Whidbey General Hospital has offered the federal government an $854,000 settlement to make good on the hospital’s violation of rules that regulate in-house patient referrals.

The offer was made in June as an attempt to address instances in which the hospital breached requirements of the Ethics in Patient Referrals Act of 1989, and subsequent regulations commonly referred to as “Stark” laws.

The rules are designed to regulate physicians who may create a conflict of interest when they refer Medicare patients to hospitals or facilities where they work. According to a recently completed independent auditor’s report of the hospital’s books over the past two years, the violations resulted in an estimated $237,000 in “benefits conferred” to physicians.

The audit was completed by Moss Adams, a certified accountant with offices up and down the West Coast.

Joe Vessey, chief financial officer for the hospital, confirmed that the violations were identified in 2008, but he declined to say when exactly they occurred or for how long.

“That is part of an ongoing investigation and I really can’t comment on that,” Vessey said.

Anne Tarrant, president of the hospital’s board of commissioners, could not be reached by press time, but Hospital Commissioner Roger Case said the violations were mainly the result of administrative oversight concerning the renewal of contracts between doctors and the hospital.

“The contracts had lapsed and were not re-signed, and that’s where the Stark violations occurred,” Case said.

The errors were discovered shortly after Vessey took over for Doug Bishop, who retired from his post as chief financial officer in 2008.

Once the problems became apparent, hospital officials reported the mistakes to the U.S. Department of Health and Human Services’ Office of the Inspector General.

In October 2008, the board also voted unanimously to fire former Chief Executive Officer Scott Rhine and not allow him to work until his planned retirement in March of 2009. According to Case, the events were linked to the Stark violations.

“There is a connection there, but I’m not prepared to go into that,” Case said.

He did say that as head of the hospital, Rhine was ultimately responsible for the financial practices at WGH, such as the expired contracts that were being funded with public funds.

While the settlement was proposed in June, it is not yet clear whether the inspector general will accept the offer. Vessey said the hospital’s attorney, Steven Ortquist of the Chicago-based firm Meade & Roach, which specializes in health care regulatory and compliance matters, has informed the board that these issues can take from months to years to resolve.

“It depends on the nature of events and the government’s workload,” Vessey said.

He also confirmed that this is the hospital’s second offer. In 2009, the district offered the inspector general a $230,000 settlement but it was rejected, he said.

According to the Moss Adams’ audit report, the amount in the latest offer is based on a multiple of the estimated $237,000 received by doctors. It also verified that the final settlement amount may exceed the hospital’s offer, although it could be lower as well.

“The final settlement amount cannot be reasonably estimated at this time,” the audit said.

It’s also not clear whether the doctors that received the undeserved funds will have to return the money. That decision will likely be up to the inspector general, Vessey said.

The commissioners recently voted to begin educating the community on the need for a $50 million expansion project. The board has yet to vote to bring the issue before voters, but the hope is to have a measure on a ballot early in 2011.

Although Case said he did have concerns that news of the violations and settlement offer could dampen the public’s willingness to approve the expansion project, he said the board wasn’t trying to keep them a secret. The issue hasn’t been publicly addressed because it’s ongoing. The board had every intention of being fully transparent once the matter was resolved, he said.

“You should have confidence that the hospital will come out with all the facts once we know what they are,” Case said.

A presentation of the Moss Adam’s audit will be made during the board’s monthly meeting Monday, Aug. 9. The meeting begins at 6 p.m. and will be held in conference room A.

Vessey said the Stark violations will likely not be addressed.