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Stark and FCA Damages Mount for Tuomey Healthcare System, Inc.

on Thursday, 14 November 2013 in Health Law Alert: Erin E. Busch, Editor

A second jury verdict in the whistleblower case filed under the False Claims Act eight years ago against Tuomey, the Sumter, S.C.-based health system, led to a federal district court order on September 30, 2013 that Tuomey pay more than $277M in fines and penalties based on Stark law violations found in earlier proceedings. This initial order was based on the value of approximately $39.3M in Medicare and Medicaid reimbursement for services and supplies (21,730 claims) ordered by physicians with an improper financial relationship with Tuomey under Stark, trebled (x3), plus a penalty of $5,500 per claim improperly filed under the False Claims Act. The government sought $5,500 per claim based on a statutory range of $5,500 to $11,000. A revised order was issued on October 1, 2013, after it was determined that the calculation had initially included repayment of the actual Medicare and Medicaid reimbursement in addition to trebling, reducing the amount to $237.5M.


This saga began in 2002 when Sumter Urological Surgical Center, LLC sought a certificate of need to build a freestanding ambulatory surgical center (ASC). Tuomey competitively filed for certificate of need for an outpatient surgery center. Both were granted. The government alleged that Tuomey determined in 2003 that it would lose revenue of approximately $9.6M over a 13-year period if, as predicted, 80% of gastroenterologists using Tuomey took advantage of their access to freestanding ASCs.


In response, Tuomey entered into “employment” contracts with 19 specialists during 2005 and 2006, requiring that the physician provide outpatient procedures at Tuomey Hospital or facilities owned by it. Tuomey was responsible for billing patients and third party payors for both the professional and technical fees for such services, based on the specialist’s reassignment of professional fees to Tuomey in the agreement.


Tuomey’s compensation to the specialist consisted of (1) an annual base salary that fluctuated based on Tuomey’s net cash collections for the outpatient procedures performed by the specialist; (2) a “productivity bonus” equal to 80% of the net collections; and (3) an incentive bonus that could total up to 7% of the productivity bonus.

Each contract was for a ten-year term and prohibited the specialist from competing with Tuomey during the term of the contract and for two years thereafter. The specialists were allowed to continue their private practices separately as independent contractors, however. According to the government, the Tuomey compensation packages paid the specialists 131% of their total net collections as independent contractors, and was thus in excess of fair market value.


The whistleblower claim was brought by Michael L. Drakeford, M.D., a specialist whose attorney had advised against entry into one of these “employment agreements” because they violated the Stark law.


On appeal from the first jury verdict, which was set aside by the trial judge, the Fourth Circuit concluded that in the second jury trial, the jury would have to determine whether the contracts took into account the volume or value of referrals, and if so, whether the arrangement met the standards of the Stark exception for indirect compensation: compensation received by the referring physician was (1) equal to fair market value for services and items actually provided; (2) not determined in any manner taking into account the volume or value of referrals or other business generated by the referring physician for the hospital; and (3) commercially reasonable.


On May 8, 2013, a jury, on remand, returned a verdict finding that Tuomey had violated the Stark law, as well as the False Claims Act, and that 21,730 claims had been submitted in violation of the False Claims Act for a value of $39,313,065.


The September 30, 2013 Order and Opinion of the District Court is interesting for two failed arguments by Tuomey:


1. Tuomey asserted that the physician contracts were not subject to the Stark Law because they did not vary with the volume or value of referrals; the compensation was based solely on collections for the physicians’ personally performed professional services. The government responded by showing that each time one of the physicians performed a legitimate procedure on a patient at Tuomey’s facility, the physician’s compensation would increase. The government also showed that there was a one-to-one relationship between the professional fee and the facility fee chargeable by Tuomey. Tuomey received a facility fee for the services provided by the Hospital in connection with each physician’s professional referral. The court found that a reasonable jury could find that the physicians’ compensation varied with the volume and value of their referrals to Tuomey. While the court did not state this expressly, the government’s evidence that total compensation by Tuomey to the physician would exceed patient and third party reimbursement for the procedure by 31%, logically suggests that a portion of Tuomey’s facility fee was paid to the physician for the referral.


2. Tuomey argued that, based on its reliance on the advice of counsel, no reasonable jury could find that the government met its burden of proving Tuomey’s “scienter” or intent to violate the False Claims Act. The jury heard several days of testimony from Tuomey’s counsel and others regarding the investigation undertaken by counsel in preparing the contracts for the 19 specialists. The jury also heard testimony that Tuomey and Drakeford had jointly retained Kevin McAnaney in 2005. McAnaney had previously been employed in the Office of Counsel for the Inspector General, and thus had been responsible for issuing formal guidance to health care providers on behalf of the government in his prior employment. The evidence included an e-mail message from a Tuomey executive to Tuomey’s legal counsel in which it became apparent that Tuomey brought efforts to influence McAnaney to favor the proposed physician compensation agreements. When McAnaney did not, he was instructed by Tuomey not to submit an opinion in writing. Tuomey proceeded to engage another independent attorney who issued an opinion favoring the proposal. The Court found this evidence sufficient to support the jury finding of intent under the False Claims Act.

Barbara E. Person

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