HHS' inspector general's office appears to be taking a page from the Internal Revenue Service's playbook.
The inspector general's office incorporated middle-of-the-road punishment into some major fraud settlements signed in 1998, including a whistleblower case at the University of Texas medical school (June 22, 1998, p. 8).
The IRS calls such penalties "intermediate sanctions." Through excise taxes, the IRS can punish individuals at tax-exempt organizations without revoking the companies' tax exemptions.
HHS refers to midlevel consequences as "stipulated penalties." They are designed to keep penitent hospitals and healthcare organizations in strict compliance with their corporate-integrity agreements, which providers usually enter as a condition of fraud settlements.
Any resemblance to the IRS' intermediate sanctions is purely coincidental, said Eduardo Acosta II, the HHS attorney who developed the stipulated penalties.
"We were not aware of those (IRS) provisions," Acosta said. "We modeled (them) after the existing exclusion and civil monetary penalties provisions pertaining to the (HHS) office of inspector general."
Acosta intended for the penalties, which are usually monetary fines, to fill the gap between the severe sentence of exclusion and no penalty.
The agency used stipulated penalties in a fraud settlement for the first time in March. The case involved the University of Pittsburgh School of Medicine and an audit related to HHS' Physicians at Teaching Hospitals initiative, which looks at how teaching hospitals and physician faculty members bill federal health programs. Another case involving stipulated penalties is a $144 million Illinois Blues settlement (July 20, 1998, p. 3).
"We received a lot of complaints and compelling arguments from providers regarding the tremendous impact of exclusion," Acosta says. "Stipulated penalties are a way of providing for a remedy short of Draconian exclusion. We save exclusion for material breaches, as defined in the individual agreements."
That doesn't mean the inspector general is going soft on those who violate their agreements, however.
"The penalties have to have a (financial) impact on providers," Acosta said. "These aren't late fees. We want penalties substantial enough to make the providers comply. "We're not interested in making money," he added. "We just think (money) is the most logical incentive for providers to stay in compliance."
One example of a stipulated penalty in action is the settlement HHS reached in June with the University of Texas Health Science Center at San Antonio and its medical school (See chart).
The settlement refers to the stipulated penalties as "a contractual remedy" triggered by "failure to comply with certain obligations set forth in this agreement."
The document, which MODERN HEALTHCARE obtained through the federal Freedom of Information Act, specifies monetary penalties for a slew of minor infractions.
The science center agreed to pay a stipulated penalty of $2,500 for each day past the deadline that the group fails to:
* Submit a complete annual report to the inspector general's office.
* Appoint and maintain a compliance officer and committee.
* Set up and maintain a toll-free hotline to report potential fraud.
The agreement also calls for stipulated penalties ranging from $1,000 to $2,500 per day for other breaches.
Corporate integrity agreements typically allow providers a certain period of time-ranging from five days to 30 days-to respond to HHS' accusations.
Stipulated penalties have become a standard feature in most corporate integrity agreements.
Leonard Homer, a healthcare attorney in the Baltimore office of Ober Kaler Grimes & Shriver, said the penalties provide a needed alternative to the economic death penalty that is exclusion from the Medicare program.
"Prior to (stipulated penalties), a breach could mean the end of a corporate integrity agreement, which meant there was no longer a settlement, which meant that everything was up for grabs," said Homer, who recently negotiated a settlement that included stipulated penalties. "It's truly an intermediate sanction for intermediate failures."
Acosta said the government is willing to talk to providers about more-subjective breaches before imposing penalties. Other breaches, such as failure to have an acting compliance officer for even one day, are "no-brainers" and will result in automatic penalties.
"Stipulated penalties are discretionary," Acosta said. "We don't have to demand (them). But we need to give ourselves the ability to enforce the provisions of the agreement."
That doesn't reassure some providers, who fear the government's wide latitude in negotiating such settlement terms.
"I'm not sure I want a client in a position of immediately having to make payments in that situation," said Sanford Teplitzky, one of Homer's partners at Ober Kaler. "It would be different if the provider had admitted to doing something wrong. Signing a corporate integrity agreement doesn't mean you admit to anything."
Acosta estimates that at least 30 fraud settlements in 1998 included a stipulated penalties clause.