Following a month-long retrial, a South Carolina jury has concluded that Tuomey Healthcare System Inc. (Tuomey) violated the Stark Law and the False Claims Act (FCA) by illegally paying referring physicians. The jury found that Tuomey’s compensation arrangements with referring physicians were impermissible under the Stark Law, resulting in almost 22,000 false claims and more than $39 million in overpayments. As a result, Tuomey is facing up to $357 million in potential liabilities.
Tuomey, a 242-bed hospital located in Sumter, South Carolina through a subsidiary, previously entered into part-time employment agreements with 19 referring specialists in which the physicians’ salaries and bonuses took into account the hospital’s collections (technical component) for outpatient procedures performed by the employed physicians. Dr. Michael Drakeford refused to accept a similar arrangement from Tuomey and, subsequently, filed a qui tam lawsuit against Tuomey in 2005 alleging Stark Law violations.
In 2007, the U.S. Department of Justice intervened and brought an FCA lawsuit against Tuomey. DOJ alleged that the physicians’ compensation took into account the volume or value of referrals that the physicians generated for Tuomey because it included a portion of the technical component for the outpatient procedures performed. As a result, the illegal compensation arrangements violated the Stark law, and these arrangements resulted in 21,730 improper claims being submitted to Medicare, thereby violating the FCA.
The initial trial took place in the District Court of South Carolina in 2010. At trial, the jury found that Tuomey violated the Stark Law, but not the False Claims Act. As such, the District Court set aside the jury’s verdict and ordered a new trial on the False Claims Act allegations. Additionally, the District Court entered a judgment against Tuomey for more than $44 million based on the DOJ’s estimated value of the false claims submitted by Tuomey to Medicare.
On appeal, however, the Fourth Circuit vacated the District Court’s $44 million judgment against Tuomey. The Fourth Circuit concluded that when the District Court set aside the jury’s guilty verdict concerning the Stark Law in favor of granting DOJ a new trial on the FCA violations, the jury’s verdict regarding the Stark Law issue was a legal nullity. Therefore, the penalties imposed by the District Court violated Tuomey’s Seventh Amendment right to a jury trial. The Fourth Circuit then remanded the case to the District Court to determine if Tuomey violated either the Stark Law or the FCA. On remand, it took the jury less than five hours to find that Tuomey violated both the Stark Law and the FCA.
Defense counsel for the hospital stated that Tuomey will be evaluating its options in light of the jury’s verdict. Such a large penalty could put Tuomey out of business. DOJ was granted two weeks to petition the court for additional fines and penalties in the case.
Legal counsel needs to carefully structure hospital-physician arrangements, in light of the Tuomey opinion and the government’s positions. When establishing physician compensation, anticipated referrals of designated health services cannot be considered. Under the bona fide employment exception, physicians should be compensated only for the professional services they personally perform and such compensation should be fair market value. 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.
For additional information, please contact Kim Harvey Looney or any member of the Waller Healthcare Department at 800.487.6380.
Information contained in this bulletin was originally distributed to members of the American Health Lawyers Association Physician Organizations and Hospitals and Health Systems Practice Groups.
The opinions expressed in this bulletin are intended for general guidance only. They are not intended as recommendations for specific situations. As always, readers should consult a qualified attorney for specific legal guidance.