LIVINGSTON, N.J. — The St. Barnabas hospital system spent much of the last decade in a sprint to expand through aggressive mergers, political connections and celebrity patrons like the actor Joe Pesci, growing into New Jersey’s largest health care provider and the state’s second biggest private employer.

But the rapid rise in the prominence of St. Barnabas — which at one time had 3,200 beds in nine hospitals throughout the state — was also fueled by what federal prosecutors called one of the most lucrative Medicare fraud schemes in the nation’s history.

By systematically inflating the bills for their sickest elderly patients, the prosecutors said, the executives of the St. Barnabas Health Care System bilked the federal government of at least $630 million from 1995 to 2003. The hospital system, which is a nonprofit institution, eventually stopped the overcharging when it was publicly questioned, and in June the hospital system and its executives, who had been threatened with criminal prosecution, agreed to repay the federal government $265 million.

St. Barnabas has rejected allegations that it defrauded Medicare. In the settlement, it did not acknowledge any deliberate wrongdoing, and last week, Ellen Greene, a spokeswoman for St. Barnabas, described the situation as the result of a misinterpretation of Medicare’s complex rules. She said the company was glad to have gotten past the problem and was focusing on its health care mission.

What happened at this health care system, based largely in suburbs throughout New Jersey, is representative of how hundreds of hospitals around the country, facing pressures from cuts in reimbursements by private insurers, improperly charged the taxpayer-financed Medicare program billions of dollars.

The episode at St. Barnabas, whose legal problems are not over, is part of a wave of Medicare fraud investigations that, according to a federal report, have reached more than 450 hospitals nationwide. Experts said the money involved could exceed $6 billion.

“The way the system has operated, it’s almost irresponsible corporate governance for hospitals not to cheat Medicare,” said Patrick Burns, an analyst at Taxpayers Against Fraud, a leading watchdog organization.

The problems began a decade ago, when hospital administrators around the country —facing cuts in reimbursements from managed care companies — turned to a handful of accounting firms that promised to help them maximize their financing from Medicare, the nation’s health insurance program for the elderly.

By exploiting loopholes in the complex formula that Medicare uses to reimburse providers for their most expensive cases, known as outliers, many hospitals’ federal aid doubled, quadrupled or increased 10 times.

St. Barnabas received more federal Medicare money from the pool of outlier money than some national chains 10 times its size. In 2001, the aid accounted for more than 15 percent of St. Barnabas’s total revenue, at least five times a typical percentage, and, according to depositions from former employees, the hospital system’s bookkeepers were ordered to hide the money elsewhere in the budget to avoid arousing the suspicions of auditors.

Ms. Greene declined to comment on that allegation.

 

Fearing that a harsher fine might run the St. Barnabas health care system out of business, federal prosecutors said St. Barnabas had been required to pay back less than half of the amount it overbilled.

A few weeks after the government case against St. Barnabas was settled, Tenet Healthcare, one of the nation’s largest hospital chains, agreed to repay $788 million of the $1.9 billion it had been accused of overcharging. No one involved in either case faced criminal charges.

After their Medicare subsidies shrank, both St. Barnabas and Tenet closed hospitals, costing hundreds of employees their jobs and disrupting medical care for the communities they had served. Still, in New Jersey, where state officials are impaneling a commission to close a dozen or more hospitals, St. Barnabas finds itself in a far stronger financial position than many hospitals that were not suspected of skirting the law.

As recently as the early 1990’s, St. Barnabas — which was named after a martyr who sold his possessions to help the poor, but is not run by the Roman Catholic Church — operated with a low-key business approach usually found at institutions that are licensed as nonprofit.

Faced with pressure from managed care insurance plans and the prospect of federal health care reform, the system’s chief executive, Ronald J. Del Mauro, voiced determination to firm up St. Barnabas’s financial stability. He preached a strict devotion to the bottom line and engineered a bold set of mergers and acquisitions.

By 1996, St. Barnabas ran seven hospitals in northern and central New Jersey, with 4,000 affiliated doctors, more than 20,000 employees and a million patients. According to depositions by a St. Barnabas consultant and two former employees, which were filed in the settlement, the drive for profits soon affected the Medicare billing, and hospital administrators found a way to capitalize on a loophole in the formula Medicare used to determine reimbursements in outlier cases.

One part of the equation was based on a hospital’s retail charges: the amount paid by the small percentage of patients who do not have insurance. By rapidly increasing retail charges for procedures often covered by Medicare, St. Barnabas got a steep increase in federal aid. As a result, its Medicare payments for outlier cases jumped to $287 million in 2002 from $85 million in 1998.

