$276 million Tuomey case holds many lessons for risk managers
Physician arrangement leads to Stark, False Claims Act violations
In what is thought to be the largest judgment of its kind against a community hospital in U.S. history, a federal district judge in South Carolina has ordered Tuomey Healthcare System (THS) to pay $238 million for violations of the Stark Law and False Claims Act (FCA). Legal analysts say Tuomey’s missteps before and after the fraud accusations hold many lessons for risk managers.
The Tuomey saga began eight years ago in 2005 when Michael Drakeford, MD, filed a qui tam lawsuit against Tuomey alleging that the Sumter, SC-based hospital system violated the Stark Law and the FCA by entering into prohibited contractual relationships with 19 physicians that required the physicians to perform all their outpatient surgeries at Tuomey’s outpatient surgery center. (See the story on p. 135 for more background on this case.)
In the arrangement that later led to so much trouble, Tuomey agreed to pay each physician an annual base salary that fluctuated based on Tuomey’s net cash collections for the outpatient procedures, plus a "productivity bonus" equal to 80% of the net collections. Physicians also could earn incentive bonuses of up to 7% of the productivity bonus. Physicians agreed not to compete with Tuomey during the 10-year term of the contract and for two years after.
The federal government attorneys joined the case after Drakeford’s allegations and said that because Tuomey performed the billing for the services provided at its outpatient center, the claims THS submitted to Medicare and Medicaid were the result of prohibited contractual relationships and thus were false claims. Prosecutors also accused Tuomey of making false statements in its certificates of cost reports. (For more on the Tuomey background, see Healthcare Risk Management, July 2013, p. 80.)
Tuomey might not end up paying the entire $238 million, notes Thomas E. Bartrum, JD, a shareholder with Baker Donelson in Nashville, TN. The system has tried to settle the case earlier but would not accept the government’s offer, he says, and it now might end up settling for even more because the verdict came in so high. Years of legal fees must make the total burden on Tuomey enormous, Bartrum says.
"If I were on the board of directors at this system, I would have asked for the resignation of this counsel and started the process for settling the matter much earlier," he says. "At this point their top priority must be putting this behind them and stopping the bleeding."
Risk managers should study the Tuomey case to see where the mistakes were made, suggests Alan H. Rumph, JD, an attorney with the law firm of Baker Donelson in Atlanta. The lucrative physician arrangement apparently misled Tuomey leaders who should have put the brakes on the deal, he says. (See the story on p. 136 for more on the lessons to take away from Tuomey’s experience.)
"When a hospital is considering relationships with physicians, the number one priority should be compliance," Rumph says. "I know the economics are important and hospitals have to have relationships with physicians in order to survive, but compliance should be the first objective and everything else should flow from that."
The purpose of a physician arrangement should be providing better quality care to more patients, Rumph says. It is dangerous for the hospital or health system to openly discuss the potential financial benefits to the hospital, he cautions.
Bartrum concedes that hospitals will make that calculation, at least to ensure that the arrangement is economically feasible. "But what is really damning is when that calculation drives the whole transaction," he says. "If you say you can’t let the doctors leave because you will lose $18 million a year, and that’s the motivation for the arrangement, that gives the government a lot of ammunition to say that your compensation arrangements were driven by volume and value of referrals rather than a fair market value arrangement."
Fair market valuation turned out to be a key issue in the Tuomey case, and Bartrum says the case will lead to much closer scrutiny of valuation in similar arrangements.
"Hospital leaders try to be compliant, I really believe that. But they often don’t fully understand what they can and can’t do in terms of Stark and the False Claims Act," Bartrum says. "A lot of times risk managers and lawyers are not brought to the table until all this background has been done. The incriminating e-mails are already circulating before we ever get involved in it."
Bartrum also cites what he calls "opinion shopping" by Tuomey when consulting with attorneys about the physician arrangement. Tuomey had attorneys warn them that the plan could be problematic, but they dismissed those opinions in favor others that said it was acceptable, Bartrum explains.
Rumph suggests that the Tuomey case might prompt similar allegations against hospitals and health systems. "With all this publicity and the financial windfall for this whistleblower physician, you’re going to see more whistleblowers," Rumph says. "They’re in a position to produce more of the facts than anyone else, after you’ve pitched the deal to them, and particularly if they are jealous that their competitors got in on the deal they didn’t."
