False Claims Act / Stark Law Litigation Threatens Hospital Bondholders

stark lawLast week, Moody’s downgraded King’s Daughters Medical Center’s (KDMC’s) debt from A2 to A3. The agency cited “a large $40.9 million Department of Justice settlement” as one of the reasons for downgrading the Ashland, Kentucky hospital.

Bitvore users learned about the settlement from local media coverage on May 28. The hospital made the payment “to resolve allegations that it submitted false claims to the Medicare and Kentucky Medicaid programs for medically unnecessary coronary stents and diagnostic catheterizations and had prohibited financial relationships with physicians referring patients to the hospital,” according to a Department of Justice press release cited by the local newspaper.

Although the hospital did not admit wrongdoing, the fact that it agreed to such a large settlement suggests that it violated at least one of two federal laws that DOJ is using to reign in escalating Medicaid and Medicare reimbursements.  The False Claims Act allows the government to collect triple damages plus a fine of between $5500 and $11,000 each time a hospital files a reimbursement claim that it knows to be false. The Stark Law prohibits physicians from referring patients to certain types of health facilities in which they have a financial interest. While this law often applies to physician-owned hospitals, the definition of “financial interest” includes compensation. In the case of KDMC, the hospital is alleged to have paid certain cardiologists in excess of their fair market value as a quid pro quo for these physicians referring patients to KDMC.

The KDMC case is not an isolated incident.  The DOJ press release mentions that it has recovered over $13.4 billion from False Claims Act actions since 2009. And for some hospitals, a DOJ action could be a death knell.

Last year, Tuomey Healthcare System in Sumter, South Carolina was ordered to pay $237.4 million in False Claim Act penalties. S&P reacted by downgrading Tuomey to CCC. In May, the health system’s CEO said that he was considering a bankruptcy filing – triggering a further downgrade to CC.

Enforcement actions like those against KDMC and Tuomey rarely make national news, but they are big stories in the communities served by their respective hospitals. Articles about these actions are likely to appear in the local news outlets that Bitvore monitors. By using Bitvore, you can stay one step ahead on breaking news of major legal actions against hospitals.

Marc Joffe, Senior Policy Analyst

Marc Joffe, Senior Policy Analyst

Marc Joffe is the Principal Consultant at Public Sector Credit Solutions, where he researches government credit quality. Among his recent publications are studies of Illinois state debt, California municipalities and Canadian provinces. Before starting PSCS, Marc worked in credit technology roles at a number of major banks and as a product manager at Moody’s Analytics. He holds an MBA from New York University and an MPA from San Francisco State University.

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