(This article was updated at 5:30 p.m. ET.)
Tuomey Healthcare System has agreed to settle with the government for $72.4 million—less than a third of the $237 million that a federal appeals court said it would have to pay for illegal compensation arrangements with doctors.
The sum required by the verdict would otherwise have been the largest levied against a community hospital and would have exceeded the Sumter, S.C., system's annual revenue.
As part of the settlement, Tuomey will also be sold to Palmetto Health, a system based in Columbia, S.C. Tuomey previously signaled it planned to partner with Palmetto.
Tuomey said in a statement Friday that the settlement will bring its decadelong struggle with the U.S. Justice Department to an end once the partnership with Palmetto is finalized Jan. 1.
“We are now able to close this chapter and look to the future,” said Tuomey CEO Michelle Logan-Owens in a statement. She said she was elated to share news of the agreement with Palmetto and “moved beyond words with joy as I report today, we also signed a settlement with the Department of Justice.”
Before agreeing to settle the case, Tuomey had already lost three times in federal 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. A federal appeals court upheld that decision in July.
Tuomey had argued in the appeals court that it had relied on the advice of its lawyers regarding its physician compensation arrangements. The court, however, noted that Tuomey should have taken more seriously concerns raised by one of the lawyers with whom it consulted over the contracts.
The not-for-profit Tuomey system is anchored by Tuomey Regional Medical Center, which has 252 staffed beds, according to the American Hospital Association. It's the only hospital in Sumter, a city of about 40,000.
Legal experts said it's not surprising Tuomey agreed to settle, given the appeals court's decision and the huge verdict levied against it.
“Tuomey didn't really have any other options, I think, but to settle,” said J.D. Thomas, a partner at Waller Lansden Dortch and Davis.
The decision by the 4th U.S. Circuit Court of Appeals didn't leave much legal wiggle room, and the case would have been a long shot for consideration by the U.S. Supreme Court, he said.
The settlement allows the hospital to keep its doors open and the government to get paid. It otherwise would have likely been tough for Tuomey to cough up $237 million, which exceeds its annual revenue.
“They want to reach a result that allows the government's claims, or the damages they believe they suffered, to be paid back while at the same time allowing a healthcare operator to continue to operate,” Thomas said.
Reed Stephens, a partner at McDermott Will & Emery, said the settlement and case itself indicate the high stakes involved in cases alleging violations of the Stark law and False Claims Act.
“The outcome is a reflection of how challenging it is for hospitals to manage the risk that they run under the highly complex Stark law regulations,” Stephens said.
The Stark law, which governs financial relationships between physicians and other providers, has been widely criticized for its complexity, including by federal appellate Judge Albert Diaz, who recently upheld the verdict against Tuomey.
“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 in his decision.
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.
Increasingly, alleged Stark violations have been brought to court as False Claims cases, a trend Stephens said he doesn't see ending any time soon because of the large potential payouts for the whistle-blowers who bring such cases.
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. Drakeford will receive $18.1 million from the settlement.