(This story was updated at 4:45 p.m. ET)
A federal appeals court on Thursday upheld a $237 million False Claims Act verdict against Tuomey Healthcare System in Sumter, S.C. The sum is believed to be the largest ever levied against a community hospital and exceeds the hospital's annual revenue.
"We are disappointed," said Tuomey President and CEO Michelle Logan-Owens in the statement responding to the decision reached by the 4th U.S. Circuit Court of Appeals (PDF).
Tuomey said it would continue settlement discussions with the government and consider its legal options moving forward.
"However, for more than 100 years we have been providing healthcare services in this community, and we stand firm in our resolve to continue our mission. I am confident that we will find an appropriate resolution which will allow Tuomey to close this chapter and emerge strongly and successfully in our potential collaboration with Palmetto Health."
The system said in February it was entering negotiations to partner with South Carolina's Palmetto Health to help it weather unsustainable financial trends, including declining admissions, an inability to meet lender requirements and the long-running legal battle.
Before Thursday's decision, Tuomey had already lost the case twice in the past 10 years in U.S. District Court. In 2013, a federal jury concluded that Tuomey violated the False Claims Act by submitting tens of thousands of illegal claims to Medicare. The jury found that Tuomey paid doctors in ways that rewarded them financially for referring patients to the hospital in violation of the Stark law, tainting the Medicare claims.
The not-for-profit Tuomey system is anchored by Tuomey Regional Medical Center, which has 301 licensed beds. It's the only hospital in Sumter, a city of about 40,000.
Tuomey argued to the appeals court that it was merely relying on the advice of its lawyers in its physician compensation arrangements at issue. The court, however, noted that one lawyer Tuomey consulted raised concerns about the contracts and concluded Tuomey should have taken that opinion more seriously.
Though the appeals court sided with the lower court, Judge Albert Diaz, who wrote the opinion, called the case “troubling.” Diaz wrote that given the Stark law's complexity, it is easy to see how even diligent attorneys might give clients incorrect advice.
“It seems as if, even for well-intentioned healthcare providers, the Stark law has become a booby trap rigged with strict liability and potentially ruinous exposure—especially when coupled with the False Claims Act,” Diaz wrote.
The American Hospital Association and South Carolina Hospital Association filed a brief on Tuomey's behalf, saying hospitals shouldn't be penalized for relying on flawed advice from attorneys.
“Permitting hospitals to be penalized in this draconian fashion for obtaining and following the advice of legal professionals will jeopardize the ability of hospitals to meet the healthcare needs of their communities, especially in rural, medically underserved locations,” the associations wrote. “It would also leave hospitals in an untenable catch-22: Without expert advice hospitals cannot ensure that their transactions comply with the Stark law, but even if they obtain and rely on such advice they are still in jeopardy.”
Daniel Melvin, a partner in McDermott Will & Emery's health law group, said the decision raises questions about whether providers put themselves at risk by getting more than one legal opinion on Stark matters.
“If the second opinion is more favorable and you decided to go with the favorable opinion, are you now going to have some risk of not acting in good faith because you disregarded or didn't follow the advice of the negative opinion?” Melvin said.
Melvin said the fact that the case went to trial surprised some health lawyers given the facts of the case. The vast majority of False Claims Act cases settle before reaching trial. But it's possible Tuomey felt emboldened because it had multiple attorneys sign off on the compensation arrangements.
It's also possible Tuomey had little choice but to take the case to trial. When proposed penalties are so high, hospitals might not have the money to settle, said Reed Stephens, also a partner at McDermott Will & Emery.
Under the False Claims Act, those found guilty are liable for three times the amount of actual damages as well as financial penalties for each false claim. In the Tuomey case, the jury in the second trial found Tuomey knowingly submitted 21,730 false claims to Medicare worth $39.3 million.
“Certainly, the outcome here is a very negative one for the provider community, but because of the way the government measures its damages in these Stark law cases, providers still have a very difficult decision to make as to whether or not they're going to try one of these cases rather than try to settle,” said Stephens, who previously worked for the Justice Department's civil fraud section.
Tuomey could now ask for a rehearing before a full panel of 4th Circuit judges or take its case to the U.S. Supreme Court if it wants to continue the legal fight.
“I'm sure right now they're weighing the options they have lined up to decide whether or not they can continue financially as they have previously existed or whether or not they need to continue the appeals process hoping to get a different opinion,” Stephens said. “The hospital is no doubt going to be talking to its financial advisers to decide what options it has to potentially restructure if it chooses not to continue the appeals process.”
The case was originally filed in 2005 by a whistle-blower, Dr. Michael Drakeford, who declined to enter into an agreement offered by the hospital. In successful False Claims Act cases, whistle-blowers are entitled to a percentage of whatever money the government is able to recover.