On March 30, 2012, the Fourth Circuit reversed a $44 million judgment against Tuomey Hospital (Tuomey) for contracts that Tuomey had with physicians that allegedly violated the federal Stark law.  Stark law prohibits physicians from referring patients to health care entities for designated health services that will be paid for by Medicare if the physician, or the physician’s immediate family member, has a financial relationship with the entity.  Stark law also prohibits health care entities from submitting claims to Medicare for such prohibited referrals.  Violations of Stark law may result in denial of payment, recoupment of payment, civil money penalties, or exclusion from participation in Medicare.

In 2003, Tuomey entered into part-time employment agreements with physicians to perform outpatient procedures at Tuomey in exchange for a salary that was based on Tuomey’s collections for the outpatient procedures and bonuses that took into account Tuomey’s net collections.  The United States Department of Justice (DOJ), on behalf of a physician at Tuomey who reported the employment agreements, filed a lawsuit against Tuomey pursuant to the False Claims Act alleging violations of Stark law because the compensation Tuomey paid to the physicians who performed outpatient procedures at Tuomey took into account the volume or value of referrals that the physicians generated for Tuomey.

In 2010, at trial in the District Court of South Carolina, the jury found that Tuomey violated Stark law, but not the False Claims Act.  For its Stark law violations, the District Court entered a judgment against Tuomey for $44 million, the value of prohibited referrals the DOJ estimated that Tuomey had submitted to Medicare.  In entering the judgment, the District Court set aside the jury’s verdict and ordered a new trial on the False Claims Act allegations.

On appeal, the Fourth Circuit vacated the District Court’s $44 million judgment against Tuomey for violations of Stark law because it found that the District Court violated Tuomey’s Seventh Amendment right to trial by jury because when the District Court set aside the jury’s verdict and ordered a new trial on the False Claims Act allegations, it set aside the entire verdict, including the verdict that Tuomey violated Stark law.  As such, the District Court could not have entered a judgment against Tuomey for violations of Stark law.  The Fourth Circuit remanded the case to District Court for further proceedings to determine if Tuomey violated either Stark law or the False Claims Act.  The date for the new trial has not yet been set.

In its opinion, the Fourth Circuit stated that on remand the jury must determine whether the physicians’ employment agreements took into account the volume or value of the referrals the physicians made to Tuomey, and if so, whether the physicians’ agreements met the statutory exception to Stark law for indirect compensation arrangements.  If the jury does not find that a statutory exception to Stark law applies, the jury will have to determine the “number and value of claims Tuomey presented to Medicare for payment of facility fees resulting from the facility component referrals made by the physicians, and for which it received payment.”

The court’s decision can be accessed here.