BRADENTON, Fla. - King's Daughters Medical Center plans to pay $40.9 million to settle allegations of health care fraud by the Department of Justice, a penalty that is among the largest of its kind in Kentucky.

The nonprofit Ashland-based medical center will also pay interest and legal fees to resolve false claims the DOJ said were submitted to the Medicare and Medicaid programs for medically unnecessary coronary stents and diagnostic catheterizations.

The government also alleged that physicians falsified medical records to justify unnecessary procedures, generating millions of dollars in state and federal government health care reimbursements for the Medical Center. Kentucky will receive $1.02 million as the state's share of recovered Medicaid funds.

The settlement, announced May 28 by the DOJ, was the result of a review of procedures. No civil or criminal charges were filed.

Agreeing to resolve the allegations is not an admission of wrongdoing, King's Daughters said in a statement.

"The Medical Center's leadership team made the difficult decision to settle the investigation, rather than continue to drain valuable resources on government allegations related to old cases," the statement said.

The settlement comes as King's Daughters is experiencing a "significant deterioration in operating performance due to a sharp decline in revenue," Fitch Ratings said in February when it downgraded $231 million of outstanding revenue bonds to A from A-plus.

Fitch attributed some of financial difficulties on the DOJ investigation, which began in 2011.

"The settlement will not impact the Medical Center's ability to pay its debt," The Bond Buyer was told.

King's Daughters has a number of subsidiaries, including a 465-bed hospital in Ashland.

The case also involved prohibited financial relationships with physicians referring patients to the hospital in violation of the Stark Law, in addition to "paying certain cardiologists salaries that were unreasonably high and in excess of fair market value," according to the DOJ.

"The conduct alleged in this matter is unacceptable, victimizing both taxpayers and patients," said U.S. Attorney Kerry Harvey. "Treatment decisions motivated by financial gain undermine public confidence in our health care system and threaten vital federal programs upon which so many of our citizens rely."

The center said independent reviews the past several years have found that the cardiac care at King's Daughters meets or exceeds national standards.

In its Sept. 30, 2013 audit, King's Daughters said it was setting aside the $40.9 million for the DOJ settlement, and that it would also pay an amount based on an accrued interest rate of 2.5%. This amount was not mentioned in the audit, nor would the center discuss it May 28.

The audit said an additional $8 million was set aside for legal fees associated with the investigation and settlement that had accrued at the end of fiscal 2013.

The settlement required the center to enter into a corporate integrity agreement with U.S. Department of Health and Human Services' inspector general.

In lowering its rating in February, Fitch said that inpatient and outpatient activity decreased in fiscal 2013, and since the close of the fiscal year, "due to the combined negative impact" of the DOJ investigation, national trends, and the impact of high deductible health plans.

Patient use declined "materially across the board" in 2013 with decreases in inpatient admissions by 6.5%, total surgeries by 12.4%, and cardiac catheterizations by 48.3%.

Fitch also said that unrestricted cash and investments equaled $259.8 million and liquidity metrics remained solid with 196.6 days cash on hand as of Dec. 31.

"However, liquidity metrics could be materially impacted by a potential settlement of the DOJ investigation," said analyst Adam Kates.

Moody's Investors Service also cited material losses when lowering its ratings to A2 from A1 in August.

"Weakened operating results and volume softness" prompted Standard & Poor's to lower its ratings A from A-plus in June 2013.

The three rating agencies place negative outlooks on the Medical Center's bonds, which were issued by the Kentucky Economic Development Finance Authority.

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