Large Verdict in Stark Law Case Jolts Health Care Industry

Those of us who are involved in negotiating and drafting physician employment agreements and other service agreements between health care providers were recently reminded of the importance of carefully vetting those agreements to assure compliance with the Stark Law and/or the Anti-Kickback Statute.  On October 3, 2013, Tuomey Healthcare System, a community hospital system based in Sumter, S.C., was ordered to pay a whopping $237 million in damages after a jury earlier found that Tuomey had violated the Stark Law and the False Claims Act as a result of compensation provisions in physician employment agreements that Tuomey had negotiated with 19 local physicians.

In 2003, a number of local physicians that had been performing outpatient surgical procedures at Tuomey’s facilities informed Tuomey that they planned to begin performing certain of those procedures in their own offices.  Allegedly fearing that this would result in a loss of business for Tuomey, Tuomey entered into 10-year, part-time employment agreements with 19 of the physicians.   The employment agreements provided that compensation to the physicians was contingent in part on net cash collections from outpatient procedures performed at a Tuomey facility.  In addition, the physicians were eligible for productivity bonuses based on net collections, as well as an incentive bonus tied to the productivity bonus.  Other provisions in the employment agreements required the physicians to perform outpatient procedures at a Tuomey facility and prohibited the physicians from competing with Tuomey during the 10-year term of the employment agreements and for a period of 2 years after the agreements expired.

The Stark Law and Anti-Kickback Statute generally require that compensation paid by a hospital to its employed physicians must reflect the fair market value of the services provided and must not be structured in a way that incentivizes or requires a physician to maintain or increase the value or volume of referrals that the physician may make to a hospital.  Violations of the Stark Law and/or Anti-Kickback Statute often result in violations of the False Claims Act on the grounds that the parties to an improper relationship cannot validly certify as to the medical claims they submit that result from their relationship.  Because the penalties for violating the False Claims Act can be very steep, it is common for health systems to engage a third-party valuation company to review proposed compensation arrangements in order to obtain a fair market value opinion regarding the proposed compensation.  Tuomey in fact followed this practice and did obtain an outside opinion that the proposed compensation arrangements for the 19 physicians complied with the fair market value requirements.  However, there was testimony during trial that the opinion was deficient and that Tuomey had also disregarded adverse opinions about the compensation arrangements provided by other experts.

In 2005, a local physician filed a qui tam (whistleblower) lawsuit against Tuomey claiming that the compensation arrangements exceeded the fair market value of the services provided by the physicians.  The federal government intervened in the case in 2007.  In May 2013, a jury found that the employments agreements between Tuomey and the 19 physicians violated the Stark Law and the False Claims Act, resulting in the filing by Tuomey of nearly 21,730 false Medicare claims totaling approximately $39 million during a nearly two-year period.   The False Claim Act provides for a penalty of up to $11,000 per false claim plus the trebling of damages, resulting in a possible verdict against Tuomey of $357 million.  The government requested damages of $237 million, which is the figure that a judge ordered Tuomey to pay earlier this month.  Unless Tuomey can negotiate an alternative settlement arrangement with the government, many wonder if Tuomey will survive this verdict and continue as a going concern.

The outcome of the Tuomey case reinforces the importance of closely scrutinizing agreements between health care providers and their referral sources for Stark Law and/or Anti-Kickback Statute violations.  It also serves as a notice of the importance of obtaining sufficiently-documented fair market value opinions from reputable and experienced valuation firms.


About Jeff Swaim

Jeff is a partner and a former chair of the firm's Business Group. He has extensive experience practicing in the areas of mergers and acquisitions, equity financing, securities regulation, contract drafting and negotiation, business formation, corporate governance, and general corporate and business matters. He has worked with clients in a wide range of industries, including manufacturing, plastics, medical devices, health services, life sciences, publishing, telecommunications, internet services, software, high-technology, financial services, and the media. Jeff's clients range in size from small start-up ventures to large multi-national public companies.
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