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Hospital Hit With $237 Million Stark Law Judgment
July 7, 2015

The U.S. Court of Appeals for the Fourth Circuit affirmed a $237,454,195 judgment against Tuomey Healthcare System (Tuomey), a small, nonprofit hospital in Sumter, South Carolina, on July 2, 2015.  This may be the final chapter in a long-running legal drama that offers a number of important cautionary lessons for hospitals and other healthcare organizations struggling to stay compliant with the complex and evolving standards of the Stark law. 

Originally, a jury in federal district court found that Tuomey had violated the Stark law, based on allegations that physicians were paid in excess of fair market value, and in a manner that took their referrals into account.  That jury, however, found no False Claims Act (FCA) violations, concluding that Tuomey did not “knowingly” violate the Stark law and hence did not knowingly submit false claims.  The district court vacated the jury’s verdict and ordered a new trial after concluding that certain testimony by a Tuomey executive had been erroneously excluded from the first trial.  The jury in the second trial found that Tuomey had knowingly violated the Stark law and knowingly submitted false claims, thus leading to a verdict in favor of the government (and the qui tam whistleblower) of $237,454,195, which Tuomey challenged on appeal to the Fourth Circuit, but which the Fourth Circuit has just affirmed.

The heart of the case involves 19 part-time physician employment agreements that Tuomey entered into with surgeons on its medical staff.  The impetus for these arrangements apparently arose from a concern that these physicians were increasingly performing outpatient surgeries at their offices or at ambulatory surgery center (ASC) facilities, rather than as outpatient hospital surgeries, and thus Tuomey was losing revenue it would otherwise receive from the facility fees generated by outpatient hospital services.  According to the whistleblower and the government, Tuomey entered into these part-time employment agreements in order to stem the loss of this business.

The part-time arrangements were unusual in a number of respects, but primarily because, while they were “part-time,” they were not based on working during specific hours of the day or days of the week, but rather were based solely on activity.  Specifically, the surgeons were employees of Tuomey only when they performed outpatient surgeries, and at all other times, they remained in independent practice.  Also, these part-time employment agreements were for 10-year terms, required that the surgeons perform all of their outpatient surgeries exclusively at Tuomey, and included a two-year period after the agreements expired or terminated, during which the surgeons were prohibited from performing outpatient surgeries anywhere else within 30 miles of the hospital.

The physicians were largely paid based on their productivity, including productivity bonuses, and their compensation typically exceeded the collections generated by their professional services, which the government asserted meant that their compensation exceeded fair market value and, in effect, included a portion of the facility fees collected by Tuomey, which were generated each time they performed their surgeries.  The government alleged that the physicians’ compensation consequently took their referrals into account, which is prohibited by the Stark law and its exceptions.  (Tuomey attempted to counter this position with the opinion of a valuation consultant it had engaged when entering the compensation arrangements who opined that they were consistent with fair market, value, and by pointing to the employment exception in the Stark law that permits paying physicians a bonus based on their personal productivity.)

The Stark law has an exception for bona fide physician employees, who may be paid productivity bonuses, and there is commentary which accompanied the Stark regulations saying that, just because a physician’s productivity may correspond with the physician’s referrals to the hospital, it does “not invalidate” paying the physician for productivity, subject to fair market value.  The Fourth Circuit, however, concluded it was reasonable for the district court jury to find that the compensation Tuomey paid these physicians impermissibly took account of their referrals.  While not entirely clear, the court seems to suggest, among other things, that these physicians might not have been bona fide employees, given the unconventional nature of these relationships.

Accordingly, one of the takeaways of this case is that physician compensation may present risk under the Stark law, even if it arguably is consistent with fair market value in the eyes of an independent valuation consultant, if some or all of the following factors are present:  (1) the party paying the physician compensation is motivated by a desire to retain or secure referrals, (2) the terms and conditions contained in the compensation arrangement are highly unusual, (3) the compensation correlates with or is affected by the physician’s referrals, and (4) the compensation paid to the physician exceeds the professional fees generated by the physician.

Another key takeaway concerns the testimony that was erroneously excluded from the first trial (where the jury found no FCA violations) and allowed in the second trial (where the jury did find FCA violations).  In fact, the Fourth Circuit seems to think the inclusion of this testimony in the second trial was a key reason the second jury found what the first jury did not – that the FCA was violated.  The testimony that came before the second jury showed that after Tuomey’s regular outside counsel approved the arrangements, and in response to a lawyer for one of the physicians questioning their compliance, Tuomey engaged a lawyer with expertise in the Stark law to advise it on the proposed part-time employment arrangements and that lawyer raised significant compliance concerns and said the arrangements would make an “‘an easy case to prosecute’ for the government.”  Tuomey disregarded this advice, told this lawyer not to put the advice in writing, and terminated the lawyer’s engagement.  Tuomey then hired another lawyer (who was not told about the other lawyer’s opinion) who appears to have advised that the arrangements were permissible. 

The Fourth Circuit focused on Tuomey “shopping” for a favorable opinion and seemed to think this was critical to the second jury’s conclusion that Tuomey had engaged in “knowing” FCA violations (“knowingly” violating the FCA means acting with actual knowledge, reckless disregard or deliberate ignorance).  The takeaway is that obtaining a second legal opinion or valuation opinion, if you do not like the first one, must be done cautiously (if at all) because it might later be used as evidence of improper intent.  For example, if a second expert is hired, at some point in the process it might be prudent to consider sharing the first expert’s opinion with the second expert and asking the second expert to explain the basis for reaching a different conclusion, e.g., changes in facts since the first expert’s review, information overlooked by the first expert, or other reasons why the second opinion should be given more weight (besides that it is the answer the organization hiring the expert was hoping to hear).

One final note of interest comes from the concurring opinion, which acknowledges that the outcome of the case follows from the application of the law to the facts, but laments “the picture this case paints:  An impenetrably complex set of laws and regulations that will result in a likely death sentence for a community hospital in an already medically underserved area.”  In making this point about the complexity of this area of law, the concurring opinion cites a book on the Stark law authored by HLB Attorney Charles B. Oppenheim, The Stark Law:  Comprehensive Analysis + Practical Guide (AHLA 5th ed. 2014): “‘[t]he Stark law is infamous among health care lawyers and their clients for being complicated, confusing and counter-intuitive; for producing results that defy common sense, and sometimes elevating form over substance. Ironically, the Stark law was actually intended to simplify life by creating “bright lines” between what would be permitted and what would be disallowed, and create certainty by removing intent from the equation.’” The practical takeaway from the point made in the concurring opinion is the importance of engaging qualified legal counsel when addressing Stark law issues, given both the complexity of this area of law, and the potential magnitude of the problems arising from Stark law violations.  This is even more critical when contemplating unusual or innovative arrangements. 

For additional information, please contact Charles Oppenheim, Patric Hooper, or Brad Tully, David Henninger in Los Angeles at 310.551.8111; Ben Durie in San Francisco at 415.875.8500; Mark Johnson in San Diego at 619.744.7300; or James Segroves in Washington, D.C. at 202.580.7700.

For media inquiries, please contact Barrett McBride at 916.456.5855.