Facing a $237 million verdict for alleged illegal compensation arrangements with doctors, Tuomey Healthcare System has agreed to settle with the government for $72.4 million.  According to the government’s press release, Tuomey will be sold to Palmetto Health, a multi-hospital healthcare system, as part of the settlement.  Tuomey must also retain an independent review organization to monitor any arrangements that it makes with physicians for the duration of a five-year Corporate Integrity Agreement imposed as part of the settlement.

As we previously briefed, Tuomey owed 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 had stated that it would likely need to file for bankruptcy based on the damages imposed in this case, and then 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 – even as mitigated by this government settlement – 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 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 the U.S. Court of Appeals for the Fourth Circuit upheld on appeal.  United States ex rel. Drakeford v. Tuomey, 4th Cir., No. 13-2219, opinion released on July 2, 2015.