Foster Swift Health Care Law E-News
June 4, 2013
Tuomey Healthcare System ("Tuomey"), a 242-bed hospital located in Sumter, South Carolina, now faces up to $237 million in fines and penalties after a jury found it liable for submitting $39 million worth of claims to Medicare in violation of both the Stark Law and the False Claims Act (FCA) as a result of compensation arrangements with referring physicians. See Case No. 3:05-CV-02858-MBS (U.S. Dist. Ct., S.C.).
Beginning in 2003, Tuomey entered into exclusive part-time employment contracts with 19 specialists requiring them to perform outpatient procedures at Tuomey Hospital. The physician contract provided for a compensation formula that was guaranteed to exceed Tuomey's net collections for the physicians' services. The contract consisted of an annual base salary that fluctuated based on Tuomey's net collections for the physicians' procedures, a productivity bonus equal to eighty percent of the net collections, an incentive bonus of up to seven percent of the productivity bonus, and fringe benefits. Each contract also included a covenant not to compete with Tuomey for the duration of the contract and for a period of three years thereafter. In developing these arrangements, Tuomey hired a compensation expert who determined the compensation rates were at fair market value and were unlikely to violate the Stark Law.
One of the surgeons with whom Tuomey was negotiating, the relator (whistleblower) in this qui tam case, sought legal advice regarding the legality of the arrangement. After being advised by counsel that the proposed agreement violated the Stark Law, the surgeon attempted to bring his concerns to the Tuomey Board of Directors and subsequently related the matter to the Federal Government. The government brought suit against Tuomey, alleging that the employment contracts exceeded fair market value, were commercially unreasonable, and illegally took into account the volume of referrals in violation of the Stark Law.
On May 8, 2013, the jury found Tuomey liable for violating the Stark Law and the FCA. The jury determined that as a result of the illegal arrangement, Tuomey submitted 21,730 false claims to the Medicare program for which Medicare paid $39 million.
On May 22, 2013, the Department of Justice ("DOJ") filed a motion with the U.S. District Court of South Carolina requesting $237 million in additional fines and penalties. The amount was calculated as three times the amount of damages plus a $5,500 penalty (could have been $11,000) per claim. The government stated that it realized the hospital may not be able to pay the full judgment, so it was open to discussing a lower settlement on appropriate terms.
This case illustrates that reliance on a documented appraisal by an expert will not always protect a physician compensation arrangement from government scrutiny under the Stark Law. The DOJ is normally reluctant to challenge compensation arrangements that are well-documented and supported by an expert opinion. However, the government will look at the quality of the documentation and the surrounding facts and circumstances.
In Toumey's situation, despite reliance on an expert opinion, several aspects of the compensation arrangement and surrounding circumstances led to increased scrutiny by the government, including:
- the compensation formula was guaranteed to exceed the net revenue actually generated by the physicians;
- exclusive part-time employment agreements prevented the physicians from moving their surgeries away from Tuomey to competing ambulatory surgery centers; and
- the suspect relationship with the physicians was exposed by a qui tam relator who previously attempted to warn the hospital of the legal implications of the arrangement.
To avoid Stark liability, fair market value should be documented by reasoned opinions given by competent valuation experts. But, as this case demonstrates, all the correct documentation will not deter the government if the transaction looks and smells like improper payment for referrals. While it is important to document fair market value, any arrangement that appears to be beyond what is commercially reasonable is not protected from Stark liability simply because it was supported by an expert opinion.