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Fourth Circuit Vacates Stark Damages Award; Provides Interpretation of Key Stark Law Provisions

On March 30, 2012, the U.S. Court of Appeals for the Fourth Circuit published its long-awaited decision in the case of United States ex rel. Drakeford v. Tuomey Healthcare Sys., No. 10-1819 (4th Cir. 2012).  The Fourth Circuit specifically held that the Seventh Amendment entitles Tuomey to a new jury trial on the issue of whether there were financial relationships between Tuomey and certain specialist physicians that violated the Stark Law (42 U.S.C. § 1395nn).  Notably, the opinion also addresses two Stark Law concepts that the Fourth Circuit believes are likely to recur on remand.  The Tuomey opinion therefore provides a rare opportunity for hospitals, physicians and other relevant industry stakeholders to glean at least one circuit court’s interpretation of the muddied waters of the Stark Law.

United States ex rel. Drakeford v. Tuomey Healthcare Sys. is an appeal of a district court’s decision directing Tuomey Healthcare System, a Sumter, South Carolina-based health system, to pay approximately $44 million to the U.S. Government as equitable relief for alleged violations of the Stark Law.

By way of background, Tuomey—through wholly owned subsidiary organizations—entered into part-time employment arrangements with 19 specialist physicians in the area who were at risk of  performing their outpatient procedures at competing ambulatory surgery centers.  Under the arrangements, which had initial 10-year terms, the physicians were eligible for an annual base salary, a productivity bonus calculated as 80 percent of the net collections and an incentive bonus (equal to up to 7 percent of the productivity bonus).

The relator, Dr. Michael Drakeford, filed a qui tam lawsuit in October 2005 that alleged these compensation arrangements violated the Stark Law, and the United States intervened in December 2007, where it sought relief under the False Claims Act (FCA) (31 U.S.C. §§ 3729-33), as well as under equitable claims of mistake of fact and unjust enrichment.  In a March 2010 jury trial, the jury found that Tuomey violated the Stark Law, but did not violate the FCA.  In a July 13, 2010, order, however, the district court judge granted the government’s motion for a new trial on the issue of liability under the FCA.  In a separate July 13, 2010, order, the district court judge granted the U.S. Government’s motion for judgment as a matter of law on its two equitable claims and awarded relief in the amount of more than $44 million, plus pre- and post- judgment interest.

Seventh Amendment Holding

In its March 30, 2012, opinion, the Fourth Circuit vacated the district court’s July 13, 2012, order and held that the district court inappropriately based its ruling in favor of the U.S. Government on the jury’s finding that Tuomey violated the Stark Law.  As the Tuomey court notes, the Seventh Amendment creates the right of trial by jury for legal claims, and, for those facts shared by legal and equitable claims, the court cites to precedent that the right to a trial by jury should predominate for these claims.  In this case, the threshold question for both the legal and equitable claims is whether an unexcepted financial relationship under the Stark Law existed between Tuomey and the specialist physicians.  Since one of the July 13, 2010, orders set aside the jury’s verdict in its entirety—including the finding that Tuomey violated the Stark Law—the decision to award equitable relief to the U.S. Government was not based on a jury’s determination that Tuomey violated the Stark Law.

As such, the Fourth Circuit vacated the $44 million dollar judgment against Tuomey and remanded the case to the district court for a new jury trial consistent with the court’s opinion.  The Fourth Circuit specifically notes that on remand the jury must determine whether a financial relationship existed between Tuomey and the specialist physicians and, if so, whether the contracts between Tuomey and the specialist physicians impermissibly took into account the volume or value of anticipated referrals to Tuomey.

Stark Law Considerations

Separate and apart from the Seventh Amendment holding, the Tuomey court makes two findings on Stark Law issues that it believes are “likely to recur” on remand.  Notably, Judge Wynn of the Fourth Circuit issued a separate opinion concurring with the majority’s holding, but arguing that the majority’s additional Stark Law analysis constitutes an advisory opinion that might “potentially usurp the proper role and province of the jury and district court.”

