By: Jeff Cohen
The Tuomey decision, U.S. Court of Appeals case out of South Carolina, contains important lessons for physicians, especially as it relates to (1) compensation arrangements with hospitals, (2) proper compensation arising in connection with the provision of designated health services (“DHS”), and (3) the advice of counsel defense.
The concept of DHS arises largely in the context of the federal Stark Law, which in pertinent part (1) forbids physicians from owning and referring to providers of DHS (e.g. PT, rehab, diagnostic imaging, home health, DME, clinical laboratory, inpatient and outpatient hospital services), (2) describes how medical practices can provide DHS to their own patients, and (3) forbids even physicians within a practice from allocating DHS profits on the basis of who ordered or referred to them.
The Tuomey case involves a whistleblower action filed against a not for profit hospital system. The original jury in that case decided that the system didn’t violate the False Claims Act, but the appellate court set aside the verdict using facts and testimony that had be excluded from the jury trial, Tuomey Healthcare System was found to have knowingly submitted over 21,000 false claims to Medicare and the government was awarded over $237 Million (most of it in the form of punitive damages). The government (which often advances the plaintiff’s—“relator” case in whistleblower cases) filed a motion for a new trial, which the trial court granted and the appellate court affirmed.
The case involves the following:
- Beginning around 2000, doctors in the Tuomey community performed their surgical cases in surgery centers, not the Tuomey hospital;
- In response to their concern re lost hospital revenues from doctors going elsewhere for surgical services, Tuomey negotiated part time employment agreements with some doctors;
- The agreements had the following characteristics—
The doctor received an annual base salary;
It was adjusted each year based on the amount collected for the physician’s services in the prior year;
Most of the compensation was in the form of a productivity bonus, which was also based on prior year collections for the physician services; and
The doctors could not own any surgery centers in the community.
One doctor rejected the proposed contract because he thought it violated Stark, in part because the doctor would receive compensation that exceeded the collections for services he provided. He believed the compensation exceeded the fair market value of the services he provided. In fact, the appellate court found that “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,” and hence the physician compensation “varied with the value or volume of referrals”, a Stark compensation arrangement violation. Compensation that is set in advance, does not vary based on the value or volume of business generated between the parties and is consistent with fair market value is one of the conerstones of Stark (and Anti-Kickback Statute) compliance.
The appellate court’s comments regarding the Stark issues were instructive, underscoring the illegal nature of a referral by a physician who has a financial relationship with an entity (including a hospital) that provides DHS. “If a physician has a financial relationship with a hospital, then the Stark Law prohibits the physician from making any referral to that hospital for the furnishing of designated health services.” Moreover, the court highlighted the fact that a claim submitted in violation of Stark would be result in liability to repay all amounts received for that impermissible referral.
The court stated that, since inpatient and outpatient hospital services fall within the DHS definition, and since a “referral” includes “the request by a physician for the item or service,” Stark is implicated when a hospital bills a facility fee “in connection with the personally performed service” (i.e. surgery performed by a compensated physician at the Tuomey hospital, where the hospital bills the facility fee).
Another topic addressed by the Tuomey court of note pertains to the “advice of counsel defense” sometimes sought by clients who have gotten legal guidance. In this case, the defendant hospital system sought to rely on written advice obtained by legal counsel, but the lower court was unpersuaded by the system’s attempt to rely on that advice when it found that the system interfered with full and complete advice being given by counsel. The court amplified the lower court’s findings that the Tuomey counsel did not receive all the pertinent information in connection with the advice given, and the client (Tuomey) did not comply with that advice. The court said it best—
“If in good faith reliance upon legal advice given him by a lawyer to who he has made full disclosure of the facts, one engages in a course of conduct later found to be illegal, the trier of fact may in appropriate circumstances conclude that the conduct was innocent because ‘the guilty mind’ was absent.” However “consultation with a lawyer confers no automatic immunity from the legal consequences of conscious fraud. Rather, to establish the advice-of-counsel defense, the defendant must show the (a) full disclosure of all pertinent facts to [counsel], and (b) good faith reliance on [counsel’s] advice.” [Emphasis added].
While the Tuomey court decision offers a great deal of value to attorneys looking for direction on the substantive issues (especially advice of counsel defenses), there are some key issues that physicians should focus on in light of the case:
- Any compensation arrangement between a physician and hospital requires close analysis and guidance to ensure regulatory compliance;
- The “set in advance” and fair market value requirements of Stark are serious. Obtaining independent fair market valuations ought to be on the top of the list for physicians who are reviewing compensation arrangements;
- The “set in advance” requirement should cause practices that flex their DHS profit allocations to reconsider compliance; and
- The utility of obtaining written advice from legal counsel is especially important in an environment flush with intent based laws, but clients have to (a) be ready to be fully disclosed with their attorneys (or risk wasting money on written advice), and (b) be prepared to receive advice they may not like, since shopping for advice is risky when hoping for protection with strong, written legal advice.