Prosecutors pressure Tuomey to settle

Pressure is mounting for executives at Tuomey Healthcare System in Sumter, S.C., to settle their epic legal conflict with the federal government to avoid rendering the community hospital insolvent.

Last week, prosecutors warned Tuomey officials that they intend to seek at least $237 million in damages after jurors decided May 8 that the 242-bed hospital violated the Stark law and False Claims Act by financially rewarding specialty doctors who referred patients to the hospital.

That damage figure—which Acting Assistant U.S. Attorney General Stuart Delery said was the minimum potential penalty—was greater than the combined revenue Tuomey received in 2011, according to its most recent public disclosures (PDF).

“We recognize that the defendant's resources may be inadequate to fully satisfy this judgment and, accordingly, the government remains open to discussing a settlement, on appropriate terms, at a level below the amount of the judgment,” Delery's court filing says (PDF), showing government interest in resolving the case out of court even though a jury has already ruled and both sides are only waiting for the judge to decide the amount of damages.

On Tuesday, the holders of more than $74 million in tax-exempt bonds issued on Tuomey's behalf learned that Standard & Poor's Ratings Service has dropped its rating of the debt by two notches since the verdict—and it will damage the system's credit profile further if executives don't find a way to settle.

The ratings agency even named a settlement amount: $40 million.

“We, however, believe any settlements beyond $40 million would cause us to reassess Tuomey's financial profile and could cause us to lower the rating further,” S&P analyst Margaret McNamara wrote in a ratings downgrade that was posted Tuesday (PDF) to the Municipal Securities Rulemaking Board's public filing system.

Hospital officials have not commented publicly beyond a May 9 e-mail saying the hospital was disappointed in the verdict. “We continue to believe in Tuomey's case and the people who work at the hospital,” public relations director Brenda Chase said in the statement. “We will look at our options and then move forward.”

The case is being watched nationally by the healthcare community because it could end up as one of the largest False Claims Act penalties ever levied against a single hospital. Although such lawsuits are relatively common in healthcare, the overwhelming majority are settled out of court, typically with agreements that allow the company to avoid admitting wrongdoing.

Tuomey officials have steadfastly denied doing anything wrong, arguing that their physician compensation contractors were fully vetted by system attorneys who were following the letter of the law and CMS guidance.

Tuomey, which recorded $13 million income on $202 million in revenue in 2011, is the sole hospital in Sumter. The hospital receives Medicaid disproportionate-share payments, which means that it serves a higher-than-average number of low-income residents.

The hospital informed bondholders earlier this month that it could be rendered insolvent if the judge awards damages in the higher range of the possible outcomes, the S&P note says.

Sandra Miller, attorney for the whistleblower who brought the initial legal case against Tuomey in 2005 leading to this month's outcome, said Tuomey executives have not responded to overtures by the government to settle the case, even after the jury verdict.

“We are also certain that the government has never had any desire to jeopardize healthcare delivery in the Sumter community, nor is there any reason to believe it will be jeopardized as a result of the jury's decision,” Miller said in an e-mail, adding that her client, Dr. Michael Drakeford, continues to practice medicine at Tuomey. “It is certainly Dr. Drakeford's desire to see this matter resolved fairly.”

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