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May 08

Another Hospital CEO (And His Senior VP) Sentenced To Years In Prison

It’s getting harder for hospital CEOs to stay out of jail. Or to get released.

OK, in all fairness, James R. Cheek was the former CEO of Hope Medical Park Hospital in Hope, Arkansas. Cheek will be spending 3 years in federal prison, followed by 3 more years of supervised release. He won’t be lonely, though, because his former Senior VP, Herschel J. Breig, Sr. received the same sentence. Both will be broke, because they were also ordered to pay $6 million in restitution to the United States Government.

In Messrs. Cheek and Breig’s case, it wasn’t cheating Medicare or bribing doctors for referrals that got them in trouble. In fact, it was something far less legally grey. Better said, it was something completely black and white: The failure of the hospital that they led as the senior executives, to collect, account for, and pay over payroll taxes to the I.R.S.

You can draw your own conclusion as to whether Cheek and Breig are (1) merely unlucky, (2) incredibly stupid, or (3) career criminals, because at the time of their sentencing they were already serving time in federal prison for nearly identical crimes committed in Texas in regard to payroll taxes from another hospital they once controlled.

Don’t join them.

Most instances of the failure to turn over payroll taxes aren’t as egregious as those of Cheek and Breig, who apparently pocketed some or all of the IRS’s missing money.

Instead, it’s often the case of the employer’s officers desperately dipping into the pot of withheld funds to cover legitimate business expenses, like a loan. They have every intention to come up with the cash and pay the IRS all that’s due. Unfortunately, their financial situation worsens and the government comes knocking.

Not every corporate officer is liable for the payment of payroll taxes, only those who’re responsible for the entity’s financial affairs.

Not every failure results in criminal prosecution. Those that don’t are pursued in civil actions, which seek both the original amount due as well penalties, which can be as much as the amount of the taxes themselves.

Unfortunately, it’s easy for medical groups to fall into the “failure to withhold and pay over to the government” trap, at least in the sense of civil liability. That’s the situation that can result from misclassifying employees, whether physicians or staff, as independent contractors. In the IRS’s view, as well as that of state tax authorities, the “employer” should have withheld and paid over payroll taxes for the “employees.” Obviously, that didn’t happen.

It’s one thing for an organization’s “responsible person,” for example, the medial group’s managing partner or its president and CFO, to think that the group is running a risk. It is. But so are the “responsible persons” who themselves are civilly liable for the failure to withhold, if not criminally liable as well.

Comment or contact me if you’d like to discuss this post.

Mark F. Weiss

www.advisorylawgroup.com

 

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