By David Summer, Jr., Parker Poe, Columbia, SC
On May 8, 2013, for the second time in three years, a federal jury found that Tuomey Healthcare System (“Tuomey”), located in Sumter, South Carolina, violated the Stark Law1 by entering into 19 part-time physician employment agreements. The second jury also found that, as consequence of these illegal arrangements, Tuomey submitted over $39 million in false claims to Medicare.2 In its Motion for Entry of Judgment under the False Claims Act, the Government seeks in excess of $237 million in damages, which the Government contends is the minimum it is entitled to under the Act. Tuomey opposes the entry of judgment and has moved to reduce or set aside the verdict. These motions are currently pending before the United States District Court for the District of South Carolina in United States ex rel. Drakeford v. Tuomey Healthcare Sys., Inc., C.A. No: 3:05-cv-2858-MBS.
Tuomey, a 301-bed regional medical center with 150 physicians on its medical staff, is the only hospital in Sumter County, a medically underserved and Health Professionals Service Area (“HPSA”).3 Beginning in late 2004, Tuomey initiated negotiations and began contracting with physicians who already routinely performed outpatient surgeries and procedures at the hospital. In 2005, Dr. Michael Drakeford, one of the physicians approached by Tuomey, filed a qui tam action alleging that the physician contracts violated the Stark Law and were not commercially reasonable because the compensation took into account the volume and value of referrals. In 2007, the Government intervened and assumed prosecution of the case.4
The first trial occurred in March of 2010 and resulted in a jury verdict that Tuomey had violated the Stark Law but not the False Claims Act. The district court set aside the entire jury verdict and granted the Government a new trial on the False Claims Act counts; it also granted the Government judgment in its favor on the equitable unjust enrichment claims.5 In its decision on appeal overturning the judgment on procedural grounds, the Fourth Circuit also issued what has been characterized as an “advisory opinion,” regarding whether any referrals took place in this case for Stark Law purposes.6 This guidance, in favor of the Government’s case, was used to shape the instructions to the second jury.
While the second jury verdict is also subject to change in the event of an appeal, even at this stage it is instructive for providers to reflect upon the Government’s arguments that persuaded two juries to find against Tuomey.
In attacking the legality of the arrangement, the Government highlighted the “unusual” nature of these contracts under which the physicians, who maintained separate employment in an office setting and in the provision of inpatient hospital surgeries and procedures, became part-time employees of the hospital for the exclusive provision of outpatient services. The Government noted that Tuomey had enjoyed a virtual monopoly as a sole provider in Sumter County until several physicians threatened the monopoly by establishing an ambulatory surgery center in the community. The 19 physicians who benefitted from the lucrative part-time contracts were already located in the community, were already on Tuomey’s medical staff, and were already performing services at the hospital. The Government argued that Tuomey’s part-time employment of these physicians was evidence that Tuomey was willing to pay a premium to protect its existing referral sources, and the facility fees they generated, from the new competitor.
In both trials, the Government argued that, in furtherance of its goal to retain referrals, Tuomey offered physicians contracts that were too rich in both cash and benefits to be commercially reasonable. Contract terms included base salaries based upon prior years’ production, 80 percent production bonuses on the first dollar collected, and benefits which included health insurance, medical malpractice insurance, and other benefits that were more generous than Tuomey’s other part-time employees enjoyed. The Government claimed that this and other evidence proved that Tuomey was willing to pay these substantial sums in excess of the physicians’ collections in order to capture referrals.
Significantly, in order to demonstrate intent for purposes of the False Claims Act counts, the Government used the advice of Tuomey’s own consultants and attorneys against it. The Government presented testimony and exhibits demonstrating that Tuomey disregarded adverse legal and expert opinions in entering into the contracts, even though Tuomey could point to at least one legal opinion that the contracts and the compensation complied with applicable law. Based on the outcome, it can be assumed that the existence of the contrary opinions significantly undermined the “advice of counsel” defense in the eyes of two juries.
