In its second opinion in United States ex rel. Drakeford v. Tuomey Healthcare System, Inc., the Fourth Circuit Court of Appeals affirmed a judgment that Tuomey Healthcare System (“Tuomey”) was liable for $237 million in treble damages and penalties for violations of the federal False Claims Act (FCA), premised upon violations of the federal physician self-referral law (“Stark Law”).

Amidst other findings important to health care providers seeking to avoid liability under the False Claims Act, the Fourth Circuit’s decision touches on one of the most complex areas of Stark Law analysis and evaluates in detail whether Tuomey could have “knowingly” submitted false claims in light of legal advice it had received. It is important to note that Tuomey had appealed the district court’s denial of its motion for judgment as a matter of law, after the jury had found Tuomey liable under the FCA, and therefore the question for the Fourth Circuit waswhether a reasonable jury could have found that Tuomey had violated the Stark Law and the FCA. Each of the court’s findings should be viewed through the lens of assessing whether the jury’s decision wasreasonable—not necessarily whether it was supported by the balance of the evidence.

Background 

Among other key facts, a number of physicians were employed by a Tuomey corporate staffing entity on a part-time basis. Notably, the physicians’ employment only applied to their outpatient surgical procedures, which were to be performed at Tuomey Regional Medical Center; the physicians provided all other services outside the scope of that employment. Under the employment contracts, each physician received a fixed base salary, a productivity bonus calculated according to 80% of collections for the physician’s personally performed services subject to the employment arrangements, a quality bonus equaling up to 7% of the productivity bonus, and other employment benefits. After the first year, the base salary would be determined according to the physician’s professional collections in the prior year. Specifically, each physician would earn a certain pre-determined salary if professional collections in the previous year fell within a certain range, and a higher pre-determined amount if professional collections were within a higher range.

Tuomey had sought compliance advice from several sources, including multiple lawyers or law firms, with respect to the employment agreements. While two lawyers advised that they did not view the arrangements as running afoul of the Stark Law, and a compliance advisor (a former Inspector General for HHS) did not identify significant Stark issues, Tuomey had retained a third lawyer, jointly with a physician with whom Tuomey was negotiating a similar arrangement. That lawyer, a former OIG attorney who helped to draft the Stark Law regulations in question, identified “red flags” and believed the agreements in question would present “an easy case to prosecute” for a federal enforcement agency. As cited by the Fourth Circuit, each of these advisors had access to varying degrees of information and was engaged by Tuomey at different points in the timeline of negotiations. The physician whose negotiation led Toumey to jointly retain the former OIG attorney ended up becoming the relator, Dr. Drakeford.

Stark Law: Compensation “Varies With” Referrals?


The Fourth Circuit’s analysis may stand at odds with the manner in which CMS historically has interpreted the key standard at issue in Toumey. On appeal, Tuomey challenged whether a reasonable jury could have found that the physicians’ employment compensation, in the aggregate, “varies with, or takes into account” the volume or value of the physicians’ referrals to the Tuomey hospital. Under relevant Stark Law rules, this point is critical to establishing whether a certain kind of Stark Law “financial relationship”—an “indirect compensation arrangement”—existed between the physicians and the hospital. If no financial relationship existed, the Stark Law could not have been implicated by the physicians’ referrals to the hospital.
 
The Fourth Circuit found it was reasonable to conclude that the compensation “varied with” referrals in the aggregate because each time an employed physician performed the professional component of a surgical procedure, the physician also “referred” to the hospital for the technical or facility service it delivered to the patient. The court noted that the base salary and bonus payments both depended on professional collections. The court reached its conclusion even though the compensation formula in the employment contracts did not include referrals or collections for the hospital service. 

Potentially contrary to the Fourth Circuit’s interpretation of the standard, in regulations and guidance to the health care industry, CMS has made clear that personally performed services are not “referrals,” and that it is acceptable for physician compensation to depend on the physician’s own professional productivity at a hospital or other health care facility. For CMS, this is true even if, along with professional productivity, there are corresponding hospital services.

After noting, but essentially disregarding this incongruity, the opinion fell short of precisely defining what it means for compensation to “vary with” referrals. For instance, it is not clear whether the court’s analysis would be limited to situations where, even if payment is not expressly tied to referrals, there is an arguably inevitable or “one-to-one” linkage between compensation and referrals. This was the case for the Tuomey employment arrangements, where payment was based on professional collections and where the only services provided were surgical procedures performed at the hospital, under a part-time employment arrangement. This correlation would not be nearly as strong in many other circumstances where physicians also perform non-surgical services under more comprehensive employment agreements.

