Government Suffers Set Back in Stark Law Prosecution

The case U.S. ex rel. Drakeford v. Tuomey Healthcare System, a highly anticipated appeal in the Fourth Circuit Court of Appeals in South Carolina, represents an instance where the defendant went to trial to fight the United States Government’s attempt to use an alleged Stark Law violation as the basis for penalties under the False Claims Act (“FCA”). The Government alleged Stark Law violations in connection with part-time employment agreements between the defendant hospital and area physicians and that the resulting billings constituted false claims. After trial, a jury found a Stark Law violation while at the same time deciding that Tuomey did not violate the FCA.

The Stark Law prohibits a physician who has a “financial relationship” with an entity from making a referral to that entity to furnish certain designated health services for which payment may be made under Medicare. An “indirect compensation arrangement” exists where the aggregate compensation received by the physician “vary with, or take … into account, the volume or value of referrals or other business generated by the referring physician.” Certain indirect compensation arrangements do not constitute financial relationships if the compensation received is 1) equal to fair market value for the services and items provided; 2) is not determined in any manner that takes into account the volume or value of referrals or other business generated by the referring physician for the entity; and is 3) commercially reasonable. This is known as the indirect compensation exception.

The employment contracts at issue required each physician to provide outpatient procedures at Tuomey Hospital or other facilities that defendant owned or operated. Tuomey agreed to pay the physicians a salary that fluctuated based on Tuomey’s net collections from outpatient procedures, a “productivity bonus” equaling 80% of the net collections, and an incentive bonus that could equal 7% of the productivity bonus. Each procedure generated both a professional component fee for the physician and a facility or technical component fee for the hospital.

At trial, the judge instructed the jury that a Stark Law violation would be found if 1) the contracts constituted indirect compensation arrangements meaning that the physicians received aggregate compensation from Tuomey and that such compensation would “vary with, or take … into account, the volume or value of referrals or other business generated by the referring physician” to Tuomey. If the jury found there was such an arrangement it then would determine whether Tuomey had proven that the arrangement fell within an exception. The trial court also stated that the jury needed to determine the number and value of claims for services that were referred to Tuomey and for which Tuomey received payment from Medicare. The jury found that Tuomey had violated Stark but not the FCA.

The trial court set aside the verdict and ordered a new trial on the FCA claim but also awarded damages of $45 million as result of several equitable claims made by the Government. The Fourth Circuit vacated the judgment of $45 million due to a violation of Tuomey’s Seventh Amendment right to a jury trial when the trial court overturned the verdict on the FCA claim but still entered judgment on claims that required a fact finding that Tuomey and the physicians had entered into a financial relationship prohibited by the Stark Laws.

The Fourth Circuit reasoned that because the FCA claim was based on the allegations of a Stark Law violation, ordering a new trial necessarily vacated the finding concerning the Stark Law violations since proof of an illegal financial relationship was needed to prove a Stark Law violation and was also a critical element of the FCA violation. In addition, because the trial court ordered the re-trial of the FCA claim, the equitable claims based on the Stark Law convictions were rendered a nullity.

The appeals court held that the jury must determine whether the contracts took into account the volume or value of referrals. If so, it must then determine whether Tuomey could prove the indirect compensation arrangement exception. Finally, if the exception did not apply, the jury must determine the number and value of claims paid by Medicare that Tuomey had submitted for payment of facility fees for the facility/technical component referrals made by the physicians in order to determine damages.

With respect to the Stark Law, the appeals court discussed several issues that it expected to recur with the trial court. It first decided that the facility component of the services performed by the physician pursuant to the contract did in fact constitute a “referral”. The Court rejected Tuomey’s argument that the technical component of a personally performed designated health service did not constitute a referral for Stark purposes. A facility component that results from a service performed or provided by the referring physician does constitute a referral. The court stated that the personal services exception does not extend to a facility fee that a hospital bills for a facility component resulting from a personally performed service. Thus, the referral consisted of the facility component of the physicians’ personally performed services and the resulting facility fee billed by Tuomey based upon that component.

The court went on to state that the jury must decide whether the volume or value of anticipated facility component referrals in computing the physicians’ compensation implicated the “value or volume” standard under Stark. In particular, whether the employment contracts on their face implicated the Stark Law “volume or value” standard. The court found that compensation arrangements that take into account anticipated referrals do implicate the volume or value standard as well as historical referrals and therefore the jury must decide whether the contracts took into account the value or volume of anticipated referrals. 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 Tuomey case shows that it hospitals and physicians must be careful in drafting employment agreements with respect to compensation that varies based on productivity. However, the case also demonstrates that it is not a fait accompli for the Government to bring charges against a medical provider.