The High Cost of Paying Physicians for Referrals: Tuomey Healthcare System Faces Penalties of up to $357 Million

by Akerman LLP
Contact

On May 8, 2013, a jury sitting in the U.S. District Court for South Carolina found that Tuomey Healthcare System, Inc. violated the Stark Law and the False Claims Act (FCA) by illegally paying referring physicians. The jury found that Tuomey, a private, nonprofit hospital, submitted for payment to Medicare over 21,000 tainted claims resulting in $39 million in damages.  Additionally, Tuomey is potentially liable for treble damages plus a penalty of up to $11,000 per claim under the FCA, which could amount to a total of $357 million. The verdict was issued in a retrial ordered by the United States Court of Appeals for the Fourth Circuit in U.S. ex. rel. Drakeford v. Tuomey Healthcare System, Inc., 675 F.3d 394 (4th Cir. 2012).

The case arose from Tuomey's efforts to prevent its medical staff members from performing outpatient procedures at facilities not owned by the hospital. In 2005 and 2006, Tuomey entered into part-time employment contracts with 19 specialist physicians, all with similar terms. Each contract, which had a 10-year term, provided that the physician was required to perform outpatient procedures at Tuomey Hospital or at facilities owned or operated by it. Tuomey was solely responsible for billing and collections from patients, Medicare and other third-party payors for the professional and technical components of the procedures, and the physicians expressly reassigned to Tuomey all benefits payable to the physicians.

Central to the case was the fact that Tuomey paid each physician an annual base salary that fluctuated based on Tuomey's net cash collections for the outpatient procedures. Tuomey further agreed to pay each physician a "productivity bonus" equal to 80 percent of the net collections.  In addition, each physician was eligible for an incentive bonus that could total up to 7 percent of the productivity bonus. All parties performed according to the agreements, including Tuomey billing Medicare and other third-party payors for the professional and technical components of the procedures.

Dr. Michael Drakeford, an orthopedic surgeon and the relator in this case, became involved in this matter when Tuomey attempted to negotiate the above arrangement with him. When negotiations failed, Dr. Drakeford filed a qui tam action in 2005. The United States Department of Justice (DOJ) intervened in the case in 2007 and asserted an additional claim for violation of the FCA. DOJ alleged that the physicians' compensation improperly took into account the value or volume of referrals that the physicians generated for Tuomey because it included a portion of the technical component for the outpatient procedures the physicians performed. These illegal compensation arrangements violated the Stark law, resulting in 21,730 improper claims being submitted to Medicare in violation of the False Claims Act. For his efforts in bringing the matter to DOJ's attention, Dr. Drakeford is now likely to recover a significant bounty.

When the case initially went to trial in 2010, the jury found that Tuomey violated the Stark Law, but did not violate the FCA. The trial court set aside the jury's verdict and ordered a new trial on the FCA allegations. The trial court also entered judgment against Tuomey for more than $44 million based on DOJ's estimate of the value of tainted claims submitted to Medicare.

The case was appealed to the Fourth Circuit, which vacated the $44 million judgment and ordered a new trial on both the Stark Law and FCA allegations. The Fourth Circuit agreed with Tuomey that Tuomey was deprived of its right to trial by jury when the trial court set aside the jury's verdict on the Stark Law allegations and granted the DOJ's motion for a new trial on the FCA allegations because the Stark Law violations were the predicate for the FCA allegations. The Fourth Circuit directed that at the new trial the jury was to determine whether Tuomey's contracts with the physicians took into account the volume or value of referrals in violation of the Stark Law. The Fourth Circuit noted that compensation arrangements that take into account anticipated referrals do implicate the volume or value standard in the Stark Law. It 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 flow from the physician's referrals, that compensation takes into account the volume or value of such referrals.

As noted above, on retrial the jury found that Tuomey violated both the Stark Law and the FCA. After the verdict, the court directed the parties to file their positions on damages and these matters are expected to be the subject of significant litigation in the coming months. It will be interesting to see how much the DOJ seeks in fines and penalties against Tuomey because a judgment close to the statutory maximum of $357 million could put the nonprofit hospital out of business. It remains to be seen whether the judge in the Tuomey case will consider, as the judge in the WakeMed case (U.S. v. WakeMed Health and Hospitals, 5:12-CR-00398-BO, E.D.N.C.) did, the impact of a substantial judgment on the patients and the community served by the hospital.

In light of the Tuomey verdict and case law, hospitals should review their existing compensation arrangements with physicians. Also, going forward, it is clear that hospitals and physicians cannot consider anticipated referrals of designated health services when structuring physician compensation. Physicians should be compensated only for the services they actually provide, i.e., the hospital cannot pay the physicians for the technical component that the procedures performed by the physician generates for the hospital. Adopting a coordinated approach to structuring compensation arrangements, which takes into account the collective knowledge of human resources, compliance and legal counsel, is now more important than ever. In addition to federal prohibitions, parties and their legal counsel should pay special attention to applicable state self-referral or anti-kickback laws when structuring compensation arrangements to avoid potentially disastrous consequences down the road.


 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Akerman LLP | Attorney Advertising

Written by:

Akerman LLP
Contact
more
less

Akerman LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.