May 2012 Volume 8 Number 9

4th Circuit Sets Aside $45 Million Judgment Against Tuomey Hospital

By Anna C. Watterson, Policy Analyst, Lockheed Martin, Greenville, SC

AuthorThe United States Fourth Circuit Court of Appeals reversed the district court’s $45 million judgment against Tuomey Healthcare System, Inc. (“Tuomey”) on Friday, March 30, 2012, finding that the district court violated Tuomey’s Seventh Amendment right to a jury trial.1 While reversing on procedural grounds, the Fourth Circuit also shed light on the Stark Law issues presented on appeal.

Background

This case arose out of a series of negotiations, beginning in 2003, between Tuomey Hospital in Sumter, South Carolina and local specialty physicians who were considering performing their outpatient procedures elsewhere. Tuomey entered into a total of nineteen part-time employment contracts with specialists requiring that they only perform their outpatient procedures at Tuomey Hospital. Each of these contracts had a ten year term and provided an annual base salary and productivity bonus for the physicians. Both the annual base salary and the productivity bonus varied based on Tuomey’s net cash collections from the outpatient procedures. The procedures performed at Tuomey by the physicians it had contracted with resulted in Tuomey billing a professional fee for the physician’s services, the “professional component,” and a facility fee for the space, nurses, and equipment used, the “facility component” or “technical component.”

Tuomey was unsuccessful in contract negotiations with one physician, Dr. Drakeford, who initiated this action as a qui tam relator under the False Claims Act (“FCA”). The United States government subsequently took over the litigation of this case.

At the conclusion of the case before the district court, in March 2010, the jury found that Tuomey had violated the Stark Law, but that Tuomey had not violated the FCA. The Stark Law, named after its sponsor, Congressman Pete Stark, prohibits physicians from making referrals for designated health services paid under Medicare or Medicaid if the physician or an immediate family member has a financial relationship with the entity.2 The Stark regulations enumerated specific exceptions to this prohibition. The FCA establishes additional penalties for anyone who “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval” to the U.S. Government.3 Under the FCA, Tuomey could face civil penalties of $5,500 to $11,000 per claim in violation of the law, treble damages and exclusion from Medicare and other federal healthcare programs.4

Seventh Amendment Claims

The Seventh Amendment requires common facts of legal and equitable claims to be first adjudicated by a jury. “[A] district court may not deprive a litigant of his right to a jury trial by resolving an equitable claim before the jury hears a legal claim raising common issues.”5 In this case, the financial relationship between Tuomey and the physicians was a factual issue in both the legal and equitable claims, as a violation of the Stark Law is a factual predicate to liability on the equitable claims sought by the Government. Although the jury found that Tuomey did not violate the FCA, the district court set aside the jury verdict and ordered a new trial on the entire FCA claim. The court then relied on the jury’s findings, which it had just set aside, to hold that the United States was entitled to a nearly $45 million judgment based on equitable claims. On appeal, Tuomey argued that the district court violated its Seventh Amendment right by basing its judgment on the equitable claims on the jury’s finding when the district court had set aside the jury’s verdict. The Fourth Circuit agreed, remanding the case back to the district court, finding that when the district court set aside the jury verdict, a jury had yet to determine the common issue, and thus the district court impermissibly deprived Tuomey of its right to a jury trial. The Fourth Circuit found there was insufficient evidence to establish that the district court could have granted judgment as a matter of law, and thus the district court’s actions did not constitute a harmless error.

Fourth Circuit’s Analysis Beyond the Seventh Amendment Claim: The Stark Law

Although the Fourth Circuit remanded this case on procedural grounds, the court addressed other issues “likely to recur upon retrial.” The Honorable Judge Wynn, although concurring in the result, argued that this analysis is advisory in nature. Wynn stated that “prudence and judicial restraint require that we address only those questions necessary to the disposition of an appeal, lest we overstep our role.”6

