On October 2, 2013, the federal district court in Columbia, South Carolina imposed a landmark $237 million judgment in a much-discussed False Claims Act case which was predicated on violations of the Physician Self-Referral (Stark) Law, U.S. ex rel. Drakeford v. Tuomey Healthcare System, Inc.1 The case was originally filed as a qui tam case in 2005 by a physician, Michael Drakeford. The federal government intervened in the case in 2007.
The relator Drakeford and the government alleged that Tuomey Healthcare System (Tuomey) had established employment relationships with certain referring physicians which did not meet a Stark Law “exception,” thus tainting all Medicare referrals and claims submitted by Tuomey for services resulting from these physicians’ referrals. The physicians, employed through Tuomey’s affiliated medical practice groups, were part-time employees and their compensation covered only the physicians’ outpatient surgery services. The physicians’ salaries were adjusted according to collections received by the hospital for the services personally performed by the physicians. The physicians also received productivity and quality bonuses based on a percentage of these collections.
The government presented testimony that leading up to the employment of these physicians, Tuomey had calculated the fees it would lose if the physicians were to perform their surgeries at a competitor ambulatory surgery center. There was evidence that Tuomey also determined that even though the physicians’ compensation would exceed Tuomey’s collections from the physicians’ personally performed services, the employment relationships were nonetheless valuable to Tuomey.
The government argued in part based on this evidence, that the physicians’ aggregate compensation “varied with, or took into account the volume or value of referrals or other business generated” by the physicians for Tuomey, and therefore constituted an “indirect compensation arrangement” between the physicians and Tuomey. The government argued specifically that Tuomey’s facility fees constituted the physicians’ referrals and that their compensation, which fluctuated directly on the basis of the physicians’ personally-performed physician fees, also fluctuated consistently with those “facility fee” referrals. The government further argued that the arrangements did not meet the indirect compensation arrangements exception because the compensation “took into account the volume or value of referrals or other business generated” by the physicians for Tuomey,2 was not consistent with fair market value and was not commercially reasonable unless the physicians made referrals to Tuomey.
When the case was first tried in federal court in 2010, the jury concluded, based on this theory, that Tuomey had violated the Stark Law, but found rather surprisingly that it had not violated the False Claims Act. The federal district judge set aside the jury verdict and entered judgment for the government, but only on the government’s equitable claims, not its FCA claims. Tuomey and the government cross-appealed this decision to the Fourth Circuit which reversed the decision below on March 30, 2012, based on Seventh Amendment grounds irrelevant to the Stark Law. However, the Fourth Circuit also offered “advisory guidance” with respect to the applicability of the Stark Law to certain issues in the case. The advice was confusing to many, and so issues lingered following the decision with regard to how key Stark Law phrases such as “volume or value of referrals,” “commercial reasonableness” and “fair market value” were interpreted. Confusion also arose as to whether only an agreement’s “four corners” were to be considered, rather than all the evidence, in so determining.
With this “advice,” following re-trial in the spring of 2013, the jury concluded that Tuomey had violated the Stark Law and False Claims Act, and that Tuomey had submitted a total of 21,730 false claims valuing $39.3M in payments.
On September 30, Judge Margaret B. Seymour denied a series of Tuomey’s post-trial motions, determining instead that a reasonable jury could have found that the physicians’ employment compensation did “vary” with referrals – even though physician compensation was not expressly connected to those referrals – because Tuomey also received a facility fee each time one of the physicians personally performed a procedure at the hospital, which the court characterized as evidence of a “one-to-one relationship” between the physicians’ aggregate compensation and the physicians’ referrals. Judge Seymour also found that a reasonable jury could have found that Tuomey “took into account” the volume or value of referrals in “establishing the physicians’ compensation.” The court entered judgment under the False Claims Act at approximately $237.5 million, including treble damages and civil penalties.1