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A United States District Court judge in South Carolina has ordered Tuomey Healthcare Systems (THS) to pay just shy of $278 million for entering into prohibited contractual relationships in violation of Stark Law and the False Claims Act (FCA). Click here to view the final order and opinion.

This case originated as a qui tam lawsuit filed by one of THS’ physicians, Dr. Michael Drakeford. Stark Law prohibits, among other things, a physician who has a “financial relationship” with an entity—such as a hospital—from making a “referral” to that hospital for the furnishing of certain “designated health services” for which payment otherwise may be made by the United States under the Medicare program.

Dr. Drakeford, and later the United States Government (Government), alleged that THS unlawfully entered into compensation contracts with 19 specialist physicians on its medical staff that required the physicians to perform all of their outpatient surgeries at THS’ outpatient surgery center (OSC).

Additionally, each part-time employment agreement contained essentially the following terms:

  • THS agreed to pay each physician an annual base salary that fluctuated based on THS’ net cash collections for the outpatient procedures
  • THS agreed to pay each physician a “productivity bonus” equal to 80 percent of the net collections
  • Each physician was eligible for an incentive bonus that could total up to seven percent of the productivity bonus
  • Each physician agreed not to compete with THS during the ten year term of the contract and for two years thereafter

Section 3729(a) of the FCA imposes liability on persons who, among other things, knowingly present, or cause to be presented, a false or fraudulent claim to the Government for payment or approval. Any such person is liable to the Government for a civil penalty of not less than $5,500 and not more than $11,000, as well as three times the amount of damages that the Government sustains because of the act of that person. Persons violating § 3729 also are liable to the Government for the costs of a civil action brought to recover any such penalty or damages.

In its amended qui tam complaint, the Government alleged that because THS performed the billing for the services provided at the OSC, each claim THS submitted to Medicare and Medicaid as a result of the prohibited contractual relationships which included both the professional fee and the facility fee or technical component, amounted to a false claim. The Government also alleged that THS made false statements on its certificates of cost reports by stating that it was entitled to payment of its claims for services that were provided in violation of Stark Law.

Despite being faced with these allegations and potential penalties, THS chose to go to trial rather than settling the matter. At trial the jury found THS guilty of violating the Stark Law, but not the FCA. In July 2010, on a post-trial motion, the District Court entered a $45 million judgment against THS for the equitable claims of payment by mistake of fact and unjust enrichment, based on the jury’s finding that THS violated the Stark Law. The District Court also set aside the FCA verdict and granted the Government’s motion for a new trial on the issue of the FCA violation. THS appealed the District Court’s judgment to the Fourth Circuit Court of Appeals.

On March 30, 2013, the Fourth Circuit overturned the District Court’s judgment on procedural grounds, specifically finding THS’ Seventh Amendment right to a jury trial was violated. Click here to view the opinion. The Fourth Circuit found that because the District Court set aside the jury verdict in its entirety, including the jury’s finding that Stark Law had been violated, no factual basis existed to sustain the judgment against THS on the equitable claims. The Fourth Circuit vacated the District Court’s judgment and remanded the matter for further proceedings consistent with its opinion. 

In April 2013, a new jury found THS violated both Stark Law and the FCA. The District Court subsequently entered judgment against THS in an amount just shy of $278 million. THS has since filed a notice of appeal.

This case is an important reminder that if an arrangement solely involves the provision of personally performed services it does not mean that Stark Law can be ignored. Further, when establishing compensation methodologies, a hospital cannot compensate physicians for their anticipated referrals. Rather, physician compensation must reflect the fair market value of the services actually being provided by the physicians.

For more information, please contact:

Jenny McGovern

Richard S. Cooper 

Jane Pine Wood

McDonald Hopkins has a large and diverse healthcare practice, which is national in scope. The firm represents a wide variety of healthcare providers, facilities, vendors, technology companies and associations. Our diverse experience enables us to give our clients a unique perspective on the issues that may confront them in the rapidly evolving healthcare environment.