Condell Medical Center (Condell), a 238-bed hospital in Libertyville, Ill., agreed last month to pay the government $36 million to settle alleged Stark and Anti-Kickback violations.  Condell voluntarily disclosed the potential violations after they were discovered in the course of a potential buyer's due diligence for a pending acquisition. The settlement is a powerful illustration of the importance of closely monitoring physician relationships as well as the important role due diligence plays in the acquisition process.

According to the settlement agreement, Condell had a number of questionable financial relationships with physicians that fell within the following four categories:

  • Professional Service Agreements: Condell paid certain physicians for providing services without a written agreement in place.  Additionally, some of its written agreements with physicians did not meet an applicable Stark exception or Anti-Kickback safe harbor.
  • Lease Arrangements: Condell leased medical office space to referring physicians at rates that were below fair market value.  In other cases, Condell abated or deferred collection of rental payments owed by physicians.
  • Financial Support Agreements And Loans:  Condell allowed physicians to "work off" amounts owed under financial support agreements and loans at hourly rates that exceeded fair market value.  
  • Physician Recruiting:  The support agreements benefited physicians or physician groups rather than the community, were given to physicians already in the hospital's service area, and in some cases the hospital entered into multiple support agreements with the same physician or group.  Some of the support agreements prohibited physicians from obtaining privileges at other hospitals.  The settlement agreement also noted that Condell paid incentive bonuses to its physician recruiters.

The Condell settlement contains important lessons for any healthcare provider that has physician relationships as well as for companies acquiring healthcare facilities.

1. Pay Attention To Physician Relationships

The Condell settlement illustrates why it is important for hospitals and other healthcare providers to ensure that their physician relationships are Stark and Anti-Kickback compliant.  Regular contract audits and third party valuations can help identify potential violations so they can be corrected appropriately.  

This case serves as an unsettling reminder of the degree of liability that attaches to Stark and Anti-Kickback violations.  While it is impossible to estimate Condell's total potential exposure for all the alleged violations, the $36 million settlement ostensibly represents a discount on the total amount the government would have sought had the violations not been voluntarily disclosed.  The government does not guarantee leniency for every voluntary disclosure, but certainly holds that out as a possibility for providers who cooperate in the self-disclosure process.  Linda Wawzenski, the assistant U.S. attorney who handled the case, stated in The Report on Medicare Compliance that Condell "was extraordinarily cooperative," and "gave us access to every piece of paper we could want.  It's an example of how voluntary disclosure should work."  The implication is that Condell could have faced steeper penalties had these potential violations been brought to the government's attention through an investigation or whistleblower lawsuit.  

Added to the threat of government investigations or whistleblower lawsuits is the fact that many hospitals will soon be required to submit to CMS the Disclosure of Financial Relationships Report (DFRR).  Hospitals will be required to submit detailed information regarding all of their physician relationships as well as copies of every physician contract.  It has never been more important for hospitals to carefully review all of their physician relationships to ensure compliance.

2. Be Diligent In Due Diligence

When buyers discover potential compliance risks in due diligence, they may demand price concessions, indemnification, or adjustment to other deal terms to address perceived risks.  In some cases, especially where the arrangements are systematically non-compliant, the liability is impossible to predict; voluntary disclosure is the best option because the allegations are resolved and the buyer gets a healthcare facility with a clean provider number. In other cases, such discoveries could result in the buyer walking away from the deal.  If Condell had a process in place for monitoring potential compliance issues, it could have identified and corrected the problems and kept the proceeds of the sale rather than paying $36 million to the State and Federal government.  

From the buyer's perspective, the Condell settlement illustrates the importance of due diligence in healthcare acquisitions.   If the buyer had not adequately reviewed Condell's physician relationships, the questionable arrangements may not have been discovered until after the closing of the transaction.  Committing the time and resources necessary to thoroughly review a seller's physician relationships can spare a buyer the time and expense of defending a seller's wrongdoing, seeking indemnification under the agreement, and paying associated fines and penalties.

3. Economic Climate Not Likely To Slow Prosecution

Finally, this settlement also sends a clear signal to the healthcare community that prosecutors are undeterred by the economic challenges of the current recession, especially where there is an available source of funds.  Violations of the law, whether inappropriate financial relationships, kickbacks or false claims, will be prosecuted, and healthcare providers must be ever vigilant to prevent and detect inappropriate financial relationships.

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