More and more judges are rejecting settlements negotiated between federal regulators and companies accused of corporate fraud. Two recent examples illustrate this trend.

1. WakeMed

In January of 2013, a judge in North Carolina rejected a settlement reached between the Department of Justice and WakeMed Health and Hospitals, an 870-bed hospital system. WakeMed was accused of billing Medicare for millions of dollars’ worth of overnight stays for patients who did not actually spend the night in the hospital. Federal regulators discovered the practice during a routine audit, which determined that the hospital had a high “zero-day stay” rate.

The settlement reached between the government and WakeMed, but rejected by the Judge, required WakeMed to admit wrongdoing and pay an $8 million dollar fine and also included a deferred prosecution agreement. The judge viewed the proposed settlement as a slap on the wrist and lambasted both WakeMed’s lawyers and the government’s lawyers. The judge cited the increasing number of healthcare fraud cases and took issue with the fact that “the everyday working Joe or Jane” has to serve time in prison but corporate giants get off with a fine.

2. Orthofix

A judge twice rejected a proposed global settlement reached between Orthofix International NV and federal regulators. In September and then again in December of 2012, A U.S. District Court Judge in Boston refused to accept the proposed global settlement agreement because the plea deal improperly restricted his sentencing powers and because he felt it would not ensure the public interest. However, one day after rejecting it for the second time, Judge William Young accepted the settlement when a five-year probationary term was added. As part of the settlement, an Orthofix unit agreed to enter a guilty plea to one felony count of obstructing an audit and to pay a $7.6 million criminal fine. The settlement between Orthofix and the government resolved allegations that it set up fake consulting and royalty agreements with physicians and provided travel and entertainment as an incentive to use its products. Orthofix also paid $32.3 million plus interest to resolve civil claims first raised in a whistleblower lawsuit related to the company’s bone growth stimulators.

Our Insight. Your Advantage.  A theme that runs through both cases is concern from certain judges that corporate criminal conduct is treated like civil fraud. It appears that judges are demanding settlements that inflict pain and discomfort on an organization and do not simply allow them to pay a fine and move on. If judges are increasingly expecting tougher sentences for corporate wrongdoing, then the government will follow suit and settlement agreements likely will become harsher. If an organization finds itself potentially facing criminal charges or addressing criminal conduct within the organization, it is essential that experienced outside counsel be involved to run the investigation. Criminal charges aimed at a healthcare organization is the worst possible scenario, but one which is becoming a more likely possibility for which organizations should be prepared.