A $237 Million Risk: The Stark Law, Tuomey Healthcare and How to Mitigate Risk

On September 30th, 2013 a United States District Court in South Carolina ordered Tuomey Healthcare (“Tuomey”) to pay $237 million for Stark and False Claims Act (“FCA”) violations stemming from inappropriate contracts with physicians.  The United States alleged that Tuomey entered into compensation arrangements with physicians that exceeded fair market value and were based on the volume of business generated by the physicians. 

The Stark Law prohibits a physician from making a referral to a hospital if that physician has a financial relationship with the hospital and an exception has not been met.  If an exception is not met, the hospital is required to reimburse the federal government for any payments made from prohibited referrals.  The FCA imposes liability on persons or entities that present false or fraudulent claims to the United States Government.  If liability is imposed based on the FCA, the party is responsible for civil penalties between $5,500 and $11,000 per false claim. 

The following is an in depth analysis of the recent order and what healthcare organizations should be doing to limit their liability under the Stark Law.

Government Allegations

A surgery center applied for a certificate of need in Sumter, South Carolina.  At the same time, Tuomey applied for a certificate of need for its own surgery center which was later converted into an outpatient surgery center.  Both certificates of need were granted, and Tuomey was facing competition from the surgery center.  After analyzing the impact of a specialty group redirecting their referrals to the other surgery center, Tuomey estimated it would lose $9.6 million over a thirteen year period.

To limit this loss, Tuomey began recruiting specialist physicians to enter into part-time employment contracts.  The nineteen (19) contracts included the following provisions:

·         Physicians were required to perform procedures at Tuomey facilities exclusively;
·         Tuomey was responsible for all billing and collections;
·         Yearly salaries based on previous year’s net collections;
·         Productivity bonuses were equal to 80 percent of net collections;
·         Additional incentive bonuses that could total up to 7 percent of the productivity bonus;
·         Each agreement had a 10 year term;
·         Physicians received full time benefits; and
·         The agreement included a two year non-compete.

A valuation firm indicated these contracts were fair market value.  In coming to that conclusion, the following facts were provided:

·         Analysis indicated productivity levels of the physicians were between the 50th and 75th percentiles; and
·         Compensation levels exceeded the 90th percentile.

The valuation did not take into account any full time benefits provided.  In addition to the valuation, Tuomey sought out the expertise of a former Department of Health and Human Services attorney who had experience with the Stark Law.  This attorney advised Tuomey that the physician contracts were problematic and the terms could potentially expose Tuomey to liability under the Stark Law. 

Shortly after, Tuomey terminated the representation and sought advice from a new attorney.  The new attorney was placed in the position of providing guidance to Tuomey regarding compliance with the Stark Law.  This new attorney allegedly advised Tuomey that given the facts above, the Stark Law did not apply to the physician contracts.

The government alleged that these employment agreements exceeded fair market value, were based on the volume and value of referrals to Tuomey, and the Stark Law did apply to these employment agreements.

Procedural History

The action was originally assigned to the Honorable Matthew J. Perry, Jr. and on March 29, 2010, the jury returned a verdict in favor of the government establishing that Tuomey violated the Stark Law.  The jury also found that Tuomey did not violate the FCA.  Judge Perry then ordered Tuomey to repay nearly $45 million to the federal government.

Tuomey appealed Judge Perry’s order for the $45 million.  On March 30, 2012 the Fourth Circuit Court of Appeals issued its opinion on Tuomey’s appeal.  The Fourth Circuit held that in the context of inpatient and outpatient hospital services, there were referrals of hospital services as the hospital billed the facility fee billed in connection with the physicians’ personally performed service.  In addition, the court noted that compensation arrangements taking into account anticipated referrals would be based on the volume or value of referrals.  Nevertheless, the court remanded the case for retrial.

On retrial, the jury returned a verdict finding Tuomey had violated the Stark Law, the FCA, had submitted 21,730 claims in violation of the FCA, and the value of the claims submitted in violation were nearly $40 million.

United States District Court Order

On September 30th, the United States District Court issued an order responding to post-trial motions filed by the parties.  Several arguments were made through these motions in an attempt to void the previous jury verdict.  The arguments and summaries of the court’s decision follow:

·         Tuomey argued the government failed to prove the physician contracts were subject to the Stark Law.

