For the second time in the past three years, Tuomey Healthcare System found its fate in the hands of the 4th Circuit Court of Appeals as a Qui Tam Defendant under the False Claims Act (“FCA”). Only this time it did not fare quite as well in what amounts to a crushing defeat. Back in 2012, pending retrial on allegations that Tuomey violated the FCA, the 4th Circuit Court of Appeals vacated a $45 million judgment stemming from violations of the Stark Law, see prior article here. Now, on July 2, 2015, the 4th Circuit affirmed the district court’s decision on retrial that Tuomey submitted 21,730 False Claims based on Stark Law violations and was thereby liable for $237,454,195 in damages and penalties. The 4th Circuit rejected Tuomey’s arguments that no reasonable jury could have concluded that Tuomey violated Stark or intended to submit False Claims and that it was entitled to a new trial based upon various assignments of error related to jury instructions and damages issues related to measurement and constitutional matters.
The result is stunning, and should give pause to health lawyers, consultants and healthcare executives who find themselves walking the tightrope between sound business judgment and the complicated maze of the Stark Law and other complex healthcare rules. Indeed, in his concurring opinion, Judge Wynn expressed distaste for the outcome:
But I write separately to emphasize the troubling picture this case paints: An impenetrably complex set of laws and regulations that will result in a likely death sentence for a community hospital in an already medically under-served area…..Health care providers are open to extensive liability, their financial security resting uneasily upon a combination of their attorneys’ wits [and] prosecutorial discretion.” [citations omitted]. Despite attempts to establish “bright line” rules,…the Stark law has proved challenging to understand and comply with.
This case is troubling. It seems as if, even for well-intentioned health care providers, the Stark Law has become a booby trap rigged with strict liability and potentially ruinous exposure – especially when coupled with the FCA.
Judge Wynn’s words were not lost on the majority:
Finally, we do not discount the concerns raised by our concurring colleague regarding the result in this case. But having found no cause to upset the jury’s verdict in this case and no constitutional error, it is for Congress to consider whether changes to the Stark Law’s reach are in order.
Short of congressional action, CMS recently announced Stark-related proposals [http://www.cms.gov/Newsroom/MediaReleaseDatabase/Fact-sheets/2015-Fact-sheets-items/2015-07-08.html] that could ease the burden of the law. Tuomey will need to find its relief elsewhere.
A physician may not make a referral to an entity for the furnishing of designated healthcare services (“DHS”) if the physician has a financial relationship with the entity, unless an exception applies. DHS include inpatient and outpatient hospital services. A referral does not include any DHS personally performed or provided by the referring physician. There is a referral, however, when the hospital bills a facility fee in connection with personally performed services. A financial relationship may exist through ownership or a compensation arrangement.
Tuomey’s Reaction to Business Challenges.
Tuomey is a nonprofit community hospital in Sumter, South Carolina, a mostly rural, medically underserved area. In the early 2000s, like so many other community hospitals, Tuomey faced the challenge of dropping outpatient volumes due to physicians performing procedures in their own offices or in ambulatory surgery centers. Tuomey’s future looked bleak and tens of millions in lost revenue was predicted. Tuomey developed a strategy to enter into part-time employment agreements with several previously-independent physicians on its medical staff. The arrangements were problematic for several reasons, without considering their current $237 Million price tag:
- Compensation that varied year to year based on collections;
- A requirement that Physicians perform outpatient procedures at Tuomey facilities;
- Productivity bonuses of eighty percent of collections and an additional incentive bonus up to 7 percent of the productivity bonus;
- Physicians were paid more than their collections, despite fair market value opinions from valuation experts;
- Tuomey provided malpractice coverage, and performed the billing;
- Ten year terms with 2 year back-end non-competes;
- Physician who refused the arrangement and raised specific Stark issues (e.g. the Qui Tam Plaintiff in this case, Dr. Drakeford); and
- Competing expert legal opinions from top health lawyers who were kept in the dark from one another and rejection and lack of diligence regarding negative opinions from counsel
Following two trials and two appeals, the 4th Circuit affirmed the $237 Million jury verdict and concluded that the trial court correctly granted a motion for a new trial, and rejected Tuomey’s various claims of error. As discussed below, the Court considered and commented on several important Stark and FCA issues.
Significant Aspects of 4th Circuit’s Opinion
Testimony of Kevin McAnaney:
Following the first Tuomey trial in 2010, the jury found that Tuomey had violated the Stark Law, but not the FCA. The trial court granted a post-trial motion based on what it viewed as its substantial error in excluding the testimony of Tuomey’s Senior Vice President and Chief Operating Officer, Gregg Martin. The 4th Circuit agreed that a new trial was proper, but reached that decision on slightly different grounds – the trial court’s exclusion of Kevin McAnaney’s testimony. Mr. McAnaney, a lawyer in private practice, was retained by Dr. Drakeford and Tuomey to advise of the Stark Law risks. Mr. McAnaney previously wrote a substantial portion of the Stark Law regulations in his role as Chief of the Industry Guidance Branch of DHHS Office of General Counsel to the Inspector General. The Court and the jury, apparently, found the McAnaney testimony to be particularly probative of the knowledge element of the FCA. McAnaney advised that the Tuomey employment agreements raised significant “red flags” under the Stark Law, such as compensating physicians in excess of their collections, thus making the arrangement “an easy case to prosecute.”
On McAnaney’s testimony, the 4th Circuit observed and concluded the following:
In the first trial, the jury did not hear from McAnaney and found for Tuomey on the FCA claim. When the case was retried, McAnaney was allowed to testify and the jury found for the government. Coincidence? We think not.
