United States: Tuomey Ordered To Pay $237.5 Million For Stark And False Claims Act Violations: Key Lessons For Providers

Last Updated: October 9 2013
Article by Nathan A. Kottkamp, Gretchen Heinze Townshend and Holly Carnell

Nearly eight years to the day since the case was filed, Senior U.S. District Judge Margaret B. Seymour ordered Tuomey Healthcare System to pay more than $237.5 million in False Claims Act (FCA) fines and Stark Law penalties. Originally brought as a qui tam (whistleblower) action, this order now threatens Tuomey's financial survival. Unless overturned on appeal, Tuomey must pay $237.5 million for the Stark and FCA violations, more than its total revenue last year. As part of her ruling, Judge Seymour also rejected Tuomey's motions for a new trial.

The order reminds the health care industry to remain vigilant on fraud and abuse issues. The United States Department of Justice (DOJ) is bringing more cases against health care providers that violate the Stark Law and the Anti-Kickback Statute (AKS), and there is a risk of qui tam suits from competitors and employees alike. In this case, the initial whistleblower was a physician competitor who refused to contract with Tuomey on terms similar to those in the physician agreements found problematic in this case. Since these violations also trigger FCA penalties (i.e., recoupment of reimbursement, treble (3x) damages and up to $11,000 per claim), the consequences for violating fraud and abuse laws are significant.

A. Four Key Lessons from Tuomey

This order provides numerous lessons for hospitals, health systems and physicians, including:

  1. Stark Law's fair market value standard is not simply about a fair business deal. Stark has specific requirements that must be strictly followed. For example, physician compensation cannot take into account the volume or value of actual or anticipated referrals. Simply negotiating at arm's-length will not provide protection if the DOJ or a whistleblower brings suit.
  2. While hospitals and other health care providers can employ physicians, care must be taken to comply with all applicable state restrictions and also the Stark Law and the AKS. Stark and the AKS provide protection for arrangements that meet certain specific requirements. Failing to comply fully with the requirements of an applicable Stark exception or AKS safe harbor leaves health care providers open to potential claims and liability.
  3. Since the AKS may be violated if even one purpose for entering into a deal is to induce or reward referrals, health care providers need to be careful not only in the structure of their deals but also regarding their reasons for considering financial arrangements. Tuomey entered the employment arrangements with physicians after Tuomey's board discussed the potential lost revenue from such physicians' referrals to other less costly facilities in the community. These board discussions were central to the DOJ's allegations that Tuomey was considering potential referral volume in setting physician compensation.
  4. Since anyone can bring a qui tam action, health care providers need to be aware that competitors as well as possible partners and current employees are potential plaintiffs in these cases. When a question is raised regarding whether a physician or other referral source arrangement complies with applicable law, it is important that the provider appropriately investigate such question and, where necessary, remedy any instances of noncompliance.

B. Summary of Tuomey Litigation

In 2010, an initial jury found that Tuomey violated the Stark Law but not the FCA. After the judge granted a new trial on the issue of an FCA violation and issued an order in which he found that Tuomey violated the Stark Law (pursuant to the jury verdict) and found for the United States on the issues of payment by mistake and unjust enrichment, Tuomey appealed. In 2012, the Fourth Circuit reversed and remanded the case for a new trial. In that opinion, the Circuit took a strict view that, absent an exception, if there is a "financial relationship ... between the physicians and [the designated health service entity]," knowingly submitting a claim for either the facility or professional component of a bill to Medicare after a Stark-prohibited referral violates the FCA. In addition, the Fourth Circuit ruled that anticipating referrals in computing physician compensation violated the "volume or value" standard of Stark. While the court acknowledged this consideration of anticipated referrals may make the agreement fair economically, it nevertheless concluded that the consideration was barred by the Stark Law.

After the Fourth Circuit's decision, a second jury found Tuomey violated both the Stark Law and the FCA in May 2013. That finding relied, in part, on internal Tuomey documents and board conversations discussing lost revenue calculations if the physicians referred to a newly formed independent ambulatory surgery center instead of the hospital. In addition, the court discussed allegations that Tuomey paid 131 percent of professional fees to the employed physicians in part-time arrangements to show that the value received by Toumey from the physicians' referral value was considered in their compensation. The DOJ alleged these payments were more than fair market value and were used to secure non-compete agreements and lock up profitable referrals. These arrangements were atypical employment arrangements; in fact, while they were being negotiated, the whistleblower's attorney identified Stark and AKS concerns with the proposed arrangement and brought them to the attention of Tuomey's representatives. The jury found that the Stark Law prohibited this arrangement and that Tuomey's submission of 21,730 claims over a five-year period, worth $39,313,065, also violated the FCA. Pursuant to this judgment, Tuomey faced a penalty as large as $357 million this week, including treble damages (almost $118 million) and up to $11,000 per claim (another $239 million).

In her September 30, 2013 decision, Judge Seymour agreed with the government's assessment of the statutory minimum civil penalty of $5,500 per claim, or $119.5 million. Combining this with treble damages and fines from the previous jury verdict means Tuomey owes a total of more than $237.5 million for its non-Stark-compliant billing practices.

Tuomey is already filing a notice of appeal and will seek to stay the order pending the appeal. In addition, there is speculation that Tuomey will seek to reach a settlement with the DOJ to reduce the amount of the fine and penalties.

To read the order in U.S. ex rel. Drakeford v. Tuomey Healthcare System, Inc., click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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