A 'Stark' Result For South Carolina Hospital: Stark Law Violations May Cost Up To $357 Million In Penalties

After a four-week retrial, a federal jury concluded on May 8, 2013 that Tuomey Healthcare System (Tuomey) violated both the Stark Law and the False Claims Act (FCA). The jury determined that Tuomey violated the Stark Law by entering into improper compensation arrangements with specialist physicians. Significantly, the jury also determined that the hospital violated the FCA by submitting 21,730 claims to the Medicare program (worth more than $39 million) that were tainted by improper provider referrals. Although the jury verdict has not been reduced to a final judgment, Tuomey faces a likely $39 million judgment plus up to $357 million in potential FCA liabilities.1

Although the retrial did not bring about any startling developments, it reinforced certain Stark Law principles with respect to fair market value and physician compensation.

The Underlying Arrangement In 2003, local specialty physicians informed Tuomey that they were considering performing their outpatient procedures elsewhere. To dissuade these physicians, Tuomey entered into negotiations with all of the specialist physicians on its medical staff beginning in 2004. By November 2006, Tuomey (through a series of affiliated entities) had entered into part-time employment agreements with 19 specialist physicians whereby the physicians agreed to perform outpatient services exclusively at Tuomey Hospital and to reassign all amounts paid by third-party payers, including Medicare and Medicaid, to the hospital. In exchange, Tuomey agreed to provide full-time benefits and pay each physician an annual base salary that fluctuated based on the previous year's net cash collections for outpatient procedures, a productivity bonus equal to 80 percent of net collections, and an incentive bonus up to 7 percent of the productivity bonus. Each agreement had a 10-year term and a two-year post-termination non-competition provision. The parties performed in accordance with the agreements, including Tuomey billing Medicare and other third-party payers for the professional service and technical component of the procedures.

History of United States ex rel. Drakeford v. Tuomey Healthcare System, Inc. Tuomey's negotiations with Dr. Michael Drakeford, an orthopedic surgeon, were unsuccessful and ended in 2005. Later that year, Dr. Drakeford filed an action in the District Court for the District of South Carolina as a qui tam relator under the FCA. The government subsequently intervened in Dr. Drakeford's action, which was unsealed in 2007.

In its complaint, the government alleged, among other things, that Tuomey violated the FCA by submitting false or fraudulent claims for payment to the Medicare program for services rendered by physicians with whom Tuomey had entered into a financial...