Indeed, it is difficult to imagine any more probative and compelling evidence regarding Tuomey’s intent than the testimony of a lawyer hired by Tuomey, who was an undisputed subject matter expert on the intricacies of the Stark Law, and who warned Tuomey in graphic detail of the thin legal ice on which it was treading[.]
Jury Reasonably Found Stark Violations:
It is unremarkable in a general sense that the 4th Circuit refused to set aside a jury verdict and find that no reasonable jury could have concluded that Tuomey violated Stark. Tuomey argued, unsuccessfully, that the only question that should have gone to the jury was whether the contracts, on their face, took into account the value or volume of anticipated referrals. The Court concluded that two components of the physicians’ compensation varied with the volume or value of referrals. The physicians were paid a base salary that was adjusted upward or downward in the subsequent year depending on collections from the prior year. The physicians were also paid a productivity bonus that was set at eighty percent of their collections. The Court concluded that it was “plain that a reasonable jury could find that the physicians’ compensation varied with the volume or value of actual referrals.” The Court also recalled its earlier opinion where it noted that the tainted referrals were the “facility component of the physicians’ personally performed services, and the resulting facility fee billed by Tuomey based upon that component.”
False Claims Act
The Court rejected Tuomey’s claim that no reasonable jury could have found a violation of the FCA because it acted on the advice of counsel. The court again pointed to the testimony of attorney McAnaney and amplified the District Court’s conclusion that a “reasonable jury could have found that Tuomey possessed the requisite scienter once it determined to disregard McAnaney’s remarks.” Tuomey’s ‘advice of counsel’ defense ultimately failed because it was unable to show that there had been a full disclosure of all pertinent facts to and among legal counsel, and a lack of good faith reliance on just the favorable legal advice. The Court was not persuaded by Tuomey’s claims that it had, following Mr. McAnaney’s negative view, retained top national health lawyers from reputable firms to complete the transaction.
Tuomey Unsuccessfully Challenges Jury Instructions and Damages Award
The Court rejected Tuomey’s various claims of error related to jury instructions. Tuomey argued that the trial court failed to limit the jury’s inquiry to whether or not the contracts, on their face, took into account value or volume of anticipated referrals. The Court emphasized that the jury could consider the parties’ intent to determine if an arrangement took into account volume or value of referrals, but intent alone would not be enough to create a violation.
Tuomey argued that the jury should have been separately instructed on the knowledge element in the indirect compensation arrangement definition under Stark and in the FCA. The court found that any such error here was harmless since the jury’s conclusion that Tuomey possessed the requisite scienter under the FCA and also possessed knowledge that the Physicians’ aggregate compensation varied with referrals, a necessary element of the definition of an indirect compensation arrangement under Stark. 42 U.S.C. § 411.354 (c)(2)(iii).
Tuomey claimed that the trial court erred by failing to instruct the jury that disputed legal questions are not false claims under the FCA. As with all providers who bill Medicare, Tuomey was required to certify its compliance with laws, to include the Stark Law. Because the jury found that Tuomey violated the Stark Law, the certification of compliance was false, and therefore all tainted claims were false. This seems like fertile ground for further appellate challenge.
The Court rejected Tuomey’s challenge to the trial court’s failure to give an instruction that Tuomey was entitled to rely on legal advice even if it turned out to be wrong. The Court found that other jury instructions regarding knowledge under the FCA already were sufficient to cover Tuomey’s concern in this regard.
Finally, the Court rejected various challenges by Tuomey regarding the whopping $237,454,195 judgment. It argued that the trial court improperly calculated the penalty, that it incorrectly measured damages, and that the award violated the 5th and 8th Constitutional Amendments. The Court rejected all of Tuomey’s arguments, and found that the jury was properly instructed to consider all tainted hospital claims – both inpatient and outpatient, to determine prohibited referrals. The Court further concluded that the Government was allowed to rely on summary evidence of referrals, perhaps due in part to the fact that Tuomey did not offer its own expert as to damages calculations. The court rejected Tuomey’s challenge that the Government was not damaged, and rejected Tuomey’s claims that the award was unconstitutional under the Due Process Clcause of the 5th Amendment and the Excessive Fines Clause of the 8th Amendment.
The Court rejected Tuomey’s argument that if it submitted false claims that the only false claims were its annual cost report submissions and not the 21,730 UB-92/04 forms that it submitted. The Court concluded that Tuomey violated the FCA each time it submitted a claim for reimbursement because it was knowingly asking the government to pay an amount that, by law, it could not pay. Again, look for this issue to be prominently featured in a future appellate review of this case.
Takeaways from Tuomey
While Tuomey presents staggering results, it does represent a somewhat unusual set of facts. While it provides a strong reminder that hospitals should critically view their arrangements with referring physicians, it does not preclude the development of sound business and legal strategies within a complicated regulatory legal framework. The following are among the valuable lessons learned from Tuomey:
- Courts and juries may look beyond the four corners of an agreement to determine if an arrangement takes account of volume or value;
- Courts and juries may look beyond supporting items such as self-serving appraisals to find legal violations; Lawyers and their clients are best-advised to validate the assumptions supporting such appraisals;
- There is a reason that nearly every FCA matter settles and that is due to the shear potential downside, as evidenced by this case;
- Review arrangements with physicians and consider them and their fair market value support in the context of the history and intent that lead to the arrangements, to determine if they would pass Tuomey-like scrutiny;
- Take care when bringing in the next lawyer to rule out a prior negative legal opinion or to break the tie between two competing legal opinions – who is the client? Where is the attorney-client privilege? How will all lawyers’ opinions be considered by the lawyers and the client?
Adam Snyder is Chair of the Ogden Murphy Wallace Business Department and is a Part-time/Adjunct Faculty member of the University of Washington School of Law. For additional information regarding Tuomey, Stark, or the False Claims Act, please contact Adam Snyder or Greg Montgomery.