On July 2, 2015, the United States Court of Appeals for the Fourth Circuit affirmed a $237 million judgment against Tuomey Healthcare System, Inc., in a federal False Claims Act (FCA) case arising out of violations of the federal physician self-referral prohibition commonly known as the “Stark Law.” In deciding the case, the Fourth Circuit rejected virtually every argument offered by Tuomey. The court’s opinion provides important, if troubling, guidance regarding the Stark Law’s “volume or value” standard, the availability of the advice of counsel defense, and damage awards in FCA cases arising out of Stark Law violations.

Background

The Tuomey case arises out of part-time employment contracts between Tuomey and 19 physicians, under which the physicians agreed to perform outpatient surgical procedures exclusively at Tuomey. In return for their services, Tuomey paid each physician (1) a base salary that was adjusted from year to year based upon the physician’s collections, (2) a productivity bonus equal to 80% of collections, and (3) an incentive bonus of up to 7% of collections. Tuomey also agreed to provide full-time benefits, including paying for medical malpractice liability insurance, and to absorb billing and collection costs. The agreements had a term of 10 years and prohibited the physicians from practicing medicine within 30 miles of Tuomey for a period of two years following termination of the agreement. The Fourth Circuit decision indicates that Tuomey sought to enter into these arrangements to stem the loss of revenue that began several years prior when physicians who previously performed outpatient surgery at Tuomey began doing so in their own offices or off-site surgery centers.

The relator, a physician who refused to enter into a part-time employment contract with Tuomey, brought suit in 2005 under the qui tam provisions of the FCA, alleging that the part-time employment contracts violated the Stark Law because they provided for compensation in excess of the physicians’ collections, and in excess of fair market value, in exchange for the physicians’ referrals of outpatient surgery cases. The government intervened and the case was tried to a jury in 2010. The jury found that that the arrangements violated the Stark Law, but not the FCA. The district court entered judgment in favor of the government and simultaneously ordered a new trial on the government’s FCA claim. Tuomey appealed to the Fourth Circuit, which vacated the district court’s judgment and remanded the case for another trial. At the second trial, the jury concluded that the agreements violated the Stark Law and that Tuomey violated the FCA by submitting 21,730 claims to Medicare for services based upon referrals by the physicians who were parties to the contracts. These claims totaled $39,313,065 and, as required by the FCA, this amount was trebled, and a civil penalty of $5,500 per claim was assessed, resulting in a total judgment against Tuomey of $237,454,195. Tuomey again appealed.

The Fourth Circuit Decision

On appeal, the Fourth Circuit affirmed. In doing so, the court addressed a number of important issues.

Stark Law Analysis

First, the court held, as it had in the first appeal of the Tuomey case, that the facility fee charged in connection with a physician’s personally performed services is a “referral” under the Stark Law. In addition, the court held that in considering whether an arrangement varies with or takes into account the volume or value of referrals, the question is not merely what the face of the agreements say, but how the agreements are implemented.

The court held that there was sufficient evidence in the record to support a jury finding that the physicians’ compensation—both the base salary and productivity bonus—varied with the volume or value of referrals. The court reasoned that “the more procedures the physicians performed at the hospital, the more facility fees Tuomey collected, and the more compensation the physicians received in the form of increased base salaries and productivity bonuses.” In so holding, the court rejected Tuomey’s reliance on CMS guidance in Phase II of the Stark Law rulemaking that “the fact that corresponding hospital services are billed would not invalidate an employed physician’s personally performed work, for which the physician may be paid a productivity bonus.” In a footnote, the court indicated that this guidance applied only to productivity bonuses—not base salary—and only in the context of bona fide employment relationships. The court noted that Tuomey did not maintain on appeal that it had a bona fide employment relationship with the physicians, and rejected Tuomey’s argument that this guidance applied outside the bona fide employment context.

Advice of Counsel Defense

The court also rejected Tuomey’s argument on appeal that it did not have the requisite intent to violate the FCA. The court observed that such intent can be established by showing that a person knowingly presents a false claim, does so in deliberate ignorance, or acts with reckless disregard of whether the claim is false. Observing that “the record here is replete with evidence indicating that Tuomey shopped for legal opinions approving the employment contracts, while ignoring negative assessments,” the court held that the government had carried its burden to establish intent.

