In a landmark jury verdict filed May 8, 2013 in the United States District Court of South Carolina, Tuomey Healthcare Systems, Inc. (Tuomey)1 was found to have violated both the Stark Law2 and the False Claims Act (FCA),3 with 21,730 false claims valued at $39,313,065 before adding treble damages. The decision is noteworthy on a number of different fronts, highlighting several points:

  • Stark Law violations may form the basis of FCA actions;
  • FCA actions almost never go to trial because, if the government wins, the stakes (treble damages) are too high;4 and
  • Compensation arrangements5 that take into account the volume or value of anticipated referrals to a hospital are problematic under Stark.

After receiving their instructions, the jury deliberated only five hours and concluded that there was no Stark Law exception under an indirect compensation arrangement because the physician compensation took into account the volume or value of anticipated referrals to the hospital. The multi-millions in potential liabilities (approximated at $357,000,000) could cause the community hospital to close its doors.

Background

In 2003, the 301-bed hospital located in Sumter, SC entered into part-time employment agreements with 19 specialty physicians following statements made by the physicians that they were considering shifting their outpatient surgical procedures from Tuomey’s facilities to their private practices. In an effort to minimize lost revenue, the agreements required outpatient services be performed exclusively with Tuomey in exchange for a compensation package. This package included a "tiered" annual base salary that was tied to collections of personally performed outpatient procedures. Additionally, Tuomey agreed to pay each physician a productivity bonus equal to 80% of personally performed net collections and another bonus up to 7% of collections for meeting certain quality measures. The physicians also received full time benefits for a part-time agreement. The agreement included a ten year term and a 30-mile non-compete provision during and two years following the expiration of the contract. In 2005, when the hospital could not reach an agreement with one of the specialty physicians, Dr. Michael Drakeford, he filed a qui tam lawsuit against Tuomey alleging Stark Law violations. The federal government subsequently intervened in the litigation.

At trial, the government alleged that the total compensation to the physicians (salary plus benefits) violated the Stark Law because the compensation "took into account the volume or value of the physicians’ referrals to Tuomey." The government further argued that Tuomey knowingly submitted false claims for payment to Medicaid and Medicare due to the prohibited referrals, in violation of the FCA. At the time the contracts were entered into, Tuomey had received a fair market value (FMV) report from a valuation firm stating the physician compensation was justifiable so long as it did not exceed 150 percent of the 90th percentile. This methodology was later rejected by both parties’ experts at trial.

In 2010, a jury found that Tuomey had violated Stark Law, but not the FCA. At that time, the district court set aside the jury verdict, ordered a new trial for the FCA claim and entered a judgment against Tuomey for more than $44 million for Stark Law equitable damages.

The case was appealed to the U.S. Circuit Court of Appeals for the Fourth Circuit, which reversed the district court’s decision due to a violation of Tuomey’s Seventh Amendment right to (another) jury trial and ordered a retrial. The Fourth Circuit further instructed that, if on remand, the jury found a Stark Law violation, the jury must determine the number and value of the claims Tuomey presented to Medicare for payment of the facility fee, or technical component, for the services. Notably, this jury instruction deviates from the Stark Law, which disallows payment for all services furnished pursuant to a prohibited referral – i.e. could disallow the professional component as well. The Fourth Circuit also addressed two key issues it was sure would resurface during retrial: 1) whether a "referral" within the meaning of the Stark Law and Stark regulations was made by the physicians; and 2) whether the contracts violated the requirement of the Stark Law’s exception that the contracts not take into account the "volume or value" of anticipated referrals. On the first issue, the court concluded that claims for "facility fees based on patient referrals are prohibited under the Stark Law if there was a financial relationship within the meaning of the law between the physicians and the hospital." As to the second question, noting that the issue was "an open question of fact…for the jury to resolve on remand," the Fourth Circuit concluded that compensation arrangements that take into account "anticipated referrals" implicate the volume or value standard under the Stark Law.6

Moving Forward

The verdict is in, but the final judgment is not yet settled. With penalties approaching $357 million, it is unlikely that Tuomey has the resources to pay this judgment. According to their Form 990, the end of their fiscal year September 30, 2011 showed net assets of $123,540,611. The parties have filed their respective briefs on the monetary penalties.

The Tuomey opinion reaffirms the importance of careful legal structuring of hospital-physician arrangements. Several key points to consider:

  • When establishing physician compensation, anticipated referrals of designated health services (DHS) – including inpatient and outpatient hospital services - cannot be considered.
  • In the case of inpatient and outpatient hospital services, a Stark analysis will always be necessary because the personally performed services will automatically generate a "referral" of DHS (the technical component (TC) also called a "facility fee") whenever the physician provides a professional component (PC).
  • Under the bona fide employment exception, physicians should be compensated only for the professional services they personally perform and such compensation should be FMV. Other exceptions may be available for compensation arrangements.
  • Hospital employers as well as physician employees should carefully consider their options and ensure that any compensation arrangements are reviewed for compliance with legal requirements.
  • Non-competition agreements in such arrangements care a fairly significant degree of risk.
  • The importance of FMV opinions cannot be overemphasized.
  • The government may be more empowered to bring complicated Stark cases to a jury.