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November 24, 2014

Tuomey Violates Stark Law and False Claims Act through Physician Employment Agreements

After a retrial, a federal jury found South Carolina-based 242-bed Tuomey Healthcare System (Tuomey) guilty last week of violating the Stark Law and the False Claims Act. In addition to the jury’s $39.3 million judgment against the hospital, Tuomey faces up to $357 million in potential fines from over 20,000 violations of the False Claims Act, which allows the government to claim treble damages.

The case was initiated by a whistleblower physician, who brought a qui tam action in 2005. The whistleblower believed that Tuomey had violated the Stark Law and False Claims Act by using referral fees to create incentives for physicians to steer business to the hospital. Under the part-time employment agreements, each physician received a significant benefits package, was paid a base salary, and was eligible for two potential bonuses, one based on productivity and the other on qualitative measures. According to the government, the physicians received total compensation that exceeded fair market value for the physician’s services. The government argued that the compensation paid in excess of fair market value was evidence that the agreements took into account the volume or value of the physicians' referrals to the hospital, in violation of the Stark Law and False Claims Act.

In 2010, a jury found that the hospital had violated the Stark Law, but not the False Claims Act. The trial judge in that case had imposed a $45 million penalty, but there was a dispute on how the judge interpreted the jury’s split findings, resulting in the 4th Circuit Court of Appeals invalidating the ruling and ordering the retrial.

Previously, Stark Law cases were rarely litigated due to the complexity of the cases. Now that the government was victorious in a Stark Law case, it may now have more incentive to litigate Stark cases and be less willing to settle such cases in the future. Providers should check existing agreements with referring physicians to ensure that such agreements are fair market value and commercially reasonable.

© 2014 BARNES & THORNBURG LLP

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