An Overview of the Tuomey Healthcare Case

On Oct. 3, a federal judge ordered Sumter, S.C.-based Tuomey Healthcare System to pay approximately $237 million in fines after a federal jury, in May, found the system violated Stark Law and the False Claims Act by submitting $39 million in false claims to Medicare from January 2005 through November 2006.

There are several lessons to consider from this case, which is quite interesting and unique. Here is an overview of the case, spanning back to 2003, along with five key takeaways for other hospitals, health systems and physicians.

Tuomey's agreements with physicians
In 2003, several local specialty groups told Tuomey they planned to perform surgical procedures in-office instead of at Tuomey's 266-bed hospital. To allegedly avoid a reduction in surgical case volume, Tuomey employed the 19 specialists as part-time employees. Each of the 10-year employment contracts included essentially the same terms.

• Physicians were required to perform outpatient procedures at a Tuomey hospital or facilities owned by Tuomey.
• Tuomey was responsible for billing and collections from patients and third-party payers, including Medicare and Medicaid.
• Tuomey compensated the physicians with annual base salaries that hinged on Tuomey's net cash collections for outpatient procedures.
• The physicians were also eligible for productivity bonuses equal to 80 percent of the net collections, along with an incentive bonus that could total up to 7 percent of the productivity bonus.
• Finally, the contracts also included a non-compete clause, prohibiting the specialists from competing with Tuomey during the 10-year term and two years after the contract expired.

One of the specialists, Michael Drakeford, MD, filed a qui tam lawsuit against Tuomey in October 2005 after an unsuccessful contract negotiation with the system. Dr. Drakeford claimed Tuomey paid physicians above market value. The government intervened in September 2007 and subsequently filed its own complaint.

The initial trial
The case initially went to trial in the U.S. District Court of South Carolina in 2010, and the jury found Tuomey violated Stark Law but did not violate the FCA. The district court set aside the jury's decision, ordered a new trial on the FCA allegations and entered judgment against Tuomey for nearly $45 million (the Department of Justice's estimated amount of tainted claims reimbursed by the government).

Tuomey appealed this decision, arguing the court violated its Seventh Amendment right by basing the $45 million judgment on the jury's finding when it had set aside that verdict.

In April 2012, the U.S. Court of Appeals for the Fourth Circuit identified procedural errors, reversing the district court's decision and remanding the case for a retrial in district court. The appellate court also addressed other issues it found likely to resurface upon retrial.

One question raised was whether the facility fee Tuomey billed to Medicare constituted a "referral" under Stark Law, given the contractual agreements it held with physicians. Another question was whether, assuming Tuomey considered the volume or value of anticipated facility fees when computing physicians' compensation, those contracts violated Stark law by taking into account the volume or value of anticipated — not just actual — referrals. Here is how the Fourth Circuit interpreted this when remanding the case back to district court:

"It stands to reason that if a hospital provides fixed compensation to a physician that is not based solely on the value of the services the physician is expected to perform, but also takes into account additional revenue the hospital anticipates will result from the physician's referrals, that such compensation by necessity takes into account the volume or value of such referrals."

The conclusion of the retrial
A retrial in the district court concluded with a verdict against Tuomey this past May. This time, the 10-person jury found Tuomey violated both Stark Law and the FCA. Claims for items or services resulting from a violation of the Stark Law or Anti-Kickback Statute constitutes a false claim under the FCA.

The jury decided the system's contracts with physicians took into account the value of anticipated referrals, and Tuomey knew these contractual agreements would result in false claims to the government. It found Tuomey submitted a total of 21,730 Medicare claims that were illegal due to the compensation arrangements.

This week, U.S. District Judge Margaret Seymour ordered Tuomey to pay $276.7 million in civil penalties, a figure that was later reduced to approximately $237 million after federal attorneys submitted a motion to lower the amount to correct an apparent clerical error.

At the same time, Tuomey's attorneys have officially filed their notice to appeal the financial judgment to the 4th U.S. Circuit Court of Appeals. They are also seeking an appeal for their motion calling for either a new trial or a judgment in their favor, as Judge Seymour initially denied that motion. In addition to these appeals, Tuomey officials said they are also continuing to pursue a post-judgment settlement with the government. If that is reached, it would bar the case from going to the appellate court.

Key points to take away from the Tuomey case

1. When a strategy doesn't smell correct, notwithstanding how many legal and valuation firms weigh in, leadership ought strongly consider not pursuing the strategy. If a system needs multiple legal and valuation firms to support or back up a program, that in and of itself may be reason for pause. Each of a hospitals' relationships with physicians does need legal and valuation support. But if you find yourself needing to seek multiple opinions for a relationship, that may be good reason for concern. The jury for the Tuomey case concluded that even though the health system relied upon an expert assessment of the fair market value of the employment agreement, when other factors were considered, the arrangements were in essence payment for referrals.

