On July 2, 2015, the Fourth Circuit affirmed a $237,454,195 judgment against Tuomey Health Care System (Tuomey) for violations of the Federal False Claims Act (FCA), which liability arose from violations of the Stark law.

Last week’s decision comes after a lengthy trial and re-trial, and a prior appeal to the Fourth Circuit.  A full analysis of the prior qui tam litigation and the at-issue compensation arrangements is available in our October 7, 2013 Health Headlines article, available here.  Key is whether the hospital’s payment of base compensation and bonuses to part-time physicians were in excess of fair market value and varied with the volume and value of the physicians’ referrals. 

The three-judge panel first affirmed the district court’s decision to grant the government’s motion for a new trial, albeit on different grounds than the district court contended.  The Fourth Circuit found that the exclusion of testimony by Tuomey’s prior counsel was prejudicial to the government, in that it spoke directly to whether Tuomey “knowingly” submitted false claims.  According to the court, Tuomey waived attorney-client privilege by attempting to assert the advice-of-counsel defense.  Under such defense, the hospital would not violate the FCA, had it acted in good faith reliance on the advice of its counsel.  The Fourth Circuit found the advice-of-counsel exception ultimately inapplicable, holding instead that Tuomey “shopped for legal opinions approving of the employment contracts, while ignoring negative assessments.”  Thus, Tuomey was not entitled to judgment as a matter of law on this ground and, therefore, the jury’s determination that Tuomey violated the FCA and Stark law stands. 

The Fourth Circuit next rejected Tuomey’s arguments that a reasonable jury could not have concluded that (1) the physicians’ part-time employment contracts violated the Stark law and (2) Tuomey knowingly submitted false claims.  With respect to the first issue, the circuit court concluded that a “reasonable jury could have found that Tuomey’s contracts in fact compensated the physicians in a manner that varied with the volume or value of referrals.”  The court found that there were two components of the physicians’ compensation that they believed varied: the upward or downward adjustment of the physicians’ base salary each year depending on the prior year’s collections and the physicians’ productivity bonus, which was established at 80 percent of their collections.  The court reiterated the finding in its prior opinion that collections for the physicians’ personally performed services reflect referrals because there is a corresponding facility fee, which constitute referrals.  Thus, according to the court, “the more procedures the physicians performed at the hospital, the more facility fees Tuomey collected, and the more compensation the physicians received in the form of increased salaries and productivity bonuses.”  The court also concluded that the evidence at trial, including evidence of shopping for legal opinions, provided “ample support for the jury’s verdict as to Tuomey’s intent.”   

The Fourth Circuit also rejected Tuomey’s challenges to the district court’s jury instructions in all respects.  Finally, the circuit court found that the district court properly calculated the civil penalty and concluded that the $237,454,195 judgment was not in violation of the Due Process Clause of the Fifth Amendment or the Excessive Fines Clause of the Eighth Amendment.  Said the court, “while the penalty is certainly severe, it is meant to reflect the sheer breadth of the fraud Tuomey perpetrated upon the federal government.”

In concurring opinion, a third judge wrote separately “to emphasize the troubling picture this case paints: An impenetrably complex set of laws and regulations that will result in a likely death sentence for a community hospital in an already medically underserved area.”  Although agreeing with the majority’s legal assessment, the judge noted that, “it seems as if, even for well-intentioned health care providers, the Stark Law has become a booby trap rigged with strict liability and potentially ruinous exposure – especially when coupled with the False Claims Act.”

The full opinion is available here.

Reporters, Adam Robison, Houston, + 1 713 276 7306, arobison@kslaw.com and Elizabeth N. Swayne, Washington, D.C., + 1 202 383 8932, eswayne@kslaw.com.