Fair market value and commercial reasonableness were also issues presented to the jury in both trials. Although Tuomey had procured third party valuations attesting to the reasonableness of the compensation, the Government successfully attacked the credibility of the valuations and cast doubt on Tuomey’s right to rely on them. The scrutiny these valuations received underscores the importance of taking care at the outset of a transaction to have credible valuations performed by experts who can defend their work products on the witness stand.
In both trials, the Government attacked the compensation formula in the contracts and presented expert opinion evidence that compensation based on work national uniform relative value units (“RVUs”) would have been a more commercially reasonable methodology.7 The Government’s expert contended that reasonable RVU compensation should not exceed the 75th MGMA percentile without substantial justification, that the benefits afforded physicians should be consistent with the benefits provided to other hospital employees, and that employing a methodology that seeks to justify a pre-established compensation target, as Tuomey’s experts did, undercuts later claims that compensation was based upon fair market value and commercial reasonableness.
Finally, from an evidentiary perspective, the Government had the significant benefit of being able to use Tuomey’s own words against it. In both trials, the juries were able to hear tape-recorded conversations of board and other administrative meetings during which, the Government argued, Tuomey’s management and counsel admitted that the physician arrangements were for the purposes of retaining referrals. For example, among the recorded conversations played at trial was Tuomey’s counsel giving advice regarding what steps could be taken if the arrangements were ever questioned as violative of the law. These “admissions” were used against Tuomey by the Government in its case and in closing arguments.
As the national healthcare debate continues, counselors and consultants should consider that one lesson of Tuomey might be that hospitals and physicians may not receive much sympathy from juries when it comes to the enormous amounts of money involved in these arrangements. When in doubt, adherence to conservative legal and expert advice may be the only way to ensure compliance and avoid the Tuomey result.
|1||The physician self referral act, commonly called the Stark Law, can be found at 42 U.S.C. §1395nn. The regulations are at 42 C.F.R. §411.350 through §411.389.|
|2||Because the Stark Law does not create its own right of action, the Government sought relief under the False Claims Act (31 U.S.C. §3729-33), alleging that Tuomey’s submission of claims for payment in connection with the 19 physicians’ services carried with it false certification that the services were performed in compliance with Stark. United States ex rel. Drakeford v. Tuomey Healthcare Sys., Inc., 675 F.3d 394, 396 (4th Cir. 2012). The number of claims at issue was large because Tuomey did not unwind the contracts until after it lost the first trial in March of 2010.|
|3||Tuomey attempted to defend the physician contracts and the compensation paid as being necessary to attract and retain physicians to its rural community.|
|4||A more detailed factual background of the case is set forth in Drakeford, 675 F.3d at 398-399.|
|5||Id. at 402-403. The Fourth Circuit reversed the district court’s decision on Seventh Amendment grounds because the district court overturned the jury’s findings regarding violation of the Stark Law then relied on those findings to grant judgment to the Government on the equitable claims.|
|6||Id. at 409-410 (Wynn, J., concurring). Tuomey had argued that no referrals for Stark purposes existed because the services billed were performed by employed physicians, i.e., the patients already belonged to the hospital. In its opinion, the majority advised that the facility fee component of the claims based on the physicians’ personal services were “referrals” under Stark. Id. at 407. The Fourth Circuit majority opinion also held that the question whether the contracts took into account the volume or value of the anticipated referrals must be determined on the face of the contracts. Id. at 409.|
|7||CMS establishes payments under the Medicare Physician Fee Schedule based on national uniform relative value units (“RVUs”) that account for the relative resources used in furnishing a particular service to include work, practice expense, and malpractice expense. The Government’s expert testified that a more appropriate compensation methodology in this case would be that derived from consideration of the work RVU component. See Medicare Program; Revisions to Payment Policies under the Physician Fee Schedule, Clinical Laboratory Fee Schedule & Other Revisions to Part B for CY 2014 (Proposed Rule), 78 Fed. Reg. 43282 (July 19, 2013).|
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