Federal Appeals Court Overturns $45 Million Judgment Against Hospital Based On Stark Law Violations
On March 30, 2012, the Fourth Circuit Court of Appeals vacated a $45 million judgment against Tuomey Healthcare System in Sumter, South Carolina based on physician employment agreements that allegedly violated the Stark Law. Although the Fourth Circuit’s decision is largely based on procedural issues, the Court’s opinion included several significant comments regarding Stark Law compliance issues raised in this case regarding the compensation arrangements in the physician employment agreements at issue in this case.
In the underlying district court case to the Fourth Circuit’s decision, a jury had concluded that a hospital owned by the Tuomey Healthcare System had not violated the False Claims Act by entering into certain physician employment agreements, but the jury also concluded that the compensation arrangements in the physician employment agreements at issue did violate the Stark Law. The judge in the district court case ordered a new trial on the government’s False Claims Act allegations, and awarded $45 million in damages to the government based on the jury’s finding that the hospital violated the Stark Law.
The Fourth Circuit concluded that the district court’s judgment violated Tuomey Healthcare System’s Seventh Amendment right to a jury trial, and vacated the district court’s judgment and remanded the case for a new trial.
During 2005 and 2006, the hospital had entered into part-time employment agreements with 19 specialist physicians. Under each employment agreement, the physicians agreed to perform outpatient procedures at the Tuomey Hospital or at a facility owned by Tuomey Hospital. According to Tuomey Hospital, these agreements were entered into in response to the physicians stating that they were considering performing outpatient surgical procedures in their own stand-alone surgical centers or in their office, rather than at Tuomey Hospital.
Under these part-time employment agreements, Tuomey Hospital paid each physician an annual base salary that fluctuated based on the hospital’s net cash collections for the outpatient procedures. The hospital also agreed to pay each physician a productivity bonus equal to 80 percent of the net collections, and an incentive bonus for meeting certain quality measures. Each agreement had a ten-year term and provided that the physicians would not compete with the hospital during the term of the employment agreement and for two years thereafter. Another physician at Tuomey Hospital who did not enter into one of these part-time employment agreements filed a False Claims Act whistleblower action claiming these arrangements violated the Stark Law.
Stark Law Issues Addressed by the Court
In its opinion, the Fourth Circuit specifically addressed whether the facility component of the hospital outpatient service performed by the physicians pursuant to the employment agreements constituted a “referral” under the Stark Law. The hospital had separately billed a facility fee to Medicare for these hospital outpatient procedures. After reviewing the regulatory history of the Stark Law, the Fourth Circuit concluded that any claims for “facility fees on patient referrals are referrals and thus prohibited under the Stark Law if there was a financial relationship between the physician and the hospital that did not fall within an applicable exception.
The Fourth Circuit also addressed whether the hospital’s consideration of the volume or value of anticipated facility component referrals in computing the physician’s compensation under the employment agreements violated the Stark Law prohibition against compensation based on the value or volume of a physician’s referrals.
Tuomey Hospital had argued that the inquiry should be whether the physician’s compensation takes into account the volume or value of referrals, not whether the parties considered referrals when deciding whether to enter into the contracts. The government had contended that the Hospital’s actions fit within this definition of the value or volume of referrals because it included a portion of the value of the anticipated facility component referrals in the physician’s fixed compensation.
The Fourth Circuit concluded that compensation arrangements that take into account “anticipated referrals” do implicate the volume or value standard under the Stark Law. The Court reasoned that if a hospital provides fixed compensation to a physician that is not based solely on the value of the services that 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 district court’s decision in Tuomey, which was issued in 2010, had a significant effect on hospitals and physicians who were considering entering into joint ventures. The district court’s decision to impose a $45 million judgment against Tuomey Hospital, without regard to any specific evidence of claims submitted to the government, showed the significant liability to hospitals under the Stark Law. The retrial ordered in this case by the Fourth Circuit will be important for many reasons to hospitals and physicians, especially the Fourth Circuit’s comments on considering a physician’s “anticipated referrals” in calculating a physician’s future compensation under an employment arrangement.
Clay Countryman is a partner with Breazeale, Sachse & Wilson, L.L.P.