Tuomey explained that the physicians’ compensation had been based only on collections for personally performed services.  Because of this, Tuomey argued that the Stark Law did not apply because the indirect compensation arrangement exception had been met.  The court explained that each time a physician referred a patient to Tuomey, the hospital would receive a facility fee. Thus, because the hospital received a facility fee from the services performed by the physicians, a referral was made and the arrangement became subject to the Stark Law. 

·         Tuomey argued the contracts were not subject to the Stark Law because the government failed to prove the compensation took into account the volume or value of referrals.

Tuomey next argued that calculating the potential loss of referrals had no impact on the compensation paid to the physicians. The court was not persuaded by this argument because multiple experts presented evidence showing that Tuomey had been taking into account the volume of those referrals.  In the end, it was a decision for the jury and a reasonable jury could have found that the compensation took into account the volume or value of referrals. 

·         The government failed to show the submission of a false claim.

Tuomey also argued, assuming the Stark Law did apply, that the data used to calculate the number of claims was speculative because nothing in forms submitted to Medicare identifies the “referring physician” but rather the “attending physician” or the “other physician.”  The court explained that it was a jury question whether attending and operating physicians constitute referring physicians under the Stark Law.  Therefore, this argument was found to be without merit.

·         Tuomey argued that because of reliance on counsel, no reasonable jury could have found that the government met its burden of showing intent.

Tuomey argued that under the FCA, the government did not establish the requisite intent to support this claim.  Tuomey explained that it had been relying on counsel as to whether the Stark Law applied.  The court found this argument not persuasive.  First, Tuomey hired one attorney who had concerns and believed there was risk.  Only after recognizing this, Tuomey hired a second attorney who gave them the opinion that Stark did not apply.  However, there was evidence presented that Tuomey was shopping for an opinion and attempting to steer decisions of the attorneys.  The court held that a reasonable jury could come to this conclusion.

·         Tuomey argued that the government failed to prove damages.

Finally, Tuomey argued that the government did receive medical services it paid for and there should be no actual damages under the FCA.  The court explained that the FCA causes of action are based on the Stark Law and any payment from a tainted referral is prohibited.  The court conceded that in all cases the government would receive medical services it paid for, however the government would then be limited to civil penalties.  The court explained that this would be contrary to the statute.

On of October 1st, Tuomey Board of Trustees Chairman John Brabham issued a response to the judge’s orders.  “In regards to the Federal Case ruling today, Tuomey respectfully disagrees with the ruling.  Our attorneys are filing a notice of appeal today, and we will also ask for a stay of the judgment, pending appeal.  The Board is and will continue to be open to settlement.”

Takeaway Points

As this case proceeds, whether Tuomey settles or not, it is impossible to ignore the risks associated with the Stark Law.  The bad news for compliance officers, corporate counsel, and boards of trustees is that Stark Law risks associated with physician compensation and ownership arrangements should not be ignored.  The good news is that the Tuomey case provides takeaway points to help reduce Stark risk within your organization.

The Stark Law is a Strict Liability Law, Intent is Irrelevant

Given the complexity of healthcare laws, it is important to understand that any financial arrangement with a referring physician that does not meet an exception is a violation of the Stark Law.  This requires the organization to reimburse the federal government for all Medicare reimbursement received from referrals from physicians during periods of non-compliance.  The intention of the organization or lack of knowledge cannot be used as a defense.

Take a Proactive Approach to Physician Financial Arrangements and the Stark Law

It is important for organizations to implement an effective compliance and monitoring program for physician financial arrangements.  This should include evaluating physician financial arrangements from both a fair market value and commercial reasonableness perspective.

Understand the Difference Between Valuation Opinions and Legally Defensible Opinions

In Tuomey, the valuation expert failed to defend the analysis in their opinion.  With all physician financial arrangements, organizations should ensure the conclusions of the analysis are defensible from a commercial reasonableness and fair market value perspective as those terms are legally defined in the Stark Law, with the goal that the financial arrangement can be defended in a court of law.  The mere existence of a valuation in the file is not enough.

If you or your organization has any questions regarding the Stark Law, or have any questions regarding Hospital Compliance, please feel free to contact Robert A. Wade at (574) 485-2002 or Alex T. Krouse at (574) 485-2003.