On March 30, 2012, a three-judge panel for the United States Court of Appeals for the Fourth Circuit unanimously agreed to vacate a $44.9 million judgment against Tuomey Healthcare System, Inc. for Stark law violations, holding that the federal district court had violated Tuomey’s Seventh Amendment right to a jury trial and remanding the case. In remanding the case, however, two of the three panel judges took the opportunity to discuss certain Stark law issues that were likely to reoccur on appeal. The court’s discussion provides some guidance for structuring Stark-applicable physician compensation arrangements going forward, especially in light of the government’s positions in this case.

Background

During 2005 and 2006, Tuomey entered into part-time employment arrangements with 19 specialist physicians. These contracts arose because several specialty groups were considering performing outpatient surgical procedures in their offices rather than at Tuomey’s facilities. The contracts required that the physicians perform outpatient surgical procedures only at Tuomey’s facilities and to reassign to Tuomey all amounts paid by third party payors, including Medicare and Medicaid. Tuomey agreed to pay each physician a compensation package that consisted of: (i) a “tiered” base salary, whereby each physician would earn a base salary of $5,000 for up to $185,000 in personally performed services, with an additional $5,000 for each additional $25,000 in personally performed services, (ii) a productivity bonus equal to 80 percent of the net collections, and (iii) up to an additional 7 percent incentive bonus for meeting certain quality measures. These physicians were also provided with a benefits package many considered consistent with full-time employment. The employment agreements included a 10-year term and provided that the physician would not compete with Tuomey within a 30-mile area during the employment term and for two years thereafter.