When it was entering into the part-time employment contracts with the 19 specialists, Tuomey had obtained a third-party valuation in the form of a three-page opinion letter. The valuation described the transactions and concluded the compensation was consistent with FMV, but included little supporting documentation or explanation of the methodology behind the valuation opinion. Furthermore, in both trials, the government presented testimony and exhibits demonstrating that Tuomey also disregarded adverse legal and expert opinions when entering into the contracts.

CMS recommends the use of multiple, objective, independent published surveys for evaluating the FMV of physician compensation. Commonly used surveys to determine the FMV of a physician's compensation are the (i) Medical Group Management Association compensation survey, (ii) the Group Practice Compensation Trends survey published by the American Medical Group Association and (iii) the Physician Marketplace Statistics survey published by the American Medical Association.

2. The Tuomey program appears to be very different than traditional physician employment arrangements. This verdict by no means should be read as condemning to true employment agreements between hospitals and physicians. But, if there is a sense that an entity is really buying cases per a very short-term, part-time employment arrangement, one ought be cautious.

To comply with Stark Law and the Anti-Kickback Statute, compensation paid to physicians by hospitals must be generally consistent with FMV and not take into consideration the value or volume of referrals an employed physician may bring to the hospital or the hospital's affiliates. Specifically, a hospital may not base any part of a physician's compensation on the expected value of business the physician will refer to the hospital.

3. These cases often settle due to the sheer magnitude of potential damages. In these cases, all individually submitted claims are counted, and there is per claim liability and trebling of damages. The False Claims Act permits the government to seek up to three times the amount of damages, plus up to $11,000 per claim. This would amount to roughly $117 million plus another $239 million, respectively, totaling a potential judgment of $357 million. The government requested $237 million, which Judge Seymour upheld when she issued the penalty this week.

Tuomey officials said the system is also continuing to pursue a post-judgment settlement with the government. It remains to be seen whether the judge in the Tuomey case will factor the effects such a substantial judgment would have on Tuomey patients and the community.

In Februrary, in a separate case, a judge approved Raleigh, N.C.-based WakeMed Health & Hospitals' deferred prosecution deal with federal prosecutors, reasoning that a conviction could harm patients. WakeMed had allegedly overbilled Medicare by millions of dollars, billing the program for overnight stays when patients had been released the same day.

Under the deferred prosecution deal deal, federal prosecutors will provide the court with all reports tracking WakeMed's compliance with an $8 million settlement. Prosecutors also agreed to defer prosecution against WakeMed for two years. If WakeMed had been convicted of a felony, it would have become ineligible for Medicare and Medicaid and would likely have shut down.

4. All systems should view this as a reminder to again review their physician contracts for legal compliance. They also ought to similarly review their compliance program as a whole. Organizations should ensure all compensation contracts with physicians are in writing, signed by all parties and do not take into consideration the volume or value of referrals. Internal documentation should be retained to support the FMV nature of the compensation, and the documentation should include the manner in which the compensation was determined, the surveys utilized and whether an opinion from a third party valuation firm was sought.

Furthermore, all physician compensation arrangements should include a clear job description outlining the specific duties and services to be performed. Hospitals should also maintain an analysis and record of why a physician position is reasonably needed by the hospital. It is also important that each compensation relationship is periodically reviewed on an on-going basis to ensure the compensation is still consistent with FMV and complies with applicable law.

Here are some additional resources for hospitals and health systems' compliance reviews.
5 Cornerstones of a Culture of Compliance for Hospitals
16 Questions to Assess a Hospital's Legal Compliance
Physician Compensation: 10 Core Legal and Regulatory Concepts

5. These kinds of verdicts lead to the sale of the hospital and the inability for such institutions to remain independent. Tuomey is a community hospital system anchored by a 266-bed flagship hospital. Damages in the hundreds of millions of dollars will have significant financial repercussions for the hospital. This week, after the judge issued an order for $237 million in fines, Standard & Poor's Ratings Services downgraded Tuomey's credit rating by two notches — from "BB" to "CCC" connoting its view that Tuomey is currently vulnerable to nonpayment.

The case has already affected the professional careers of two of Tuomey's top executives, who stepped down last week. President and CEO Jay Cox and Executive Vice President and COO Gregg Martin negotiated a separation agreement with the board. Mr. Cox, who has served as president and CEO since 1990, held his role when the hospital negotiated the contracts with the 19 specialists.

Sources used:

Appeal from the U.S. District Court of South Carolina, March 2012

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