The Tuomey court first analyzed whether a surgeon’s admission of a patient for a service the surgeon will personally perform constitutes a “referral” under the Stark Law.  Unsurprisingly, the court concluded that it does.  The court cites to preamble discussion by the Health Care Financing Administration (now the Centers for Medicare & Medicaid Services, or CMS) that appears to answer this question.

There are two key take-aways for this portion of the decision.  First, the government has argued in various contexts that the Stark preambles should not be considered where the regulations are clear on their face.  Given the complexity and ambiguity of the regulatory text, the industry and the health law bar have relied upon the hundreds of pages of CMS commentary to provide needed clarity to any number of interpretive conundrums.  Second, while the court unsurprisingly finds that the surgeons made “referrals” in admitting the patients for outpatient surgery that the surgeons personally performed, the court did not conclude that a productivity bonus based on those personally performed services—each of which would have a corresponding facility fee—necessarily would “take into account” those referrals.  Again, this is consistent with CMS preamble commentary, but is a welcome development as Assistant U.S. Attorneys have sometimes argued that productivity bonuses based on the surgeon’s professional component take into account referrals for facility fees as well.

The other Stark Law issue the court addresses is what it means for a compensation arrangement to “take into account” referrals.  The court begins its analysis by citing to the regulatory definition of “fair market value,” noting that this definition requires the compensation not be determined in any manner that takes into account the volume or value of anticipated or actual referrals.  42 C.F.R. § 411.351 (emphasis added).  The court also cites preamble discussion suggesting that fixed compensation that does not fluctuate with referrals can nevertheless “take into account” referrals if it exceeds fair market value and was inflated to compensate the physician for generating other revenue.  The court concludes that if a hospital’s arrangement with a physician “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” (emphasis added).  The court concludes that the proper question posed to the jury on remand should be whether the contracts with the specialist physicians—“on their face”—took into account the value or volume of anticipated referrals to Tuomey.  If so, the arrangements will constitute indirect compensation arrangements with the hospital and fail the indirect compensation exception.

The court’s interpretation of the Stark Law’s fair market value standard omits an essential part of the definition, namely, that fair market value of compensation arrangements is usually determined by the value of compensation in bona fide arrangements that are not determined in a manner that take into account the volume or value of referrals.  Without including the term “usually,” the fair market value and volume or value of referrals standards are indistinguishable, which appears inconsistent with the creation of separate criterion for each of these concepts in numerous Stark Law exceptions, including the indirect compensation arrangement exception.

While the court’s conflation of the “fair market value” and “takes into account” requirements further muddies an already-opaque set of Stark Law issues, the court’s approach includes some good news for providers.  The government has argued in Tuomey and elsewhere that the term “takes into account” should be interpreted loosely and colloquially to mean that the provider considered or had referrals in mind when establishing the compensation or, indeed, in evaluating whether to enter into the arrangement at all.  Such a position is inconsistent with CMS preamble commentary and has the potential to turn the “bright line” Stark Law requirements into a search inside the minds of the individuals negotiating physician arrangements.  The Tuomey court concludes that both anticipated and actual referrals are at issue, but that the proper question is whether the contract on its face includes indicia that the compensation is not just recognition of, and payment for, the value of the physician’s services, but also recognizes and pays for the volume or the value of the physician’s referrals to the hospital.  If the answer to that question is no, the fact that such potential referrals were considered or in the minds of hospital administration in the course of their business planning should not make out a Stark Law violation.  


The Tuomey opinion is an important one in addressing some of the key recurrent issues in evaluating physician compensation, whether in connection with service agreements or practice acquisitions.  The issues raised underscore the need for careful planning and Stark counsel, both in “doing the deal” and in the course of earlier strategic planning and business development.  Developments on remand deserve careful attention as this area of the law develops. 

© 2023 McDermott Will & EmeryNational Law Review, Volume II, Number 110

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