U.S. ex. rel. DRAKEFORD v. TUOMEY, NO. 13-2219

Decided: July 2, 2015

In a case under the False Claims Act (“FCA”), the Fourth Circuit affirmed the district court’s grant of a new trial to the government, although it did so based on different reasoning from the district court.  The Fourth Circuit found no errors by the district court in the second trial.  On this basis, the Fourth Circuit affirmed the district court.  

Tuomey is a nonprofit hospital located in a rural, medically underserved area of South Carolina.  Around 2000, doctors began moving from performing outpatient surgery at Tuomey to performing such surgeries in their offices or at off-site surgical centers.  This shift represented a substantial loss in income for Tuomey, which tried to prevent the loss by employing local physicians part-time.  In creating the employment contracts, starting in 2003, Tuomey sought advice from its law firm, a consulting firm, a former Inspector General with the U.S. Department of Health and Human Services, and an additional lawyer on the impact of the Stark Law, 42 U.S.C. § 1395nn.  The Stark Law prohibits physicians from referring patients to health care entities where the physician receives compensation based on the volume or value of the referrals, and prohibits hospitals from submitting Medicare claims which violate this referral rule.  The employment contracts Tuomey designed based compensation largely on the physician’s collections the previous year, and also paid an incentive bonus based on collections.  The contracts required physicians to perform outpatient surgeries at Tuomey.  Tuomey entered into these contracts with 19 physicians, but Dr. Drakeford objected, believing that the contracts violated the Stark Law.  In 2005, Tuomey and Drakeford sought the advice of attorney Kevin McAnaney, who had experience in the federal government and the Stark Law, and who noted that the employment contracts raised “‘red flags’” under the Stark Law, and would be an easy case for the government to prosecute.

Drakeford sued the hospital in a qui tam action claiming the employment contracts violated the Stark Law, and thus the hospital knowingly submitted false payment claims to Medicare in violation of the FCA.  The government intervened, and added equitable claims seeking return of payments made.  At trial, McAnaney’s testimony and opinions were excluded as either an offer to compromise or settle under Fed. R. Evid. 408, or as a violation of the duty to his clients Tuomey and Drakeford.  The trial court also excluded the deposition of Gregg Martin, Tuomey’s Senior Vice President and Chief Operating Officer, regarding a conversation he had with Tuomey’s attorney about McAnaney’s opinions as a way of getting McAnaney’s opinion admitted.  The jury found that Tuomey had violated the Stark Law, but not the FCA.  The government filed a motion for judgment on its equitable claims, and a motion for judgment as a matter of law on the FCA claim, or for a new trial due to the exclusion of McAnaney’s testimony and opinions and Martin’s deposition.  The district court denied the motion for judgment as a matter of law, but granted the motion for a second trial, finding it committed a substantial error in excluding Martin’s deposition from the trial.  The court also granted judgment for the government for nearly $45 million dollars plus interest on the Stark Law equitable claims.  On appeal, the Fourth Circuit vacated the judgment, finding that the district court’s grant of a new trial made the finding of a Stark Law violation null, and remanded for a new trial on all claims.

At the second trial, the judge admitted both the Martin deposition and McAnaney’s testimony.  The jury found for the government on both the Stark Law and FCA claims.  Based on 21,730 false claims submitted to Medicare with a value of over $39 million, and trebling of actual damages and additional civil penalty required under the FCA, the trial court entered a judgment of more than $237 million against Tuomey.  Tuomey appealed, arguing that the trial court erred in granting the government’s motion for a new trial on the FCA claim, or if not, the district court erred in either denying Tuomey’s motion for judgment as a matter of law or new trial following the second trial, or awarding damages based on the jury’s finding of an FCA claim.

The Fourth Circuit first held that the district court did not err in granting a new trial on the FCA claim.  The Fourth Circuit found that the probative value of Martin’s deposition was low, and its exclusion thus did not substantially affect the government’s rights.  The Fourth Circuit found, however, that McAnaney’s testimony was key on the issue of whether Tuomey knowingly submitted false claims in violation of the FCA, and that Tuomey failed to present a good reason for omitting the testimony.  McAnaney, the Court noted, was an expert on the Stark Law hired as an advisor by Tuomey.  The Court further reasoned that Fed. R. Evid. 408 was not properly applied to exclude McAnaney’s testimony, since McAnaney was arguably not hired to compromise or settle a disputed claim, and even if he was, Tuomey allowed admission of his testimony by defending itself on the basis of advice-of-counsel.  Finally, the Court reasoned that Tuomey did not show how McAnaney’s duty of loyalty to his clients barred admission of his testimony under Fed. R. Evid. 403.

The Fourth Circuit next held that the district court did not err in failing to grant Tuomey’s motion for judgment as a matter of law or new trial following the second trial.  The Fourth Circuit found that, as the employment contracts were actually implemented with physician pay varying to a large degree on collections, a reasonable jury could find that the contracts violated the Stark Law.  The Fourth Circuit next found that, given the totality of the evidence, which showed that Tuomey tried to find positive opinions of its employment contracts while ignoring negative opinions, a reasonable jury could find that Tuomey knowingly submitted false claims in violation of the FCA.  

The Fourth Circuit next found that the district court did not err in providing jury instructions, and thus Tuomey was not entitled to a new trial on that basis.  The Fourth Circuit found that the jury instructions on Stark Law violations properly allowed for the admission of extrinsic evidence of intent.  Further, since the jury found that Tuomey possessed scienter under the FCA, a separate jury instruction on knowledge under the Stark Law was unnecessary.  Additionally, the Court found that since Tuomey either violated the Stark Law or didn’t, there was no need to charge the jury that “claims based upon differences of interpretation of disputed legal questions are not false under the FCA.”  The Fourth Circuit found that the district court did not err by not charging the jury that Tuomey could rely on legal advice that turned out to be wrong because the instructions the district court gave covered that issue.  

Finally, the Fourth Circuit found that the district court did not err in calculating the judgment against Tuomey.  The Court reasoned, based on Stark Law language and case law, that the district court properly took into account both the inpatient and outpatient procedures in calculating the damages.  Further, Tuomey offered no evidence that a claim for an improper referral must identify the referring physician, so the district court’s calculations were proper.  Based on case law, the Court found that the district court properly calculated damages based on Medicare forms UB-92/04 submitted rather than cost reports.  Based on the statutory language of the Stark Law, the court held that the district court properly based damages on the full amount of claims submitted, rather than on the difference between the services provided and the price paid.  Finally, the Court found that the judgment against Tuomey was large, but not unconstitutional under the excessive fines clause of the Eighth Amendment or the due process clause of the Fifth Amendment to the U.S. Constitution.  It found the judgment reasonable given the repeated actions and intentional conduct at issue here.  

For the above reasons, the court affirmed the holding of the district court.

Judge Wynn wrote a concurring opinion to point out that the outcome in this case, with which he agreed, meant that a community hospital in an underserved community would likely be forced to close.  He was concerned about this outcome given the complexities of the Stark Law, which make it difficult for medical entities to follow.  The majority opinion acknowledged this concern, and left the issue to be addressed by Congress.

Full Opinion

Katherine H. Flynn

 

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