In addition, the court’s analysis is limited to the threshold question of whether a financial relationship reasonably could have been found to exist between the hospital and the physicians, and does not address the issue of whether an exception may apply to that relationship. Thus, even following the recent Tuomey decision, ifcompensation “varies with” referrals in the aggregate (and therefore effectuates an indirect compensation arrangement between the physician and provider), it remains possible that an exception may be satisfied in which case the associated referrals and claims would be protected from Stark Law liability.

As a result of these key limitations, the ultimate impact of the Fourth Circuit’s recent Tuomey decision on Stark Law liability and enforcement may depend on how the opinion is interpreted going forward.

Advice of Counsel and “Knowing” Submission of False Claims

Tuomey separately challenged whether a reasonable jury could have found that it “knowingly” submitted claims that violated the Stark Law, in light of the advice of counsel it had received. Under the Fourth Circuit’s analysis, “the government needed to show that Tuomey knew there was a substantial risk that the contracts violated the Stark Law, and was nonetheless deliberately ignorant of, or recklessly disregarded that risk.” Tuomey argued that its reliance on the advice of counsel showed its good faith in entering into the employment arrangements, and the Fourth Circuit recognized “advice of counsel” as a viable defense to FCA liability.

In perhaps the core finding of the opinion, the Fourth Circuit concluded that it was reasonable for the jury to find that Tuomey was culpable for recklessly disregarding the advice of the jointly-retained lawyer, even though other advisors had counseled that the arrangements would not violate the Stark Law. To arrive at that conclusion, the court distinguished the advice Tuomey received that the arrangements would be lawful, by concluding that Tuomey had not provided the relevant lawyers or other advisors with enough of the facts for those advisors to provide fully-informed advice. The court cited several key pieces of information that Tuomey did not provide to one or more of its advisors, including: (1) the fact that the jointly-retained lawyer had previously made an unfavorable assessment; (2) the comparison between what the employed physicians would receive under the Tuomey employment arrangements versus what they had independently earned prior to the arrangements; and (3) the amount of money that Tuomey stood to lose by employing the physicians, not considering the value of the physicians’ referrals to the hospital. 

Additionally, the court rejected Tuomey’s asserted rationale for choosing among the advice it had received. Tuomey argued that the jointly-retained lawyer’s perception of “red flags” was unduly influenced by the relator and his counsel. In response, the court cited evidence that Tuomey itself had similarly sought to influence that lawyer’s opinion. In the court’s view, that left the jury a reasonable basis to conclude that Tuomey had “ignored [the jointly-retained lawyer’s advice] because it simply did not like what he had to say.” Separately, the court also characterized Tuomey as “shopping” for legal opinions.

Given the complexity and potential legal exposure associated with many health care laws (including the Stark Law and FCA), advice of counsel is often critical in developing business plans and entering into arrangements. The Fourth Circuit’s analysis offers pause to health care organizations receiving advice on matters implicating the FCA, particularly those organizations receiving differing advice from more than one source. Among other takeaways, the most recent Tuomey decision highlights that advisors should be presented with a full picture of the facts (and if multiple advisors, that each should receive similar sets of information). In addition, the opinion emphasizes that to demonstrate good-faith reliance on the advice of counsel, that reliance itself should be carefully-reasoned and contemporaneously documented, especially if compliance decisions are made against the backdrop of differing views.

Invigorating Calls for Stark Law Reform

The Toumey decision arrived with a critical message at what may be a critical juncture. In a concurring opinion, Judge Wynn of the Fourth Circuit wrote separately in order to “emphasize the troubling picture” painted by an “impenetrably complex set of laws and regulations” (i.e., the Stark Law) involving “potentially ruinous exposure.” Despite his cautious conclusion that a reasonable jury could have entered judgment against Tuomey, Judge Wynn echoed the belief of many in the healthcare industry that the Stark Law’s terms are unnecessarily ambiguous and often produce counter-intuitive results. Indeed, the prospect of Stark Law exposure looms as large as ever in the aftermath of the Affordable Care Act (ACA), as healthcare providers coordinate and develop new clinical integration structures and arrangements in order to align financial and other interests with the provision of higher quality, more efficient care. Less than a week after the Tuomey decision, CMS releasedproposed changes to the Stark regulations and also solicited comments on the necessity of regulatory changes to foster greater clinical integration. Nevertheless, absent meaningful reform, the Toumey decision and the massive damages and penalties award that the Tuomey system now faces show that the risks associated with any violation of the Stark Law—“technical” or otherwise—may be too great for many to accept ACA’s invitation to innovate with the type of embrace that many policymakers have contemplated.