In July, the Court of Appeals for the Fourth Circuit upheld a record verdict of $237 million against Tuomey Healthcare Systems in the case of U.S. ex rel. Drakeford v. Tuomey Healthcare System, Inc. for violations of the False Claims Act and the Stark Law. Tuomey allegedly violated these laws in over 21,000 claims, submitting bills to Medicare worth $39 million. The False Claims Act allows up to triple damages per claim, as well as a penalty of up to $11,000 per violation. Perhaps in light of such a verdict, the Center for Medicare & Medicaid Services (“CMS”) issued a set of proposed changes and clarifications to the Stark Law that should help healthcare providers to breathe a sigh of relief.

Tuomey’s alleged violations of the Stark Law occurred upon its payment of 19 physicians’ compensation and bonus payments in a manner that corresponded with the physicians’ volume of referrals to the healthcare system. The bonuses were tied only to the collection of the physicians’ own professional fees, and base salaries were computed based upon the physicians’ fee collections from the prior year. The Stark Law prohibits referrals of Medicare patients by a physician to an entity with which that physician has a financial relationship. The court found Tuomey’s compensation arrangements with its physicians to be violations of the Stark Law, and claims submitted under these arrangements violations of the False Claims Act.

As the concurrence in Tuomey noted, such a strict application of the Stark Law can spell disaster for smaller hospitals – “a likely death sentence for a community hospital in an already medically underserved area.”[1] Luckily, CMS proposed changes just after the Fourth Circuit’s Tuomey holding that should mitigate future effects of this decision.   These changes were issued in the context of the proposed 2016 Medicare physician fee schedule[2] and were designed with the intent of reducing some of the more onerous technical requirements of the law. The changes include clarifications that: “in writing” requirements may be fulfilled through “a collection of documents” even without a formal contract; a personal services or lease term is not required to be in writing if it lasts at least one year and complies otherwise with the law; personal services and lease arrangements may continue on the same terms upon expiry if they comply otherwise; missing signatures may now be obtained within a 90-day grace period, regardless of fault in failure to obtain the signature; and, importantly, when a physician provides services to patients in a hospital, a financial relationship is not necessarily formed if both the physician and the hospital bill for the services separately.

Additionally, CMS proposed two new Stark Law exceptions, one that would allow sharing arrangements for the use of office space, personnel, equipment, supplies and other services in underserved areas, and another that would allow hospitals to help physicians employ non-physician primary care providers in the service area of the hospital. This second exception is CMS’ response to primary care provider shortages in the face of expanded insurance coverage under the Affordable Care Act.

Fortunately for providers, CMS appears responsive to health care providers’ concerns after the startling verdict in Tuomey. Still, physicians should be acutely aware of the requirements of both the Stark Law and the False Claims Act and review all provider arrangements for potential violations.