By Sharon Hamrick, CPA•CFF, CFE

The healthcare industry seems to be at the center of more than its share of litigation recently, and the Stark statute is one of the most active areas. The Tuomey case being one of the most watched recent cases. 

Case Summary

On March 30, 2012, the Fourth Circuit Court of Appeals issued its decision on the appeals by both parties to the District Court’s decision and remanded the case for a new trial.  

To summarize this case to date, the U.S. government ex rel. Dr. Drakeford, a physician, brought a federal lawsuit against Tuomey Healthcare System, Inc. accusing Tuomey of violation of various federal statutes, including the Stark Law.  Because the Stark Law does not create its own right of action, the United States sought relief under the False Claims Act.¹ In March 2010 the jury returned a verdict against Tuomey related to the alleged Stark Law violations, and the court imposed monetary penalties of approximately $45 million plus interest. Further, the District Court ordered a new trial on the alleged violations of the federal False Claims Act (FCA).  

The Court of Appeals vacated the District Court’s decision and ordered a new trial, though the date of this new trial has yet to be set. The Court of Appeals determined that the District Court’s judgment violated Tuomey’s Seventh Amendment right to a jury trial. The Appeals Court opined that because the District Court granted the government a new trial encompassing the whole FCA claim, the court’s equitable relief based on the jury’s verdict regarding the Stark Law issue was a legal nullity.  

In general terms, the federal Stark Law prohibits a physician from referring patients for the furnishing of designated health services (DHS) to an entity with which he or an immediate family member has a financial relationship.² The term “financial relationship” includes, among other items, direct and indirect compensation to physicians.  Indirect compensation includes arrangements under which the physician’s compensation is dependent upon or varies with the volume or value of those referrals.  

 
Stark Law

The Stark Law contains exceptions for certain compensation arrangements, including, among others, “bona fide employment relationships” and “personal services arrangements.” In order to qualify for the Stark Law exceptions in these instances, the compensation arrangements must meet the following statutory requirements: 

• The amount of compensation is not based on the value of or volume of referrals
• The compensation is commercially reasonable even in the absence of referrals from the physician to the hospital.³ 

Tuomey Healthcare System, Inc. operated the only hospital in Sumter County, South Carolina.  As such, it was the only provider of various surgical services in the county until permission was granted by the state to a physician’s group for development of an ambulatory surgery center (ASC). At about the same time, Tuomey applied for and was granted a certificate of need for the development of its own outpatient surgery center.  According to the amended complaint, in the face of this potential competition, Tuomey formed four LLC entities, referred in the complaint as Tuomey Specialty Groups. Tuomey recruited and employed area physicians on a part-time basis through these specialty groups to perform DHS procedures at Tuomey Hospital.  The compensation arrangements with the physicians included a base salary and bonuses based on either the dollar value of the receipts in connection with the physician’s services or the number of procedures performed by that physician.  The contracts included payment of the physicians’ malpractice premiums and benefits and required the doctors to perform all outpatient surgeries at Tuomey; they contained noncompete agreements which prohibited the physicians from performing outpatient surgeries at any other location within thirty miles of the hospital during the contract period and for the two years following termination of the contract.

Among the issues raised by the government were: 

• The compensation paid exceeded the actual amount of payments received in connection with the physicians’ services;
• The contracts required the physicians to perform all outpatient surgeries at Tuomey;
• The contracts included an agreement not to compete that prohibited the physicians from performing outpatient surgeries at any other location; 
• Bills and invoices for procedures and services performed under these employment contracts continued to be prepared and submitted by the individual physicians’ offices.

During the time in which Tuomey formed the Tuomey Specialty Group entities, drafted the physician employment agreements and recruited the various physicians, it consulted with legal counsel and contracted with a consulting company to opine as to the fair market value and commercial reasonableness of the agreements.  The hospital received a report from the consulting company “opining that the compensation to be paid for the professional and administrative services outlined in the Proposed Employment Agreement is both fair market value and commercially reasonable.”⁴ Citing the consulting company’s opinion report among other items, its legal counsel advised Tuomey that the physician contracts would fall within the Stark exception for bona fide employment relationships and Tuomey represented to recruited physicians that they had received opinion letters that the contracts did not violate the Stark Law.

One of the physicians Tuomey attempted to recruit was Dr. Drakeford, who engaged his own legal counsel to review the proposed employment contract.  Discussions between his legal counsel and the hospital’s led to the joint engagement of a third attorney to provide his opinion as to the employment contracts. The complaint states that the jointly-engaged attorney told legal counsel for both parties that the contracts were problematic under the Stark statute based on fair market value, that the noncompete agreements were a problem in that they locked in referrals and extended beyond one year, that the history as to the competing ASC created a problem, that the fair market value issue would be an easy one for the government to go after, and that compensation over fair market value would be an easy case under the Stark statute.⁵  The complaint goes on to state that eventually the jointly-engaged attorney was prohibited by Tuomey from issuing his opinions in writing and was prohibited from doing any other work on this matter.

More to Come

So, what can be learned from this case and its progression through the legal system thus far?  The original jury verdict regarding the alleged Stark violations and the impending new trial illustrates that a hospital or other medical organization is not insulated from accusations of Stark violations by the existence of fair market value and commercial reasonableness opinions or legal opinions relying on such opinions.  

The Court of Appeals opinion includes a summary of items the jury must determine in the new trial. These items include:

• Whether the physician contracts took into account the volume or value of referrals; 
• If so, whether Tuomey could bear its burden of proof with respect to the exception related to indirect compensation arrangements; and
• If the jury finds that the contracts created a financial relationship as defined by the Stark Law between Tuomey and the physicians, it must then determine the number and value of claims Tuomey presented to Medicare for payment and for which it received payment.

The second Tuomey trial is likely to give us even more insight into the Stark Law.  To this point, perhaps the moral of the story is that while both medical facilities and physicians must engage legal counsel and advisors when negotiating physician employment contracts, they must also evaluate those opinions themselves and operate within the terms of the negotiated agreements.  

We Can Help 

The professionals of Decosimo’s Healthcare Group have the knowledge and experience necessary to assist in determining fair market value and commercial reasonableness, as well as to defend those conclusions when necessary. Please call us in confidence at 800.782.8382.

Mike Costello | Principal
mikecostello@decosimo.com



¹  U.S. Court of Appeals for the Fourth Circuit opinion, March 30, 2012, p. 3
²  42 U.S.C. §1395nn(a).
³  42 U.S.C. §1395nn(e)(2)(B) and (e)(2)(C)
⁴  Second Amended Complaint, para. 66
⁵  Ibid., para. 93

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