Last week, a federal jury in South Carolina found that Tuomey Healthcare System, Inc. violated the Stark Law and the False Claims Act by submitting false claims for reimbursement to the United States, resulting in $39 million in damages to the government. United States ex rel. Drakeford v. Tuomey Healthcare Sys., Inc., No. 3:05-2858-MBS (D.S.C. May 8, 2013). The size of the verdict and potential penalties – in a case where there was no allegation of overbilling – demonstrate that hospitals must carefully scrutinize fair market value and the risk of non-compete provisions when considering agreements with physicians.
In 2003, several specialty physician groups in South Carolina informed Tuomey that they intended to perform surgical procedures in-office, rather than at Tuomey’s hospital. To avoid losing this business, Tuomey entered into part-time employment agreements with the physicians requiring them to perform outpatient procedures at a Tuomey hospital. Tuomey paid each physician an annual base salary that fluctuated based on Tuomey’s net cash collections for the outpatient procedures, as well as potential bonuses based on Tuomey’s collections. Each agreement had a ten-year term and prohibited the physicians from competing with Tuomey during the term of the contract and for two years thereafter. After failing to reach an agreement with the hospital, one of the physicians sued Tuomey as a whistleblower under the FCA. The whistleblower alleged that Tuomey paid doctors on average 31 percent above fees collected.
This case first went to trial in 2010. The first jury found that Tuomey violated the Stark Law but found no FCA violation. On appeal, the Fourth Circuit found various errors and remanded the case back to the trial court. The Fourth Circuit also provided guidance to the trial court regarding issues that were likely to recur during the retrial. The appellate court explained that compensation arrangements that take future referrals into account could violate Stark. The court reasoned that “if a hospital provides fixed compensation to a physician that is not based solely on the value of the services the physician is expected to perform, but also takes into account additional revenue the hospital anticipates will result from the physician’s referrals, that such compensation by necessity takes into account the volume or value of such referrals.”
Last week, the retrial concluded with a verdict against Tuomey. This time, the jury found that Tuomey violated both the Stark Law and the FCA because Tuomey’s contracts took into account the value of anticipated referrals and were not consistent with fair market value, and because Tuomey knew that these arrangements resulted in false claims to the government. In addition to $39 million in damages, Tuomey also faces a penalty of $357 million, which will be determined by the court later.
This case is important because there was no allegation that Tuomey overbilled the government or billed the government for services that were not performed. Rather, Tuomey violated the FCA by knowingly submitting Medicare claims for services that were rendered pursuant to a prohibited referral. Hospitals should therefore carefully scrutinize the fair market value of their compensation arrangements and consider the risk of including non-compete provisions when negotiating agreements with physicians.