Nonetheless, the Fourth Circuit addressed two questions of law: “whether the facility component of the services performed by the physicians pursuant to the contracts, for which Tuomey billed a facility fee to Medicare, constituted a ‘referral’ within the meaning of the Stark Law and Stark Regulations” and “whether, assuming that Tuomey considered the volume or value of anticipated facility component referrals in computing the physicians’ compensation, the contracts implicate the ‘volume or value’ standard under the Stark Law.”7

To answer the first question, the court noted that neither the Stark statute nor the Stark regulations state whether a facility component of a personally performed service constitutes a referral. However, the court relied on The Centers for Medicare & Medicaid Services’ (“CMS”)8 preamble to the final rule, which states, in part, “in the context of inpatient and outpatient hospital services, there would still be a referral of any hospital service, technical component, or facility fee billed by the hospital in connection with the personally performed service.”9 Relying on the agency’s interpretation of the Stark Law and regulations, the court concluded that there was a referral in the Tuomey case, based on the facility component billed as part of the physicians’ personally performed services. The court, thus conclusively decided this question, leaving only whether there was a financial relationship between Tuomey and the physicians for the jury to determine.

On the second question, the court again looked to the agency’s preamble to conclude that compensation arrangements that take into account anticipated referrals do violate the Stark Law’s fair market value requirement. The Stark Regulations define fair market value as “compensation that ‘has not been determined in any manner that takes into account the volume or value of anticipated or actual referrals.’”10 The Stark Law and accompanying regulations prohibit financial relationships between hospitals and physicians, where the physician’s compensation is not the fair market value for the work done, but rather is inflated to reflect the physician’s ability to generate other revenue for the hospital.

The court leaves, as a question for the jury, whether the contracts in this case took into account the value or volume of anticipated referrals. The court opines that Tuomey’s subjective intent alone does not create a Stark Law violation.11 In other words, the jury must find that the compensation arrangements were above fair market value to find Tuomey in violation of the Stark Law. 

Conclusion

Although the healthcare industry will continue to watch this case if it is re-tried, the Fourth Circuit has provided a valuable glimpse of how it might decide two key issues involving the Stark Law. The trial before the district court focused on the fair market value of the physician contracts and whether Tuomey knew the contracts might violate the Stark Law, but proceeded anyway.12 On re-trial the jury will again need to look at the fair market value of the contracts and Tuomey’s knowledge. However, by conceding that Tuomey’s subjective intent to enter into the contracts anticipating referrals alone is not enough, the issue of whether the contracts where fair market value will likely be key in the retrial. Whether advisory in nature or not, this commentary on the Stark Law has provided the industry with some guidance as hospitals and physicians continue to enter into joint ventures. The industry should take particular note of the Fourth Circuit’s conclusion that a referral for personally performed services involving a facility component does constitute a referral, not falling under an exception, under the Stark law. On the other hand, the Fourth Circuit’s affirmation that subjective intent alone is not sufficient to find a violation should give the healthcare industry some condolence.


1 See Gary Keilty & William Mathias, Stay Tuned: Tuomey Healthcare System Ordered to Repay $45 million In Connection With Stark Law Violation; Judge Allows Government’s False Claims Act Re-Trial To Proceed, 6 ABA Health eSource (July 2010), available at http://www.americanbar.org/newsletter/publications/aba_health_esource_home/Keilty.html (outlining the background of the Tuomey case).
2

Ethics in Patients Referrals Act, 42 U.S.C. § 1395nn; Social Security Act § 1877 (2009) (commonly referred to as the Stark Law).

3 31 U.S.C. § 3729 (2009).
4 Keilty & Mathias, supra note 1.
5

United States ex rel. Drakeford v. Tuomey Healthcare System, Inc., No. 10-1819, at *18 (4th Cir. Mar. 30, 2012).

6

Id. at 30.

7

Id. at 21.

8

Formerly known as the Health Care Financing Administration.

9

Id., citing 66 Fed. Reg. at 941.

10

Id., citing 66 Fed. Reg. at 868.

11

See Tuomey Healthcare System, Inc., No. 10-1819, at *26 n. 25 (referencing United States ex rel. Villanfane v. Solinger, 543 F. Supp. 2d 678 (W.D. Ky. 2008)).

12 Keilty & Mathias, supra note 1.

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