It is by now well known that Michelle Obama is employed by the University of Chicago Medical Center (UCMC) and that, shortly after her husband was elected to the U.S. Senate, she was promoted to the newly created position of “Vice President for Community and External Affairs” and given a $200,000 raise. That promotion and its accompanying pay increase have been the subject of much commentary, but the episode hardly constitutes a major scandal.

It would appear, however, that there may have been a far more serious ethical lapse associated with Mrs. Obama’s elevation in the UCMC organization. Last week, the Washington Post grudgingly ran a story on page A4 — under a title that curiously neglects to mention her or her husband’s name — suggesting that a political crony of Barack Obama may have received preferential treatment in a UCMC contract bidding process.

Immediately following the creation of the new position for Senator Obama’s wife, according to the Post, the medical center altered its normal bidding process for the specific purpose of inviting businessman Robert Blackwell Sr. “to join a competition to upgrade the center’s intranet, the in-house equivalent of a Web site.” Blackwell Consulting subsequently submitted a proposal and was awarded the contract for which it was paid in excess of $600,000.

THIS STORY WOULDN’T be any more scandalous than Michelle Obama’s sudden promotion were it not for Mr. Blackwell’s close connection to the man who is about to become the Democratic Presidential nominee. As the Post puts it, “Blackwell and his family…have been longtime donors to the political campaigns of Michelle Obama’s husband, Barack.” Not coincidentally, Mr. Blackwell’s son, Robert Blackwell, Jr., is a high-profile fundraiser for the Illinois Senator’s presidential campaign.

It doesn’t help appearances that the going rate for intranet upgrades rarely exceeds 10 percent of what Blackwell Consulting was evidently paid for the project in question, or that Robert Blackwell was the recipient of a state grant which he received in 2000 at the behest of a then-obscure Illinois state senator named Barack Obama. According to the Los Angeles Times, “Obama sent a request on state Senate letterhead urging Illinois officials to provide a $50,000 tourism promotion grant to another Blackwell company,” after Blackwell helped him through a difficult financial patch.

Ironically, the Blackwell Consulting deal could have more lasting consequences for the University of Chicago Medical Center than for Michelle or Barack Obama. For a hospital, particularly one with UCMC’s history, the appearance of impropriety associated with such a transaction has far more serious implications than it would for a garden variety corporation. Even if the bidding process broke no state or federal ethics statutes, it could well have violated the “conditions of participation” stipulated by the Centers for Medicare and Medicaid (CMS).

CMS conditions of participation (COP) are standards to which health care providers must adhere in order to receive payment for services rendered to Medicare and Medicaid patients. The most basic COP, for hospitals, is to remain in good standing with the Joint Commission on Accreditation of Healthcare Organizations (JCAHO), which imposes stringent conflict of interest rules requiring a hospital to vet the “relationships” of medical staff, directors, and upper management “to ensure that its mission and responsibility to the clients and community it serves is not harmed by any professional, ownership, contractual or other relationship.”

To run afoul of these standards is to put the hospital’s JCAHO accreditation — and, by extension, its CMS certification — in jeopardy. And Mrs. Obama’s employer has even more reason than most medical providers to tread carefully in this area. Whereas most hospitals work to avoid potential COP problems, UCMC is concerned with avoiding additional violations. According to financial reports released pursuant to its bond obligations, audits conducted in 2000 and 2001 found UCMC wanting: “CMS notified the corporation that it is not in compliance with certain of the Medicare Conditions of Participation for Hospitals…”

UCMC STILL PARTICIPATES in the Medicare and Medicaid programs, which suggests that the hospital eventually cleared up its COP deficiencies. But another unsatisfactory CMS audit could well be disastrous. As the financial reports mentioned above dryly phrase it, “Approximately 28.8% and 24.8% of the gross payment revenues of the corporation were derived from Medicare and Medicaid patients, respectively. As a result, any termination from the Medicare and Medicaid programs would adversely affect the corporation’s financial position.”

Translated from the antiseptic vernacular of the CPA, the loss of more than half of UCMC’s $2.6 billion in annual revenue would “adversely affect” its financial position in the same way that the nuclear device dropped by the Enola Gay “adversely affected” Hiroshima. As the demise of Los Angeles’ Martin Luther King-Harbor Hospital tragically demonstrated, a major urban medical center simply cannot survive in the absence of CMS certification.

Which is why UCMC doesn’t need the kind of CMS scrutiny the Blackwell deal might attract. Indeed, the people who run the University of Chicago Medical Center may live to rue the day they hired Mrs. Obama. The Post story quotes a UCMC spokeswoman who says that the Senator’s wife “was not involved in the selection process,” and it may well be true that she didn’t put her hands on her hips, smite the floor with her expensive heel, and order cowering underlings to give the intranet project to her husband’s patron. Nonetheless, the Blackwell deal hardly passes the smell test, and CMS has a very sensitive nose.