## Facts

- Tuomey Healthcare System, a nonprofit hospital in Sumter, South Carolina, faced declining outpatient surgery revenue as physicians moved procedures to other facilities.
- To retain outpatient procedures, Tuomey entered part-time employment contracts with 19 specialist physicians requiring them to perform outpatient procedures exclusively at Tuomey.
- The contracts paid physicians a base salary (adjusted annually based on collections) plus a productivity bonus equal to 80% of collections for personally performed services.
- The compensation was set using projections that assumed physicians would continue referring outpatient procedures to Tuomey, generating hospital facility fees.
- A physician (Dr. Michael K. Drakeford) refused to sign a contract, believed the arrangements violated the Stark Law, and filed a qui tam action; the United States intervened under the False Claims Act (FCA).
- In the first trial, the jury found no FCA liability but found a Stark violation via a special interrogatory; the district court awarded equitable relief to the United States.
- The Fourth Circuit vacated and remanded for a new trial on FCA claims due to trial error (including instructional issues).
- On remand, a second jury found Tuomey knowingly submitted 21,730 false Medicare claims; the district court entered judgment for $237,454,195 (trebled damages plus civil penalties).

## Issues

1. Whether the district court properly granted a new trial following the first trial’s mixed verdict.
2. Whether the physician contracts created an impermissible financial relationship under the Stark Law by failing fair market value requirements and taking into account the volume or value of referrals.
3. Whether Stark violations rendered resulting Medicare submissions “false” or otherwise actionable under the FCA.
4. Whether sufficient evidence supported FCA scienter, including in light of Tuomey’s asserted advice-of-counsel defense.
5. Whether the damages and civil penalties were properly measured and constitutional under the Eighth Amendment.

## Decision

- The Fourth Circuit affirmed the order granting a new trial, concluding the government was prejudiced by the exclusion of evidence relevant to Tuomey’s knowledge of potential illegality.
- The court upheld the jury’s finding that the contracts violated Stark because the compensation structure effectively accounted for anticipated referrals and associated facility-fee revenue.
- The court held that claims submitted for services rendered pursuant to Stark-prohibited referrals were ineligible for Medicare payment and thus actionable as false claims under the FCA.
- The court found sufficient evidence for the jury to conclude Tuomey acted “knowingly,” including evidence of selectively seeking favorable legal opinions and disregarding adverse advice.
- The court affirmed the $237,454,195 judgment, rejecting challenges to the damages methodology and concluding the award was not an excessive fine.

## Legal Principles

- Stark Law prohibits Medicare payment for certain services referred by physicians who have an improper financial relationship with the entity billing Medicare, absent an applicable exception.
- Compensation arrangements violate Stark when they are not fair market value for actual services or when they take into account (including through anticipated-referral economics) the volume or value of referrals.
- Submitting claims to Medicare for services that are statutorily ineligible for payment due to Stark violations can satisfy the FCA’s falsity requirement.
- Statutory or regulatory ambiguity may be relevant to FCA scienter, but does not by itself defeat falsity where Medicare payment is barred for services tied to prohibited financial relationships.
- Advice-of-counsel does not negate scienter where the factfinder can infer selective reliance, incomplete disclosure, or disregard of contrary legal warnings.
- In Stark-based FCA cases, damages may be measured by amounts paid on ineligible claims, and substantial treble damages plus per-claim penalties may be sustained against Eighth Amendment challenges when proportionate to the offense and consistent with Congress’s penalty scheme.

## Conclusion

The Fourth Circuit affirmed FCA liability and a $237 million judgment against a hospital whose physician employment contracts were structured around capturing facility-fee revenue from referrals, concluding the arrangements violated Stark, tainted resulting Medicare claims, supported a finding of knowing misconduct, and justified treble damages and statutory penalties.


United States ex rel. Drakeford v. Tuomey Healthcare Sys., Inc., 792 F.3d 364 (4th Cir. 2015)