Lessons from an ASC Healthcare Whistleblower Lawsuit

Recently, David Schwartz, a former pharmacy director of a Dallas hospital, claimed in a lawsuit filed on June 8, 2021 that he was fired for airing concerns that an affiliated surgery center was fraudulently overbilling state and federal payers.

The defendants in the case are Dallas-based USP Texas and North Central Surgical Center, which were Mr. Schwartz's joint employers. The defendants decided to build an outpatient surgery center—known as an ambulatory surgery center (ASC)—in the same building as the hospital. Mr. Schwartz was tasked by his employers with “implementing the ASC.”

The defendants filed an application with Texas Health and Human Services—the agency responsible for administering the state’s health care system—for the ASC to be categorized and allowed to bill as a hospital outpatient department (HOPD). This would have entitled the center to bill third-party payers at a higher reimbursement rate. However, the center was only granted a license to operate as an ASC, meaning it could only bill at a lower rate.

In June 2018, the hospital's CEO and associate chief nursing officer told Mr. Schwartz that the surgery center would operate as a HOPD, despite the denial of the HOPD application, according to court documents. The defendants allegedly created medical and pharmacy billing systems that “comingled” operations of the ASC with those of the hospital, so the ASC could bill for services at the higher reimbursement rate. Mr. Schwartz said he informed the defendants that the comingling would result in commercial payers, federal Medicare and Medicaid, and state Medicaid being overcharged, which would be committing fraud against both the federal government and the state of Texas.

Shortly after this conversation, Mr. Schwartz said he was falsely accused of taking drugs from the hospital and later placed on administrative leave. The accusation was based on him taking a Tylenol tablet from the employee-designated medicine cache to relieve a headache, as authorized by standard practice, according to court documents. Mr. Schwartz’s employment was later terminated.

Mr. Schwartz claimed that he was terminated “as a retaliatory adverse action” meant to punish him for his opposition to the alleged scheme. He is seeking damages, interest, attorneys’ fees, and costs for the alleged unlawful acts.

There are dozens of HR and Management process that can be designed to meet business needs and mitigate litigation risks. The following recommendations are directly related to this specific case.

Ethics Line

Mr. Schwartz alleged he informed the ASC of billing impropriety. If an Ethics Line and Internal Investigation Program were in place, the concern over billing impropriety could have surfaced early and been delt with impartially. Ethics Lines should produce a historical record of every call or email received and how it was managed.

Ethics Line Training

Including 2-4 minutes of regular training on the use of the Ethics Line program is also recommended. Promoting the use of an Ethics Line Program is inconsistent with an employer being accused of fraud. The credibility of an employee who has been trained to use an Ethics Line, fails to use an Ethics Line, then alleges retaliation is diminished.

Internal Investigation Program

It is rare for an organization to outright commit fraud. But it is not uncommon for a claimant to inflate stories for their legal and financial benefit. A strong HCM program includes an effective internal investigation program. Serious allegations made by an employee can be treated with respect and investigated with integrity, with the findings carefully documented. A history of dealing impartially with serious employee allegations would be inconsistent with the allegation made in this case.

Performance Management

Details of the case indicate the manager took for one incident as justification for termination. A practice that elevates the probability of litigation. It is the responsibility of managers to effectively deal with disgruntled employees with performance issues. If this was an underperforming employee, the manager failed to address performance issues timely, document, and apply corrective action appropriately.

Termination Risk Evaluation

Evaluating each recommendation for termination for liability risk is recommended. There were multiple red flags that could helped avoid this lawsuit. Managers are expected to give feedback regularly, address performance issues (including behavior challenges) timely, and document consistently. There is no evidence this was occurring in this case making the termination for one infraction give the appearance of retaliation.