier admission and upcoding matter unrelated.

The Policy You Saw Reach Patients

If an admission target or coding instruction changed how your hospital described its patients, speak with our whistleblower experts about who set it and what followed. We connect your knowledge of the operation to the claims it produced and build the case with you. We stay beside you throughout the process and bring in whistleblower lawyers with experience in hospital admission and coding cases.