In addition to the lessons about how to avoid a Tuomey-like arrangement with physicians, the experience of the healthcare system also shows how not to handle such allegations once they hit the court system, says David M. Walsh IV, JD, a shareholder with the law firm of Chamblee Ryan in Dallas. Tuomey’s troubles, and the magnitude of the judgment against it, could have been prevented by taking a more critical approaching to assessing the legality of the physician arrangement, he says. (See the story on p. 136 for more on Tuomey’s missed opportunities. See the story on p. 137 for the likelihood of similar cases in the future.)
"The evidence established that Tuomey ignored legal advice that it received that did not support the arrangement and instead chose to listen just to the legal advice that supported the arrangement," Walsh says. "In this example, the contrarians were obviously right, and following that advice would have avoided Tuomey’s problems."
- Thomas E. Bartrum, JD, Baker Donelson, Nashville, TN. Telephone: (615) 726-5641. Email: firstname.lastname@example.org.
- Alan H. Rumph, JD, Baker Donelson, Atlanta. Telephone: (404) 443-6757. Email: email@example.com.
- David M. Walsh IV, JD, Chamblee Ryan, Dallas. Telephone: (214) 905-2003. Email: firstname.lastname@example.org.
Tuomey case went back and forth for years
In May 2013, a jury found that Tuomey Healthcare System in Sumter, SC, violated the False Claims Act by submitting more than 21,000 Medicare claims that were "tainted" due to contractual arrangements between the referring physicians, and that Tuomey violated the Stark law. This trial was the second one, after a federal judge set aside a previous verdict against Tuomey.
This most recent verdict came after a four-week trial. The case of U.S. ex rel. Drakeford v. Tuomey Healthcare System, Inc., has been winding its way through the courts since 2005 and still might not be complete. Healthcare Risk Management’s legal sources explain that in May, Tuomey requested that a federal judge throw out the jury verdict that found the hospital system violated the False Claims Act (FCA) and the Stark Law. Tuomey’s lawyers argued that prosecutors provided insufficient evidence for the jury to conclude the physician contracts at issue were subject to the Stark Law and the prosecution improperly attempted to convince the court that the physicians’ compensation would not change based upon referrals to Tuomey.
The healthcare system also contested the government’s evidence that the physicians at issue were the "referring" doctors. Its lawyers said the prosecution did not provide sufficient evidence of actual referrals. Tuomey also contested the amount of the damage award and said the jury did not have sufficient evidence to determine that amount was appropriate.
In October 2013, the court ruled against Tuomey on each point and said that on each issue in dispute, the prosecution submitted sufficient evidence upon which a reasonable jury could have based its verdict. The court refused to overturn the jury’s determination on those issues. The court stated that a reasonable jury could have concluded that Tuomey submitted 21,730 false claims and was improperly reimbursed $39.3 million.
Under the FCA, the government can seek a civil penalty of $5,500 to $11,000 per false claim, in addition to requesting treble damages. In the Tuomey case, the government requested a civil penalty of $5,500 per false claim plus treble damages.
The judge approved the request for a total civil penalty in the amount of $237.5 million. Tuomey quickly announced that it would appeal.
3 lessons to take away from Tuomey
Eight years of fighting in court left plenty of information to digest in the Stark and False Claims Act (FCA) case against Tuomey Healthcare System in Sumter, SC. But there are three clear lessons to take away from the system’s legal troubles, says David M. Walsh IV, JD, a shareholder with the law firm of Chamblee Ryan in Dallas.
Walsh offers these lessons from Tuomey:
Lesson 1: The fact that a physician personally performed the bulk of the services in question does not automatically immunize the billed service or the hospital-physician relationship from scrutiny under Stark or the FCA. While the definition of referral under Stark excludes care that is personally performed by the referring physician, a referral occurs when anyone besides the physician takes action, including an employee or agent of the physician. In the past, some have taken the approach that this type of relationship might pass scrutiny if the physician provides all of the service. But — and this is especially true for hospital service — a non-physician will have at least ancillary involvement. Thus, just because a physician personally performs the service does not necessarily immunize the relationship.