Tuomey argued that it lacked the necessary intent because, it maintained, it had relied upon the advice of its counsel. While acknowledging the availability of this defense generally, the Fourth Circuit found that the jury could reasonably have rejected the defense for several reasons. First, the court held, the jury was entitled to consider “allof the advice given to Tuomey by any source.” The evidence established that one of Tuomey’s attorneys, who was jointly retained by Tuomey and the relator, advised it that the agreements raised significant concerns and were “basically a red flag” for the government. In response, Tuomey told this attorney not to put these concerns in writing and terminated the representation.

The court also held that the advice of counsel defense requires that a party fully disclose all pertinent facts to its attorney. Here, the court noted, Tuomey failed to disclose a number of pertinent facts to the attorney who provided an opinion approving the agreements, including the fact that another attorney had found the agreements problematic, the methodology by which Tuomey’s valuation consultant had arrived at its opinion, the amount of the physician’s compensation before the contracts were entered into, or the amount that Tuomey would lose on the contracts, before considering the facility fees, by compensating the physicians in excess of their collections. Given all of these facts, the court concluded, a jury could reasonably reject Tuomey’s advice of counsel defense.

Damages

Tuomey also argued that the award of damages was improper for a number of reasons. The Fourth Circuit rejected each of these arguments. In so doing, the court held that the Stark Law prohibited all referrals for designated health services by physicians who entered into the contracts at issue, not just referrals for outpatient surgery arising out of the contracts. The court also found that Tuomey’s designation of a physician as “attending” or “operating” on the UB-92/04 claims it submitted was sufficient evidence that the physician had made the referral for services identified on the claim form. The court rejected Tuomey’s argument that the claims it submitted were the four cost reports it submitted for the relevant period, rather than the 21,370 claim forms.

The court rejected Tuomey’s argument that the proper measure of damages was the difference between the amount the government paid for the claims at issue and the value of the services provided. Tuomey’s argument, in effect, was that because there was no evidence that the government did not get what it paid for, there should be no actual damages under the FCA. The court noted that the Stark Law “expresses Congress’s judgment that all services provided in violation of that law are medically unnecessary.” As a result, “[b]y reimbursing Tuomey for services that it was legally prohibited from paying, the government has suffered injury equivalent to the full amount of the payments.”

Finally, the court found that the damages award in this case did not constitute an unconstitutional penalty under either the Excessive Fines Clause of the Eighth Amendment or the Due Process Clause of the Fifth Amendment. Noting that an evaluation of an award of damages that is punitive in nature requires a judgment of the reprehensibility of a defendant’s conduct and whether it involved repeated actions, the court found that the Stark Law itself expresses Congress’s judgment that services provided in violation of the law are worthless, and that Tuomey’s submission of 21,370 false claims clearly involved repeated actions. The court thus concluded that “while the penalty is certainly severe, it is meant to reflect the sheer breadth of the fraud Tuomey perpetrated on the federal government.” Citing an earlier Supreme Court case, the Fourth Circuit observed that “strong medicine is required to cure the defendant’s disrespect for the law.”

Concurring Opinion

Notably, one of the judges wrote a concurring opinion in order to “emphasize the troubling picture that this case paints.” While agreeing with the outcome, the judge offered sympathy for Tuomey, characterizing the case as “[a]n impenetrably complex set of laws and regulations that will result in a likely death sentence for a community hospital in an already medically underserved area.” The judge went on to observe that “the Stark Law has become a booby trap rigged with strict liability and potentially ruinous exposure.”

While all three judges recognized the troubling result of this case and the complexity of the Stark Law, each of them agreed that the jury’s verdict and the award of damages were proper under the law. As the majority opinion observed, however, “it is for Congress to consider whether changes to the Stark Law’s reach are in order.”

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It remains to be seen what will come of the Tuomey saga. In a press release, Tuomey indicated it is considering its options in the litigation, including requesting reconsideration by the full court, as well as continuing settlement discussions with the government. The press release also referred to a potential collaboration with a nearby health system. In the meantime, the Tuomey litigation leaves in its wake a number of noteworthy rulings regarding the Stark Law (including particularly the issue of whether compensation based on personally performed services may be determined to vary with the volume or value of referrals), the limits of the advice of counsel defense in the context of the FCA, and the measure and constitutionality of damages in FCA actions based on Stark Law violations. More generally, the case serves as a cautionary tale about the risks associated with litigating Stark Law-based FCA actions.