Tuomey Healthcare System Inc. owes the government $237.4 million after losing its Fourth Circuit appeal of a judgment imposed after a jury found the hospital liable for violations of the Stark self-referral law and the False Claims Act.

Tuomey has stated that it would likely need to file for bankruptcy based on the damages imposed in this case, although the hospital has since entered into merger talks with Palmetto Health.

The high penalty imposed on the hospital for allegedly taking into account the volume and value of referrals in its physician arrangements will likely encourage both the government and whistleblowers to scrutinize and challenge the nature of financial relationships with physicians, and may prompt voluntary self-disclosures by healthcare entities to proactively resolve potential issues.

Case background

The Tuomey judgment relates to a qui tam lawsuit filed by a physician who, after unsuccessful contract negotiations with the system, claimed that Tuomey paid certain physicians amounts that were above fair market value and that took into account volume or value of referrals generated by these physicians.

At a retrial of these issues, the jury found that found that these arrangements violated both the Stark Law and False Claims Act, and found that Tuomey submitted 21,730 illegal Medicare claims based on these improper compensation arrangements.

Tuomey was ordered to pay $237 million in civil penalties, which it appealed to the U.S. Court of Appeals for the Fourth Circuit.

Fourth Circuit decision

The Fourth Circuit found that Tuomey was not entitled to judgment as a matter of law or a new trial.

For example, the Fourth Circuit held that a reasonable jury could have found that Tuomey’s contracts compensated physicians in a way that varied with the volume or value of referrals, summarizing the issue as “the more procedures the physicians performed at the hospital, the more facility fees Tuomey collected, and the more compensation the physicians received in the form of increased base salaries and productivity bonuses.”

The Fourth Circuit also deemed the damages amount to be constitutional.  Tuomey had argued that the district court improperly calculated the civil penalty, used the incorrect measure of actual damages, and imposed damages that violated the Fifth and Eighth Amendments.

Addressing the challenges in turn, the Fourth Circuit concluded that although “the award is substantial, we cannot say that it is unconstitutional.”  The Fourth Circuit noted that the ratio of punitive damages to compensatory damages fell “just under the ratio the Court deems constitutionally suspect.”

The case is United States ex rel. Drakeford v. Tuomey, 4th Cir., No. 13-2219, and the opinion was released on July 2, 2015.