Lesson 2: Overbilling is not necessary for violating Stark or the FCA. The Tuomey case appeared not to involve any claimed overbilling in the traditional sense of charging too much, or provision of services that were not necessary. When these laws originally were passed, the thought was that these relationships should be limited and carefully scrutinized because if a physician is referring to a place where he might make money, the physician will have a tendency to refer unnecessary patients or charge unreasonable rates. Neither appears to have been the case here. The government’s focus on why the billing was improper under Stark and the FCA dealt with the fact that the billings were generated from a prohibited referral, which made the entire payment illegal. The government might pursue claims based on an improper relationship even if the charges were reasonable and the care provided was necessary.
Lesson 3: The focus in determining compensation arrangements with physicians starts and ends with fair market value. Tuomey attempted to consider the value of anticipated referrals as part of the compensation arrangement, and that step resulted in its troubles. The only consideration for physician-compensation arrangements should be the fair market value for the service provided.
Don’t ignore the warning signs like Tuomey
The drawn-out court case against the Tuomey Healthcare System in Sumter, SC, provides some guidance for how risk managers should evaluate these issues, says David M. Walsh IV, JD, a shareholder with the law firm of Chamblee Ryan in Dallas.
Start with heeding the warning signs. Attorneys warned Tuomey that there were problems with the arrangement, but those were ignored in favor of other, more reassuring opinions, Walsh notes. Another warning sign would have been a comparison to the traditional physician-employment agreement, he says.
"Here, the arrangement was for part-time work, and it considered volume as part of the compensation arrangement. In contrast, the typical agreement is for full-time work and ties compensation to fair-market value of services instead of anticipated volume," Walsh says. "And perhaps the largest warning sign that Tuomey ignored was that it was creating a system that had to pass through multiple legal and valuation consultants before the legality was blessed, and even then the reviews were mixed on whether the system would survive scrutiny."
If the system requires that much work to achieve mixed reviews of legality, Walsh says, then perhaps the safest course is to scrap the system and start anew.
Next, evaluate valuation opinions very carefully. In Tuomey’s case, Walsh notes that the valuation opinion upon which it relied was only three pages, without much supporting guidance about how its authors reached the conclusions.
"Apparently at the trial of this matter, even Tuomey’s expert witness conceded that the valuation opinion upon which Tuomey initially relied in creating this arrangement did not use a proper methodology. The reason that one obtains the valuation opinion on the front end is to have support in case the government scrutinizes the arrangement on the back end," Walsh says. "If the opinion does not have much analysis, then it probably will not provide much help when it matters most."
Also, Tuomey’s valuation opinion apparently did not use any of the existing surveys of fair-market value for physician services, such as the American Medical Association’s Physician Marketplace Statistics, Walsh says. A valuation expert should address at least one of these surveys to demonstrate that the expert’s opinion was not just created out of thin air, he says.
Tuomey case not likely to set trend for hospitals
The experience of Tuomey Healthcare System in Sumter, SC, should be a cautionary tale for risk managers, but it should not be the reason to overly restrict physician arrangements, says David M. Walsh IV, JD, a shareholder with the law firm of Chamblee Ryan in Dallas.
The arrangements with most physicians "do not run through as many red lights as were apparent in the Tuomey case," he says Also, the reality of litigation with the government is that most cases resolve through settlement, he says.
In making settlements, the government considers the hospital’s place in the overall medical environment. For example, the government recently entered a deferred prosecution agreement with a North Carolina hospital in which, among other factors, a felony conviction would have likely resulted in shutdown of the hospital and lack of needed medical care for surrounding community, Walsh says.
"At the same time, we know that Tuomey appealed a prior judgment of just under $45 million that resulted in what Tuomey wanted — reversal of the prior judgment — but set the stage for this result," Walsh explains. "While the likely result of this case seems like a settlement for less than the amount of the judgment, one can ask why the case reached this level. Many hospitals operate on margins that make a trial with this level of risk unthinkable."
Litigation might continue for years, including claims of legal malpractice against the lawyers who approved the arrangement and negligence claims against the executives involved, Walsh says.
"The Tuomey example is an unusual one that probably will not repeat with much frequency in light of the unusual nature of the agreements at issue as well as Tuomey’s unwillingness to settle," he says