Groundhog Day for Tuomey: Jury Finds Hospital Violated Stark Law and False Claims Act

by BakerHostetler

On May 8, 2013, a jury in the Columbia Division of the U.S. District Court for the District of South Carolina returned a verdict finding that Tuomey Healthcare Systems, Inc. (Tuomey) violated the Stark Law and the federal False Claims Act by submitting 21,730 claims to Medicare tainted by improper relationships with eighteen physicians. The jury verdict is the result of a remand ordered on procedural grounds by the Fourth Circuit Court of Appeals in March 2012.

Facts and Case History

The case was initiated as a whistleblower action brought by a surgeon who alleged Tuomey violated the Stark Law -- and in turn the False Claims Act -- when it entered into a series of part-time employment agreements with several specialty physicians. The agreements at issue provided that each of the physicians would perform outpatient procedures exclusively at Tuomey facilities for ten years and would reassign their third party payments to Tuomey for such services. Under the agreements, the physicians would receive an annual base salary plus two bonuses -- one based on productivity and the other on meeting quality measures. The base salary was calculated on the basis of the previous year's collections from outpatient procedures, while both of the bonuses varied based on Tuomey's net cash collections from outpatient procedures. At the time the contracts were entered into, Tuomey's valuation expert estimated that the average total compensation paid to each physician would be 19 percent higher than Tuomey's collections for their professional services. The government alleged that Tuomey entered into the agreements to dissuade physicians from performing the procedures in their offices or in an unaffiliated ambulatory surgical center.

The jury in the first trial found that Tuomey violated the Stark Law but not the False Claims Act by entering into the contracts and submitting claims to Medicare and Medicaid for the outpatient procedures. The district court judge set aside the entire jury verdict and ordered a new trial on the False Claims Act issue. The court later ordered Tuomey to pay nearly $44.9 million to the government under the common law theories of payment by mistake of fact and unjust enrichment. The Fourth Circuit Court of Appeals vacated the district court's judgment on appeal, reasoning that the jury's findings with respect to Stark Law violations were nullified when the district court granted a new trial, and as a result, the court's order to pay the judgment on the common law claims violated Tuomey's Seventh Amendment right to a jury trial.

Second Trial and Verdict

The new trial lasted four weeks and resulted in an even more devastating outcome for Tuomey, with the jury finding that Tuomey violated the Stark Law and the False Claims Act. Specifically, the jury found that no Stark Law exception was available to protect the arrangement because the compensation paid to the physicians took into account the volume or value of anticipated referrals to the hospital. Additionally, the jury found that Tuomey violated the False Claims Act by submitting approximately $39.3 million in claims to the government that were predicated on improper referrals. The court has not yet entered its judgment on Tuomey's liability; however, penalties and damages under the False Claims Act could exceed $350 million.

The jury reportedly deliberated for less than five hours, contradicting the general notion that the government would avoid putting a Stark Law case in front of a jury for fear that the law is too complicated to secure a favorable ruling. This case also emphasizes the importance of obtaining reliable fair market valuations for each arrangement that potentially implicates the Stark or anti-kickback laws.

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.

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