'High-stakes' decision

The next time whistle-blower attorney Joel Androphy sits down for a settlement conference with hospital lawyers, he'll have a potent new tool in his arsenal: last week's $39 million Stark law jury verdict against Tuomey Healthcare System in Sumter, S.C.

“I'd use this case in a heartbeat,” Androphy said. “I'd send this lawsuit to the defendant's lawyers and say, you need to pay us, otherwise you could be responsible for this amount of damages. They then send that to the board of directors. … It could go a long way toward encouraging people to settle.”

Tuomey, a stand-alone community hospital with annual revenue of about $200 million, faces an eye-popping maximum penalty under the False Claims Act of up to $357 million because of damage-multipliers and per-claim fines under the federal anti-fraud law.

After a four-week trial in U.S. District Court in Columbia, S.C., a jury took half a day to rule that tens of thousands of Tuomey's Medicare claims for physician services violated the Stark law, which restricts financial arrangements with referring physicians, because 19 physicians were receiving above-market compensation. Based on the Stark violation, the jury also found that the Medicare bills violated the False Claims Act, triggering punitive math that could triple actual damages and impose as much as $11,000 in fines for each of the 21,730 false claims.

The potential damages are so severe the hospital may be forced to rely on the Constitution's Eighth Amendment ban on excessive fines to try to escape the full wrath of the U.S. Justice Department in the long-running case, several attorneys said. U.S. District Judge Margaret Seymour gave each side 14 days to submit briefs before she will decide Tuomey's financial punishment.

The sky-high potential damages help explain why Tuomey may be the only hospital to go all the way to a jury verdict on a case that alleged only violations of physician-referral laws. That novelty means the case is destined to be parsed by attorneys across the country for clues about how to handle future Stark and related False Claims cases.

E. Bart Daniel, the former South Carolina U.S. attorney who served as Tuomey's lead defense counsel, said he believes Tuomey is the only hospital ever to take a case of its kind to verdict. And in fact, Tuomey did it twice: In 2010, the hospital received a split verdict that was overturned by the 4th U.S. Circuit Court of Appeals and led to the retrial that began last month and concluded May 8.

Daniel said the effect of this month's verdict could be “devastating,” despite the fact that no one ever disputed that the physician services at issue were necessary and properly provided to patients. “The government didn't lose anything,” he said. “They got every service they paid for.”

Androphy, who represents the interests of whistle-blowers who sue corporations, said such reasoning misses the point.

“They fraudulently induced the government into doing something,” he said of Tuomey's payments that were used to encourage patient referrals. “If you let them get away with minimal damages, you're not going to stop anybody because everyone is going to assume they can get away with it.”

It's not clear whether hospital officials will wait until after Seymour announces the final penalty amount before deciding whether to appeal the jury verdict.

Craig Holden, president and chief operating officer of Baltimore's Ober Kaler law firm and a former trial attorney with HHS, said he wasn't surprised by the jury's verdict.

Tuomey's physician-compensation contracts, Holden said, were considered “fairly aggressive” in the industry, and the jury's first verdict—which resulted in a $45 million penalty against Tuomey, later overturned—presaged what the second jury would decide.

“Obviously, trying a case like this is very high-stakes poker, as this case indicates,” he said. “And anyone defending one of these cases has to look at the total potential liability that could result when determining whether a settlement is appropriate.”

The lawsuit started with a whistle-blower complaint filed in 2005 by Dr. Michael Drakeford. Drakeford, a surgeon, declined one of the contracts at issue in the case after getting legal advice against it. Recordings of hospital meetings played at the trial illustrated that hospital officials wanted to find ways to discourage physicians from referring patients to other hospitals or physicians' offices—though they insisted their arrangements were legal and extensively vetted.

Several attorneys said the Justice Department took some risk trying the case, too, because a loss would have had a chilling effect on its Stark and False Claims Act enforcement. The result, though, may have the opposite effect.

“This case may embolden DOJ to take complicated Stark cases before a jury,” said Donald Romano, a lawyer with Foley & Lardner and a former attorney overseeing Stark law policy at the CMS. “I think the effect is that hospitals are going to have to be more careful about fair-market value, and that noncompete agreements with referring physicians after Tuomey … are going to be very risky.”

Follow Joe Carlson on Twitter: @MHJCarlson