I have written previously about the Stark compliance dilemma. The potential liabilities under the law are significant and, if pursued, could easily bankrupt a hospital. Many in the healthcare community, if they are aware of the problem, are skeptical. They tend to believe that the government would never seek to bankrupt a hospital just because it violated the Stark law. The Board of Tuomey Healthcare System in Sumter, South Carolina begs to differ.

In response to the opening of a competing ambulatory surgery center, Tuomey (through subsidiaries) entered into part-time employment agreements with 17 surgeons for a 10-year term. The physicians were hired through a wholly owned LLC. The agreements required the surgeons to exclusively perform outpatient surgery at the hospital’s surgery center. The amounts paid to the physicians under the agreements were determined to be fair market value by a compensation consultant and Tuomey obtained two legal opinions that the agreements did not violate the Stark law.

One of the physicians in the community who was offered the deal filed a qui tam lawsuit claiming that the agreements violate the Stark law and the False Claims Act. The federal government intervened in the suit.The Tuomey Board of Trustees has alleged that this physician was disgruntled because he wanted more money than what the consultant had opined was fair market value.

The government alleged that the agreements did not meet the Stark exception for bona fide employment arrangements because the physician’s compensation was determined in a manner that took into account the volume or value of referrals and the arrangements were not commercially reasonable absent the referrals. Specifically, the physicians were offered employment in response to competition and were paid bonuses without regard to their productivity and received full-time employee benefits (health insurance, malpractice, CME, and cell phone) even though they were only part-time employees. The government challenged the determination of the consultant that the compensation was fair market value and criticized the form of the opinion.

The hospital and government did not settle the case and it went to trial. The government sought damages of over $300 million. After a month-long trial, the jury found that Tuomey violated the Stark law but not the False Claims Act. The judge awarded the government $44 million for the Stark violation. If the case were brought today, the government would be able to prove a violation of the False Claims Act once it proved the Stark violation and the failure to repay the payments Tuomey had received in violation of the Stark law.

Tuomey has appealed the verdict. The court has ordered a new trial on the False Claims Act liability and the government is expected to again seek $300 million in damages for violation of the False Claims Act. It will be interesting to see whether Tuomey decides to settle the case and, if so, how much it will have to pay to do so.