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Utah's largest hospital chain, Intermountain Healthcare, agreed to pay the federal government $25.5 million after admitting that, over a decade, it illegally paid more than 200 of its referring physicians.

The agreement, announced Wednesday, resolves self-reported violations of the Stark Statute and False Claims Act, which is designed to prevent hospitals from rewarding doctors for making referrals. It is one of the larger recent settlements with the U.S. Department of Justice (DOJ) – and could serve as a wake-up call for other health systems.

"We disclosed this recognizing full well that there would be an economic consequence," said Intermountain's Chief Medical Officer Brent Wallace. "Given who we are and our national reputation … I think there will be a lot of organizations who say, 'Wow, we better look at what we're doing.'"

Intermountain reported the violations on Aug. 4, 2009 following a yearlong review of employment contracts and lease agreements among its 22 hospitals and 4,500 doctors.

"A group of us went to a three-day conference on [2007 updates to the Stark law] and came home from that and said, 'We need to look at our processes,'" Wallace said. "We started picking up rocks and finding things underneath."

Bruce Reese, vice chairman of Intermountain's Board of Trustees, characterized the failings as mostly technical.

"The first thing we were most concerned about is that patients didn't get unnecessary care … That we weren't getting referrals from doctors trying to game the system," Reese said. "We are absolutely convinced that has not happened."

Indeed, Intermountain has repeatedly been held out by President Barack Obama, and others, as an example of how to deliver high-quality, low-cost care.

About two-thirds of the settlement stems from failure to update leases for office space rented for more than 10 years to 16 physicians at Cassia Regional Medical Center in Burley, Idaho, and two doctors at Sevier Valley Medical Center in Richfield, Utah.

"The leases would expire, and it took our administrative folks up there sometimes a year or year-and-a-half to get a new lease executed. The doctors were still making payments, but we hadn't renewed the leases," said Wallace.

The financial consequences were, however, severe. Intermountain had to return any money that doctors under those leases had billed for treating Medicare patients.

"[The DOJ] has long-standing concerns about improper financial relationships between health care providers and their referral sources because such relationships can corrupt a physician's judgement about the patient's true healthcare needs," said Stuart F. Delery, acting assistant attorney general for the DOJ's civil division in a prepared statement. "In addition to yielding a recovery for taxpayers, this settlement should deter similar conduct in the future and help make health care more affordable for patients."

Intermountain also uncovered paperwork errors involving contracts with 154 doctors and problems with how it paid a group of 37 orthopedic and general surgeons.

"They were paid on what we refer to as a break-even contract. Revenue comes in for services they provided, and we subtracted expenses. They got paid the difference," explained Wallace. "That's what happens in every private physician's office across the country."

Where Intermountain ran afoul of the law was by reimbursing doctors for X-rays and blood tests and, ironically, paying bonuses to those who took part in projects aimed at improving the quality and lowering the cost of care.

Self-disclosure is the "appropriate and politically correct way to come clean about over payments," Lamar Blount, an Atlanta-based accountant who operates the Health Law Network, which provides litigation and compliance consulting to health care providers. Few hospitals actually self-disclose errors, however, because most don't have adequate staffing or resources to conduct the type of sweeping internal reviews that uncover problems.

It's possible, Blount said, that Intermountain's missteps were legitimate oversights or paperwork issues that fell through the cracks. For example if new physicians were added or existing doctors adjusted the number of hours they work without inking new contracts, violations can occur.

Said Reese, "Given the complexity of these rules, it's almost impossible to imagine a health care system that is in compliance. That said, we messed up."

To ensure it doesn't happen again, Intermountain has hired more compliance officers and installed a computerized system to track and flag changes to its doctor contracts.

"We're embarrassed that it happened … and have done a tremendous amount of education of our administrative and physician leadership to make sure they understand these are things we need to pay attention to," Wallace said.

Tribune Reporter Jennifer Dobner contributed to this report.

Twitter: @kirstendstewart