Hospital Pays $36 Million to Settle Kickback Allegations After Its Voluntary Disclosure to Feds

Reprinted from REPORT ON MEDICARE COMPLIANCE, the nation's leading source of news and strategic information on false claims, overpayments, compliance programs, billing errors and other Medicare compliance issues.

By Nina Youngstrom, Managing Editor, (

Condell Medical Center's $36 million settlement is a powerful argument for contract audits and management systems because the hospital didn't learn it had a multitude of potential Stark and kickback violations until its due diligence for a pending sale, people involved in the case say. When the rocks were overturned, scores of dubious deals came to light. So in late May, Condell voluntarily disclosed its possible Stark and kickback issues to the U.S. Attorney's Office for the Northern District of Illinois, which announced a settlement Dec. 2. Meanwhile, Condell's sale to Advocate Health Care has been consummated

On the up side, Condell, the largest provider in Lake County, Ill., avoided a false claims lawsuit by coming forward when it found suspicious financial relationships (e.g., below-market leases, improper loans, payments to physicians for patient services without written agreements). Linda Wawzenski, the assistant U.S. attorney in Chicago who handled the case, says the Condell experience was a model for voluntary disclosure. "This was one of the fastest settlements from start to finish. To have a deal by Dec. 1 is like warp speed," Wawzenski tells RMC. "And it had to be approved at a pretty high level of the Department [of Justice]." Time was of the essence because of the pending deal with Advocate, which was essential to Condell's survival. The hospital "was extraordinarily cooperative," she says, and "gave us access to every piece of paper we could want. It's an example of how voluntary disclosure should work."

On the down side, the 238-bed hospital is paying the feds $33.12 million to settle claims involving Medicare and Medicaid and the state of Illinois $2.88 million to settle claims relating to Medicaid. The scope and nature of the alleged Stark and kickback violations — which Condell formally denies in the settlement — are striking. According to the settlement and to sources, over 100 physicians had arrangements with Condell that did not meet a Stark exception and/or may have violated the anti-kickback statute. In certain scenarios, the physicians allegedly agreed to refer patients only to the hospital.

"This case is a poster child for not paying attention to physician relationships," says Nashville, Tenn., attorney Patsy Powers, with the law firm of Waller Lansden Dortch & Davis (who was not involved in the case).

According to the settlement, some of Condell's arrangements with referring physicians for various professional services did not always comply with a Stark exception. Brian Annulis, a Chicago attorney who represented Condell during the voluntary disclosure and settlement process, tells RMC that while he can't comment on the specifics of the settlement, physician recruitment was a big part of the problem. Using various incentives, Condell allegedly recruited physicians who would refer patients to the hospital. But the hospital ran afoul of the Stark recruitment exception and anti-kickback statute, according to the settlement. The settlement also states that Condell never assessed whether there was a community need for the recruited physicians' services, the settlement states. Some of the recruited physicians were already practicing in the hospital's service area, it says.

Despite the fact that some of the physicians didn't need incentives to be lured to a place where they already worked and the lack of clarity about the need for their services, Condell "entered into agreements which benefited individual physicians or physician groups rather than the community, and entered into multiple such agreements with the same physician or physician groups," the settlement states. Many support agreements barred physicians from getting privileges at other hospitals. The recruited physicians received "certain financial support agreements and loans secured by promissory notes," the settlement states.

MDs Allowed to Work off Loans

"They were bringing in new doctors and giving them loans to set up new practices, and then they would allow them to work off the loans. Rather than pay them back in cash, they could pay them back in kind," Wawzenski says. "But then the [hospital] did nothing to figure out the appropriate hourly rate." The settlement states that the hourly rate was greater than fair-market value. Condell didn't use a valuation expert to determine whether the deals were fair-market value, Wawzenski says. Annulis concedes that some of the permitted work-off activities were "suspect."

There were other Stark and anti-kickback violations alleged. Physicians rented space in medical office buildings owned by Condell. The physicians' rent was below fair-market value, or Condell allowed rent abatement or deferred collection of rental payments, the settlement states.

According to the settlement, Condell paid physicians for performing services at the hospital without written agreements, as required by a Stark exception. One example: EKG interpretations. The physicians assigned their billing to the hospital, and the hospital paid the physicians pursuant to a predetermined fee-schedule amount. Annulis says all the professional services were provided as charged. "These were not payments for phantom services," he tells RMC. "We are confident that the services were actually rendered and paid for, but we had a technical Stark law problem because the hospital lacked a signed agreement."

It's unclear why Condell didn't know about its alleged sweetheart deals. But lawyers say it's not uncommon for hospitals to discover Stark violations only when there's a pending sale because the buyer must perform due diligence (which is a thorough legal and financial review of a target entity).

"These things can come up in due diligence for an acquisition," Powers says. "If questionable financial arrangements are discovered during due diligence, a new owner may insist on a clean bill of health. If a buyer plans to pay millions for a hospital, it wants some assurance that it won't be investigated for the compliance failures of its predecessor, and voluntary disclosure is the best assurance. Unfortunately, it can be very expensive. If this hospital had conducted routine contract audits and employed third party valuations, these alleged improper arrangements would not have continued. The hospital decision-makers would know the problem and implement the appropriate compliance measures before facing a disappointed suitor."

But the unwillingness to tackle Stark and kickback compliance pre-emptively is perilous. In addition to self-disclosures forced by acquisitions, there is always the potential for whistleblowers to file lawsuits — a growing threat given the success of Stark-based False Claims Act lawsuits and the financial appeal of potential whistleblower rewards in these difficult economic times, Powers notes.

Expect Stark Oversight to Intensify

Meanwhile, Stark oversight will intensify in the near future for many hospitals because of the Disclosure of Financial Relationships Report (DFRR), contends Cynthia Wisner, assistant general counsel for Trinity Health in Novi, Mich. Until DFRR, CMS and OIG had no mechanism to routinely audit Stark compliance. But 500 hospitals will soon be required to complete the DFRR, a detailed form eliciting details about all physician agreements. Hospitals have to complete it and return it to CMS with copies of every contract.

"DFRR is a report that requires you to self-assess your status," Wisner says. The same way that filing tax returns forces organizations to know their taxable transactions, preparing the DFRR will push hospital compliance officers and executives toward intimacy with physician dealmaking. CMS has said that if it can find a way to reduce the burden, may require more hospitals to fill out the DFRR.

Speaking generally and not specifically about the Condell settlement, Annulis says many hospitals lack adequate policies and procedures for implementing and maintaining contracts with potential referral sources. "A hospital would be well-served to invest the time and resources necessary to ensure that its physician contracts and arrangements are compliant with the law," he says. Invest in the front end; put in the necessary time and resources to develop a contract implementation and management system, Annulis advises. "When someone comes knocking and asks questions, whether it's a government investigator or prospective buyer, you need to be able to produce and support the contract. You can't say, 'I called a couple brokers, and they thought reasonable and fair-market value for the lease was X dollars.' I know no one wants to spend the money, but in the long run, it's worth it. You can't cheat on this piece, especially with the new Stark rules," says Annulis, with the law firm of Katten Muchin Rosenman LLP.

CMS created an alternative path to fixing Stark noncompliance, penalty-free, in the final FY 2009 inpatient prospective payment system regulation published in the Aug. 19 Federal Register. Annulis notes that even before the settlement and proposed sale, Condell had hired new management, "which had begun to identify and address the problems in question."

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