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Court of Appeals Ruling in Favor of Tuomey Healthcare System

On March 30, 2012, the United States 4th Circuit Court of Appeals ("Court of Appeals") ruled in favor of Tuomey Healthcare System, Inc. ("Tuomey") by vacating the 2010 judgment of the District Court for the District of South Carolina ("District Court") and remanding the case to the District Court. In its opinion, the Court of Appeals concluded that the District Court's verdict violated Tuomey's Seventh Amendment right to a jury trial. (U.S. ex rel. Drakeford v. Tuomey Health. Sys., Inc., 4th Cir., No. 10-1819 (Mar. 30, 2012)1 


Tuomey, a private non-profit health system, operates Tuomey Regional Medical Center, a 301-bed acute care hospital located in Sumter, South Carolina, providing both inpatient and outpatient health care services. In 2003, several physician specialty groups ("Physicians") gave consideration to performing outpatient surgical procedures in-office, rather than Tuomey's hospital. In response, Tuomey entered into part-time employment agreements ("Agreements") with 19 Physicians in 2005 and 2006, each with 10 year terms, requiring the Physicians to perform outpatient surgery procedures at Tuomey.

All of the Agreements contained similar terms in which each Physician was required to provide outpatient procedures at Tuomey for an annual guaranteed salary based on outpatient procedure net cash collections, a production bonus based on 80 percent net collections, an incentive bonus of up to 7 percent of the production bonus, and a full-time equivalent benefits package. Under the Agreements, Tuomey performed all billing and collections for both the professional and technical (or facility) component charges, thereby presenting claims to Medicare and Medicaid for payment generated as a result of the outpatient procedures performed.

In 2005, Dr. Michael K. Drakeford filled a qui tam action against Tuomey citing alleged payment for referrals as a result of the Agreements not being fair market value as defined by the Stark Law. In 2007, the United States government ("United States") joined the qui tam suit requesting three causes of action (1) False Claims Act ("FCA")2, in which Tuomey presented claims to Medicare and Medicaid for designated health services rendered as a result of violations of the Stark Statute, (2) payments made to Tuomey by the United States under mistake of facts, and (3) Tuomey's receipt of unjust enrichment (Tuomey's receipt of government funds in which Tuomey was not entitled).

District Court's Findings

The United States' FCA claim against Tuomey was tried by jury in 2010. The jury was instructed to render the following possible verdicts: (1) Tuomey did or did not violate the Stark Law, (2) Tuomey did or did not violate the FCA, and (3) if the FCA was violated, determination of the total damages to be awarded under the FCA, as well as the total number of false claims submitted.

The jury reached a verdict in which the jury found Tuomey in violation of the Stark Law and not in violation of the FCA. Therefore, no FCA damages or false claims submissions were found. Following the jury's verdict, both Tuomey and the United States made post-verdict motions in which Tuomey and the United States each requested judgment on the equitable claims submission made by the United States, which included payments made under mistake of facts and receipt of unjust enrichment. The United States also requested a new trial on the FCA claim, under Federal Rule of Civil Procedure 59, based on the district court's alleged erroneous exclusion of evidence regarding Tuomey's knowledge of false claims submissions. The District Court responded by setting aside the jury's verdict and granting a new trial on the entire FCA issue. On July 13, 2010, the District Court ruled in favor of the United States in connection with equitable claims submissions based on the jury's verdict indicating Tuomey's violation of the Stark Law and awarded the United States $44,888,651 plus pre- and post-judgment interest. Upon conclusion of the district court's judgments, Tuomey submitted an appeal to the Court of Appeals citing the district court's violation of Tuomey's Seventh Amendment rights by basing its judgment on the jury's answer to interrogatories regarding the Stark Law, even though the jury's verdict had been set aside.

4th Circuit Court of Appeal's Findings

The Court of Appeals concluded that the Seventh Amendment requires facts included in legal and equitable claims be tried before a jury, thereby supporting Tuomey's request to a trial by jury. Furthermore, the Court of Appeals concluded that the district court's decision to retry FCA violations in its entirety voided the jury's verdict regarding Tuomey's violation of the Stark Law. Therefore, the district court's conclusion of equitable claims violations was deemed by the Court of Appeals as "legal nullity."

Furthermore, Circuit Judge Duncan addressed other issues likely to be raised on appeal, including the following: (1) whether or not technical component fees billed by Tuomey, generated as a result of professional services performed by the Physicians constitute a referral as defined by the Stark Law and (2) whether or not Tuomey considered the volume or value of anticipated and/or actual referrals in determining compensation to be rendered under the Agreements with the Physicians.
Based on the Stark Law's definition of a referral, Judge Duncan determined that technical component fees billed in connection with professional services were indeed referrals. After concluding that Tuomey received referrals as a result of the Agreements, Judge Duncan noted that a jury should decide as to whether or not the Agreements violated the fair market value standard required by the Stark Law by accounting for the anticipated volume and value of referrals in the conclusion of compensation and benefits rendered to the Physicians.

The Tuomey case may have far reaching implications for compensation arrangements, depending on the outcome of the jury trial at the District Court level, as professional component services giving rise to inpatient/outpatient hospital facility services (or other designated health service technical component services) have the potential to implicate the volume or value standard of the Stark Law in a wide variety of settings and incentive compensation plans.

For more information, contact HORNE Manager Christina Street, CPA, at 601.620.5122 or


1Pandazides vs. Va. Bd of Edu., 13 F.3d 823, 827 (4th Cir. 1994)

231 U.S.C. 3729(a)(1)