The Tuomey case: 12 key points

Here are 12 things to know about the case involving Sumter, S.C.-based Tuomey Healthcare System, which recently lost its appeal and faces an order to pay approximately $237 million in fines after a federal jury found the system violated Stark Law and the False Claims Act by submitting $39 million in false claims to Medicare.

1. The United State Court of Appeals for the Fourth Circuit recently (July 2, 2015) upheld the $237,454,195 verdict against Tuomey Healthcare System, Inc. (Tuomey), which was comprised of damages of $117,939,195 and civil penalties of $119,515,000.
2. The case evolved out of 19 part-time employment agreements that Tuomey entered into with specialists.  An additional physician didn't agree to enter into an agreement and brought a False Claims case against Tuomey as a qui tam relator, claiming that the part-time employment agreements violated the Stark Law and gave rise to false claims liability.  

3. The government joined the relator's case.  This is important because the chances for and the amounts of recovery go up very substantially in cases where the government intervenes in the case.   

4. False Claims cases are daunting in part because each relationship between a physician and a hospital can give rise to thousands of claims.  I.e., every claim submitted to Medicare by a hospital originating from a physician referral, where the physician had an improper financial relationship under the Stark Act, is a separate violation.  In the Tuomey case, 19 physician contracts led to 21,730 false claims.    Each claim can have damages of $5,500 to $11,000 per claim and triple damages.  In this case, they jury awarded actual damages of $39,313,065 for the 21,730 false claims, which the district court trebled. The district court then added a civil penalty of $119,515,000 to that sum, which it calculated by multiplying the number of false claims by the $5,500 statutory minimum penalty.    

5. Tuomey entered into the contracts in the early 2000s.  The contracts paid the doctors a base salary based on the prior years’ production, with substantial productivity bonuses equal to nearly 80% of aggregate compensation.  The contracts required the doctors to do all their outpatient surgery at Tuomey, and allowed the doctors to maintain a private office practice and perform inpatient surgery on their own behalf.  The contracts were allegedly entered into to stem the loss by Tuomey of outpatient surgery to independent physician offices and surgery centers.  The part-time employment contracts had ten year terms.

6. Tuomey sought the advice of several lawyers throughout the process of developing the relationships with the independent physician.  One lawyer, Kevin McAnaney, an attorney in private practice with expertise in the Stark Law, advised Tuomey that the agreements raised red flags, presented significant risk, and would be an easy case for the government to prosecute.  McAnaney had formerly served as the Chief of the Industry Guidance Branch of the United States Department of Health and Human Services Office of Counsel to the Inspector General. In that position, McAnaney wrote certain of the regulations implementing the Stark Law.

7. The testimony of McAnaney was key to the government’s case against Tuomey.  Such testimony was ultimately deemed admissible and appeared somewhat impactful to showing that Tuomey knew that what it was doing was wrong or at least quite questionable. I.e., that Tuomey knew that there was a substantial risk that the contracts violated the Stark Law.

8. The part-time employment agreements paid the doctors more than the professional collections per case and more than their collections minus expenses.  I.e., Tuomey lost money on the professional side on each case. In fact, the court’s opinion indicates that Tuomey stood to lose $1.5-2 million per year on the physician’s compensation when compared to their collections. The Court found that McAnaney explicitly warned Tuomey of the "thin legal ice it was treading with respect to the employment contracts."

9. Tuomey argued that it was solely paying for productivity and not paying for referrals and that the compensation did not vary based on the volume or value of referrals because it was based on professional production. Here, the government and court held that the payment arrangement though pegged off professional procedures did vary based on the volume or value of procedures in part because every single case involved technical/facility fees as the contract was limited to outpatient surgery performed at Tuomey. In contrast, a hospital's typical productivity arrangement with a physician covers professional services but there is not a one to one correlation or anywhere near close to it between professional and technical fees.  Further, in the employment context, the hospital is generally paying productivity on the entirety of the physician’s work and not just on cases brought to the hospital.    

10. When one cuts through the specific facts in this case, including the terms of the part-time contracts, the loss of money on the professional side, and the continuation of the physician’s private practice, it is hard to see this as anything different than trying to buy cases in exchange for an inflated professional fee.  According to the opinion, Tuomey’s former Chief Financial Officer, William Paul Johnson, admitted “that every time one of the 19 physicians . . . did a legitimate procedure on a Medicare patient at the hospital pursuant to the part-time agreement[,] the doctor [got] more money,” and “the hospital also got more money.” Where there is a loss on each case and no other effort to build a network or serve some other purpose, it is challenging to view this as anything other than buying cases.
11. The trial court jury rejected the contention that the part-time agreements complied with the bona fide employment relationship exception to the Stark Act. Tuomey did not appeal this aspect of the Jury’s verdict. This exception is generally applicable to full time employment arrangements between hospitals and their employed physicians and is a broad exception for actual employment arrangements.  The exception states:

“(c) Bona fide employment relationships. Any amount paid by an employer to a physician (or immediate family member) who has a bona fide employment relationship with the employer for the provision of services if the following conditions are met: (1) The employment is for identifiable services. (2) The amount of the remuneration under the employment is— (i) Consistent with the fair market value of the services; and (ii) Except as provided in paragraph (c)(4) of this section, is not determined in a manner that takes into account (directly or indirectly) the volume or value of any referrals by the referring physician. (3) The remuneration is provided under an agreement that would be commercially reasonable even if no referrals were made to the employer. (4) Paragraph (c)(2)(ii) of this section does not prohibit payment of remuneration in the form of a productivity bonus based on services performed personally by the physician (or immediate family member of the physician).”

In this case, Tuomey argued that the productivity bonus provision of the employment exception should apply, notwithstanding that fact that the jury determined that the arrangement did not qualify for protection under the bona fide employment exception.  

12. In the Tuomey case, the 19 doctors fully maintained their private practice and seemingly came and went as they desired i.e., they appeared very independent and to our knowledge without clearly set hours. In contrast, a typical hospital employment contract is most often full time, and the physician operates his or her practice ‎in hospital owned or controlled offices with the support of hospital staff and employees.  Further, the physicians, while granted some autonomy, are generally viewed as and consider themselves as employees.  Further, the correlation between each unit of compensation and referrals is not correlated one to one or anywhere close to such ratio. 

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