Featured Health Business Daily Story, Oct. 15, 2012
Reprinted from REPORT ON MEDICARE COMPLIANCE, the nation's leading source of news and strategic information on Medicare compliance, Stark and other big-dollar issues of concern to health care compliance officers.
Allegations that he took kickbacks from vendors put a hospital CEO in handcuffs. John R. Reynolds, the former CEO of the Hospital for Special Surgery in New York City, was arrested and charged with one count of racketeering and one count of making false statements to the federal government, the U.S. Attorney for the Southern District of New York and HHS Office of Inspector General said Sept. 26.
Reynolds allegedly extracted kickbacks from vendors in return for hospital business, even though he repeatedly denied conflicts of interest in his annual disclosure forms, according to the indictment. The case underscores the hardship of detecting or preventing alleged violations in the C-suite if there is an intent to deceive, although effective compliance programs and internal controls can make a difference.
Before he was CEO, Reynolds was CFO from 1986 to 1997 at the Hospital for Special Surgery on the upper east side of Manhattan, the oldest orthopedic hospital in the nation, the U.S attorney said in a press release. He was the employed CEO from 1997 to 2006 and then held the same position for the next two years but as a contractor.
A federal grand jury indicted him in connection with “a decade-long kickback scheme involving $1.4 million in payments that he allegedly extorted or solicited from Hospital vendors, a Hospital employee, and a United Kingdom-based healthcare organization,” the U.S. attorney said.
According to the indictment, the Hospital for Special Surgery required Reynolds to fill out and sign an annual written attestation about conflicts of interest and disclose outside consulting work. Between 1996 and 2008, the indictment alleges, “he signed forms affirmatively stating that he had no interests that might present a conflict.”
But then he allegedly solicited kickbacks from vendors in return for giving them hospital business as well as from a materials management department employee, the indictment says.
Reynolds is accused of giving hospital business to two medical billing vendors in exchange for $420,000 in kickbacks. Reynolds created KMC Healthcare, a consulting firm, and got consulting agreements with the medical billing vendors. They allegedly paid the fees “to curry favor with Reynolds in order to secure future business from the hospital and its staff physicians,” the indictment says.
The indictment describes a separate scheme involving what it calls a “victim,” who began working for the hospital in 1996 in the materials management department of the operating room. The hospital assigned the employee to mediate its royalty dispute with a company that specializes in joint replacement technology, according to the indictment. The employee resolved the dispute and the joint-replacement company agreed to pay the hospital $26 million over 10 years, the indictment says.
As a result, Reynolds got the materials management employee an annual bonus. But there were allegedly strings attached, the indictment says. Reynolds allegedly told the victim he expected to share half of any bonus money he got in the future. The indictment alleges the employee forked over $298,500 between March 13, 2000, and around Sept. 9, 2005, “fearing that failure to do so would lead to [the employee’s] termination.”
People who lie are hard to catch, notwithstanding internal controls and compliance programs, says former federal prosecutor Robert Trusiak, chief compliance officer and senior counsel for Kaleida Health in Buffalo, N.Y., who was not addressing the Reynolds case in particular. “The best detection of fraud is always the continuation of fraud,” he says, citing the cliché that “pigs get fat and hogs get slaughtered.” Vendor relations can be monitored through disclosures of conflicts and other mechanisms, Trusiak says, but if executives want to pull the wool over the board’s eyes, the hospital has an uphill battle. Even a vendor disturbed by misconduct may not want to risk the loss of business, Trusiak says.
But hospitals make it harder for rogue executives to thrive by having an effective compliance program, says one veteran compliance officer, who preferred not to be identified. He defines effectiveness largely by the presence of (1) oversight by a truly independent compliance officer and an engaged compliance and audit committee; (2) auditing and monitoring by compliance and external and internal auditors. This includes a review of the supply-chain process, which may help prevent or detect kickbacks. For example, hospitals may consider:
An analysis of purchasing patterns and trends from various suppliers.
An examination of the process for registering vendors and suppliers. This would enable health care organizations to better police conflicts of interest, which should be disclosed by industry representatives.
A review of the contractual agreements in place and the processes and criteria used by the health care organization to select suppliers and vendors.
A value analysis, which uses a team of clinicians and supply-team leadership to ensure that the products selected represent the best value to the hospital and the patient and takes the personal preference “out of the equation,” the compliance officer said.
Interviews with supply chain leadership, staff, supplier personnel and providers. “Interviews explore all aspects of the supply chain from selection to use to billing,” he says.
Vendor oversight is also important because if kickbacks lead a hospital to select the product or service provided by the company paying the kickback and it’s an inferior product or service, patients could suffer and that gets into the whole quality arena (although that wasn’t relevant in the Reynolds case), says Washington, D.C., attorney John Kelly, with Bass Berry & Sims.
Reynolds was arrested at his home in Cataumet, Mass., appeared in federal court in Boston and was released on a $100,000 unsecured bond. If convicted, the former CEO, who will return to court before Oct. 3, faces up to 25 years in prison. His attorney did not return RMC’s calls for comment.
Shelley Rosenstock, assistant vice president for communications at the Hospital for Special Surgery, tells RMC that the hospital “has not been accused of any wrongdoing. We have cooperated fully with the U.S. Attorney from the time we learned of the investigation.” She says the hospital has had a conflict-of-interest disclosure requirement since the 1990s, and it continues to “enhance and strengthen our conflict-of-interest process. We have procedures in place to validate the accuracy of disclosures reported. As part of our culture, we are committed to the highest ethical standards and [to communicating] reporting mechanisms, including our anonymous compliance helpline, so people can report any suspected violations.”
© 2012 by Atlantic Information Services, Inc. All Rights Reserved.
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