The U.S. Fourth Circuit Court of Appeals has reversed a $44 million judgment against Tuomey Hospital in Sumter, South Carolina that arose from Tuomey’s employment arrangements with physicians that allegedly violated the federal Stark Law.¹ The Stark Law prohibits hospitals from submitting claims to Medicare for designated health services that were referred by physicians with whom the hospital has a financial relationship, unless the relationship fits within an exception.² The United States alleged that some of Tuomey’s part-time employment agreements with physicians violated the Stark Law and thus any Medicare billings under those arrangements constituted false claims. During trial, the jury found that Tuomey had violated the Stark Law but found no liability under the False Claims Act (FCA). The trial court set aside the jury verdict and ordered a new trial on the FCA claim. The court found, however, that the government was entitled to recover on its equitable claims (unjust enrichment and payment by mistake) based on the jury’s finding that Tuomey had violated the Stark Law. In reversing the trial court, the Fourth Circuit held that the judgment violated Tuomey’s Seventh Amendment right to a trial by jury, and remanded the case to the trial court for further proceedings. In addition, the Fourth Circuit went on to address “other issues raised on appeal that are likely to recur” regarding the Stark Law.

Background

In early 2003, several specialty physician groups informed Tuomey that they intended to perform outpatient surgical procedures in-office, rather than at the hospital. Because the loss of these outpatient procedures would have a severe financial impact on the hospital, Tuomey sought to enter into part-time employment agreements with these physicians to perform outpatient procedures only at the hospital. Under these agreements, Tuomey paid each physician an annual base salary that fluctuated based on Tuomey’s net cash collections for the outpatient procedures, as well as potential bonuses based on Tuomey’s net collections. Another physician at Toumey, however, filed a lawsuit pursuant to the FCA,³ claiming these arrangements violated the Stark Law, which prohibits a physician from receiving compensation from a hospital that varies with, or takes into account, the volume or value of referrals or other business generated by the referring physician.⁴

After a month-long trial, the jury found that Tuomey violated the Stark Law but found no violation of the FCA. Because the jury found no FCA violation, it did not calculate the amount of damages or the number of false claims submitted. After setting aside the jury verdict, the trial court held that Tuomey submitted $44 million in claims in violation of the Stark Law, which must be repaid to the government under equitable principles.

Seventh Amendment Claims

On appeal, the Fourth Circuit of Appeals found that Tuomey’s Seventh Amendment right to trial by jury had been violated. The court explained that the government must establish that Tuomey and the physicians had a financial relationship that violated the Stark Law as a predicate to both the FCA claim and the equitable claims. When the trial court set aside the jury’s verdict, it set aside the entire verdict. The jury’s finding regarding the Stark Law was thus a “legal nullity” and there was therefore no basis for the trial court’s judgment on the equitable claims. Because this was harmful error, the Fourth Circuit Court of Appeals remanded the case to the trial court for further proceedings.

Stark Law Issues Examined

Though the Fourth Circuit could have ended its analysis with the Seventh Amendment finding, the appeals court went on to discuss other Stark Law issues that were likely to recur. First, the court rejected Tuomey’s argument that the technical component of a personally performed designated health service did not constitute a referral under the Stark Law. Next, the court explained that compensation arrangements that take into account future referrals implicate the volume or value standard contained in Stark. The court reasoned “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.” Thus, the questions for the jury were “whether the contracts, on their face, took into account the value or volume of anticipated referrals” and whether the arrangement was nevertheless permissible under a Stark exception.

Impact of Tuomey Decision

The trial court’s decision in Toumey, issued in 2010, had a chilling effect on hospitals and physicians who sought to form joint ventures. The trial court’s decision to impose a $44 million judgment against Tuomey, without regard to any specific evidence of claims submitted to the government, or gains achieved by Tuomey as a result of the physician arrangements, was seen by many as an extreme example of overreaching by the government. Many Stark observers will be watching the re-trial in this matter to see if the government, and the trial court, properly determine, what, if any damages are proper under the law.

For more information about the Stark Law or any other health law questions, please contact any one of the following Haynes and Boone attorneys.