KDMC sets aside $48.9M for potential settlement

Published 12:01 am Sunday, March 30, 2014

ASHLAND, Ky. — During a conference call Tuesday, officials with King’s Daughters Medical Center told municipal bondholders the hospital has set aside $48.9 million for a potential settlement in connection with an investigation by the U.S. Department of Justice that focused on whether or not physicians performed unnecessary heart procedures. A recording of the conference call was made available on a public website that provides information on municipal bonds.

Autumn McFann, vice president of finance and chief financial officer, told investors the reason the medical center failed to file its annual financial report, violating its debt service covenants, was to reserve a settlement amount.

“The amount of the liability is $40.9 million plus we accrued an additional $8 million for related legal expenses,” McFann said during the call. “This accrual was made in fiscal year 2013 audited financials and that’s why we had to hold our audit open a little longer this year. We had to adequately estimate what that settlement was going to be.”

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McFann also attributed a loss of market share to the negative publicity sparked by the investigation.

The hospital’s 43-page 2013 financial audit, performed by accounting firm ParenteBeard, was dated March 14 and published online Tuesday.

The audit reported that:

“In February 2014, the Medical Center and the United States of America, acting through the DOJ and on behalf of the Office of Inspector General (OIG-HHS) of the Department of Health and Human Services (HHS) (collectively the “United States”) and the Commonwealth of Kentucky, reached an agreement to settle the DOJ’s review related to unnecessary diagnostic cardiac catheterizations and coronary stents. Under the terms of the agreement, the medical center will pay $40.9 million (“Settlement Amount”) to the United States. Interest will accrue on the Settlement Amount at the simple rate of 2.5 percent. Accordingly, $40.9 million is included in the current accrued governmental settlement at September 30, 2013 for the Settlement Amount. An additional $8 million has been included in the current accrued government settlement at September 30, 2013 for legal fees associated with the investigation and settlement. In addition to the settlement, the Medical Center will enter into a Corporate Integrity Agreement with the OIG-HHS.”

A notice sent to investors and published online Thursday, however, said the figure is a reserve amount and does not reflect an agreed upon amount.

“While it is true King’s Daughters has been in ongoing negotiations with the Department of Justice, a final settlement has not occurred,” the notice stated. “King’s Daughters will update this notice if a final settlement with the Department of Justice is reached.”

Tom Dearing, communication director for KDMC, reiterated the $40 million plus figure was called a reserve amount.

“There is not a settlement,” Dearing said. “It is very much still under investigation.”

A request for comment from the inspector general’s office was not returned by press time.

The DOJ investigation has been ongoing since late 2011 and hospital officials have said little about the nature of the investigation, except that it involved an inquiry into the allegations the hospital performed unnecessary heart stents from 2006 to 2011.

Sheryl Mahaney, vice president and general counsel, gave investors some general background information during the call about the investigation, saying the medical center received a “broad and nondescript” subpoena in 2011 requesting information for all cardiac services performed at the hospital and for its cardiac physicians.

Mahaney also said the hospital was fully compliant and transparent with investigators but had “very little interaction” with the DOJ.

“There were no claims or charges filed against the medical center, any of its subsidiaries, or any of the physicians who were initially identified in the subpoena,” Mahaney told investors. “After about a year and a half, in our discussions with the Department of Justice, it became clear that the focus of their investigation was on our cardiac stent program and specifically on focusing on four providers. Those four providers were the top performing providers within our organization.”

Only two of those providers remain with the medical center, she said.

“From our understanding then and now, there was no whistleblower and there are no anticipated whistleblower lawsuits evolving out of this, but as you know circumstances can change but that is our understanding to date,” Mahaney said.

The VP also said the medical center takes the allegations “very seriously,” but maintains no wrongdoing regarding the volume of stent procedures, attributing that high number to “serving an area the size of New Jersey” and being the only provider of such a procedure in the area.

The potential settlement arose, Mahaney told investors, after hospital officials reached out to the DOJ near the end of 2013.

“We reached out to the DOJ and tried to see if there was some way we could resolve this matter,” she said. “That was, the reason that Autumn (McFann) discussed, why we held open our 2013 financials, for purposes of taking some type of reserve for that potential settlement.

“It looks good that there is going to be a potential settlement. The DOJ and the medical center are in final negotiations. It looks like the settlement will be within that reserve area so that we have adequately reserved any potential exposure with respect to that.”

Mahaney also touched on the malpractice suits filed earlier this month in Boyd County Court.

The two complaints, filed March 4, list more than 500 plaintiffs who were former patients of the medical center. They were filed by attorneys Hans Poppe, of Louisville, Ky., and William H. Wilhoit, of Grayson, Ky.

Named as defendants were Ashland Hospital Corp, Kentucky Heart Institute Inc., Dr. Richard E. Paulus, and Cumberland Cardiology P.S.C.

Both suits are identical in that they allege negligence, gross negligence, lack of informed consent, negligent misrepresentation, fraud and fraudulent concealment, negligent hiring, supervision credentialing and privileging, civil conspiracy, unjust enrichment, consumer protection act violations, battery and injury.

Mahaney said few of the plaintiffs named in the complaints were suing over cardiac stents, citing only two. Ten were filed in regards to open heart procedures, she said.

“The malpractice cases have a substantial number involved in them,” she said. “We feel that those numbers will decrease over time and that the malpractice defense of those cases are very viable and will be very much within our capability.”

According to a study published by Bloomberg News in September 2013, Ashland ranked fourth out of 1,768 regions in the number of stent-related procedures per 1,000 Medicare enrollees in 2010, according to an analysis by researchers affiliated with Dartmouth College in Hanover, New Hampshire.

That means procedures were performed on 27 of every 1,000 Medicare enrollees in 2010, which is about 3.5 times the national average, according to the study.

KDMC is also not the only hospital to come under scrutiny by the DOJ.

Bloomberg also reported “at least 11 hospitals have settled federal allegations that they billed public health programs for needless stents and related misdeeds. Federal investigations continue in five states.”

Also around the time this study was published, a Chesapeake man filed a civil suit against KDMC and Dr. Paulus, alleging the doctor knew the stent procedures he performed on the man were unnecessary and harmful.

That suit was also filed by Hans Poppe.

At that time, Robert S. Bennett, Washington, D.C.-based attorney representing Paulus in the federal investigation, said the physician would never perform unnecessary procedures. “We are hopeful at the completion of the investigation the prosecutors will see they have no case,” Bennett said. “Should they unfortunately bring one, we will vigorously contest it. Dr. Paulus is a wonderful doctor, loved by his patients, who would never insert a stent that was not appropriate.”

Paulus retired from KDMC in August after 20 years with the hospital. KDMC named its heart and vascular center after the physician in 2006.