A consultant hired to work with St. Barnabas said in a sworn deposition that the hospital’s top executives held meetings to plan a “corporate directive” to increase federal aid by raising the prices charged to Medicare patients. The consultant, James T. Monahan, said that St. Barnabas had routinely added hidden charges to the room-and-board fees of Medicare patients and tried to conceal the windfall profits it was receiving from Medicare, in part by overstating its debt.

Mr. Monahan, who later filed a whistle-blower complaint under which he stands to gain millions of dollars from the legal settlement, declined to be interviewed for this article.

St. Barnabas was hardly alone in that practice. Hundreds of other hospitals were using similar tactics to artificially boost their Medicare payments, and many were clients of two accounting firms that specialized in helping clients do that.

The fraud was so extensive, Medicare officials said in 2003, that to restrict the number of outlier claims, they had to raise the threshold for qualified cases in each of the previous five years: from under $10,000 in 1998, to more than $33,000 in 2003.

Despite the years-long surge in questionable Medicare payments across the country, federal auditors did not undertake a widespread investigation until October 2002, when Kenneth R. Weakley, an analyst for UBS Warburg, wrote a report warning investors that Tenet was receiving an “extraordinary” and unsustainable amount of outlier financing.

As they announced the settlements with Tenet and St. Barnabas in June, Justice Department officials said they were satisfied that they had collected a substantial sum of money without risking an uncertain outcome at trial and without endangering the viability of the two hospital systems. David Knowlton, executive director of the New Jersey Health Care Quality Institute, an advocacy group, said that even though the settlements did not recover all the fraudulently obtained funds, they would provide a strong deterrent.

Officials of St. Barnabas pointed out that they had not admitted any wrongdoing and said they were relieved to be able to focus their attention on health care without the distraction of an investigation.

“This agreement,” Michael Slusarz, a vice president and spokesman for St. Barnabas, said in a statement in June, “will allow us to focus our energy and resources on our mission of providing the highest quality of care to our patients.”

As the state begins deciding how many, and which, hospitals to close, St. Barnabas is in an enviable position by virtue of its size, its reputation for providing quality health care and its political contacts in Trenton. For instance, the state’s health commissioner, Fred Jacobs, was senior vice president of medical affairs at St. Barnabas before being appointed to his current post, and Gov. Jon S. Corzine’s deputy chief of staff, Jeaninne LaRue, was a senior vice president and lobbyist for St. Barnabas. The company has also had a long relationship with Senate President Richard J. Codey, whose district in Essex County has some St. Barnabas facilities. During Mr. Codey’s 14 months as acting governor, his administration approved St. Barnabas’s application to perform highly profitable angioplasty procedures without having a cardiac surgical backup, an arrangement that some health care advocates criticized as favoritism. Mr. Codey insists that the decision was made based on the recommendations of a committee of health care experts, and that he was not personally involved.

“I certainly try to support the hospital, because it’s important for the community and a large employer, but there’s nothing more to it than that, ” he said.

St. Barnabas continues to face legal scrutiny, however.

A class-action suit filed by two hospitals, one from Colorado and one from Maine, claims $514 million in damages because the overbilling by St. Barnabas deprived “all of the legitimate hospitals of aid they were entitled to,” said Hal Hirsch, a lawyer for the plaintiffs. Wall Street rating agencies downgraded St. Barnabas bonds after the government settlement was signed and the hospitals’ lawsuit was filed.

Hundreds of nonprofit hospitals across the country are being scrutinized by the Internal Revenue Service and examined by Congress to determine whether they are following guidelines that forbid tax-exempt entities to give executives excessive compensation.

The United States attorney’s office in New Jersey declined to comment on whether the executive pay structure at St. Barnabas was part of any inquiry. But two people who had been questioned by Justice Department investigators said they had been asked for documentation on how Mr. Del Mauro and two other top administrators at St. Barnabas are paid.

Mr. Del Mauro gets no compensation from St. Barnabas Hospital Center, according to its public filings, but he and two other senior administrators are paid officers of SBC Management, a profit-making company that does business with the hospital center. That sort of arrangement is common in the hospital industry.

In 1998, Mr. Del Mauro received $613,000 from SBC, according to documents on file with the I.R.S. His compensation was $4.7 million in 2003, the last year St. Barnabas received the huge Medicare overpayments. In 2004, it was $4.2 million.

Speaking on Mr. Del Mauro’s behalf, Ms. Greene, vice president for public relations and marketing at St. Barnabas, said that she was unable to provide details about Mr. Del Mauro’s compensation or the amount and type of business transactions between the hospital and SBC Management, but that the hospital was complying with the law and the federal tax code.