South Texas Health System settles fraud lawsuit

McALLEN — Hidalgo County-based South Texas Health System agreed to pay $27.5 million to the federal government to settle allegations that the hospital system paid doctors illegal kickbacks to refer patients to its facilities, the U.S. Justice Department announced Friday.

The health system allegedly disguised the payouts as “sham contracts” that included leasing office space and awarding bogus medical directorships to doctors to induce them to send patients to their hospitals, according to the government.

With the settlement, South Texas Health System denies all allegations of wrongdoing and admits no liability.

“Improper financial relationships between health care providers and their referral sources can corrupt a physician’s judgment about the patient’s true health care needs,” Tony West, the assistant attorney general for the Justice Department’s civil division, said in a news release. “This settlement should deter similar conduct in the future and help make health care more affordable for patients.”

The settlement Friday ends a nearly four-year investigation into South Texas Health System, which operates McAllen Medical Center, McAllen Heart Hospital, Edinburg Regional Medical Center, Edinburg Children’s Hospital, South Texas Behavioral Health Center and Cornerstone Regional Hospital. The company has long denied any wrongdoing and asserted that it was never the target of the investigation.

In a statement, the health system said it settled to avoid litigation and that of the hundreds of financial relationships it had with doctors who were investigated, the government focused on arrangements with only a handful. The company said the arrangements had been approved by lawyers but that the doctors failed to provide “sufficient documentation of the services they provided … which the government contended violate the technical requirements of the Physician Self-Referral Law.”

South Texas Health System is a subsidiary of Pennsylvania-based Universal Health Services Inc.

The allegations came to light in 2005, when Bruce Moilan, the former director of managed care for South Texas Health System, turned whistleblower for the FBI. He filed a lawsuit under the False Claims Act against the health system in 2005, alleging Medicare and Medicaid fraud.

Under the False Claims Act, private citizens can sue on behalf of the government and share in any settlement. Moilan will receive $5.5 million, the Justice Department said. The state of Texas will receive $2.2 million to reimburse its Medicaid program.

Moilan could not be reached for comment Friday evening.

In a statement from the Justice Department, Daniel Levinson, inspector general for the U.S. Department of Health and Human Services, said the financial arrangements could have contributed to the cost of care.

“Improper financial arrangements like these can increase the cost of health care by shifting provider attention to the quantity of treatments, rather than keeping it focused on the quality of care,” he said.

The cost of medical care in McAllen garnered national interest earlier this year after an article in The New Yorker magazine alleged the area’s high cost of Medicare care is the result of an “across-the-board overuse of medicine.”

The article relied on The Dartmouth Atlas of Health Care, which found that average annual Medicare spending per enrollee in McAllen is nearly twice the national average at nearly $15,000.

South Texas Health System, in its statement Friday, denied the allegations that physicians overused medicine or performed unnecessary medical procedures.

“The government’s investigation had absolutely nothing to do with the quality of care,” the statement reads.

Between 1999 and 2006, the health system allegedly violated federal laws that govern Medicare and Medicaid. Those laws prohibit individuals or entities, like South Texas Health System, from paying, soliciting or receiving kickbacks to induce referrals for medical care or services covered by Medicaid or Medicare.

A violation of the law is a felony offense punishable by criminal fines of up to $25,000 per violation, imprisonment for up to five years and exclusion from government health programs such as Medicare and Medicaid. Companies and doctors typically settle such cases.

The company first disclosed the investigation in 2006, months after the FBI first subpoenaed it in November 2005.

Dan McLean, then chief executive of the health system, said at the time in 2006: “We’ve asked the question whether we’re the target and so on and have been told no.”

The next year, in 2007, FBI agents raided the health system’s corporate offices in Edinburg and seized boxes of files as part of a related criminal investigation into how South Texas Health System responded to the initial subpoenas, the company said in filings with the U.S. Securities and Exchange Commission.

It’s unclear if a separate investigation is still ongoing. A spokesperson for the U.S. Attorney’s Office for the Southern District of Texas could not be reached for comment Friday afternoon.

As part of the announced settlement, South Texas Health System will enter into a five-year corporate integrity agreement, which requires that it establish procedures to track and evaluate financial arrangements between its health care facilities and its referral sources. Health system employees will also be required to undergo training.

South Texas Health System will also be subject to annual, third-party review of its compliance. That third party will report to the inspector general for the Department of Health and Human Services.

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Sean Gaffney covers business, the economy and general assignments for The Monitor. He can be reached at (956) 683-4434.