Administrative – Stark Law Violations – False Claims Act – Constitutional – Jury Trial – Hospital

U.S. ex rel. Michael K. Drakeford MD v. Tuomey Healthcare System Inc. (Lawyers Weekly No. 001-088-12, 31 pp.) (Duncan, J.) No. 10-1819, March 30, 2012; USDC at Columbia, S.C. (Perry, J.) 4^th Cir. Click here for the full-text opinion.

Holding: A federal appeals court vacates a $45 million judgment against a Sumter, S.C., health care system for Stark Law violations and sends the case back, saying the district court’s handling of the case violated the defendant’s Seventh Amendment right to a jury.

In early 2003, the members of Sumter County’s gastroenterology specialty group informed defendant Tuomey Healthcare System they were thinking of handling outpatient surgical procedures in-office, rather than at Tuomey Hospital. Other specialty groups were considering the same practice. Tuomey began negotiating with all specialist groups on its medical staff and ultimately entered into compensation contracts with 19 specialist physicians that required the physicians to provide outpatient procedures at Tuomey facilities. Each contract had a 10-year term and provided the doctor would not compete with Tuomey during the term of the contract or for two years thereafter.

In 2005, one of the doctors not under contract, orthopedic surgeon Dr. Michael Drakeford, filed a qui tam action under the False Claims Act. The government intervened, then filed its own action. Federal prosecutors alleged Tuomey had financial arrangements with doctors that violated the “Stark Law.”

The Stark Law, 42 U.S.C. §1395nn, is intended to address overuse of services by physicians who stand to profit from referring patients to facilities or entities in which they have a financial interest.

In order to collect on Stark Law violations, the government sued Tuomey under the FCA, 31 U.S.C. §§ 3729-33, a statutory scheme that prohibits false claims against the government. Prosecutors said Tuomey falsely certified compliance with the Stark Law when it submitted claims for Medicare payment. A provider liable for Stark Law violations must reimburse payment mistakenly made under the Medicare/Medicaid program.

In the trial court, a jury initially found Tuomey did not violate the FCA but did find Tuomey liable for Stark Law violations through a special interrogatory. The district court set aside the jury verdict, ordered a new trial on the FCA claim and held that the government was entitled to judgment on its equitable claims, based on the jury verdict. The trial court entered judgment for the government in the amount of $44,888.651, plus pre- and post-judgment interest.

On appeal, Tuomey contends the district court violated its Seventh Amendment rights by basing its judgment with respect to the equitable claims on the jury’s interrogatory answer regarding the Stark Law, even though the district court already had set aside the jury verdict in its entirety. We agree.

The Seventh Amendment demands that facts common to legal and equitable claims be adjudicated by a jury. Whether there was a financial relationship between Tuomey and the physicians that violated the Stark Law is a factual predicate to liability on the equitable claims. The FCA claims too were premised on the existence of such an illegal relationship. As such, the factual issue of whether a financial relationship prohibited by the Stark Law existed is common to the equitable claims and the FCA claim. It follows that the district court was required to submit that issue to the jury before it could resolve the government’s equitable claims. Here, the district court failed to do precisely that. As a result of the district court action, the jury’s interrogatory answer regarding the Stark Law is now a legal nullity. In other words, following the order granting the Rule 59 motion, a jury had yet to determine the common issue necessary to resolution of both the FCA claim and the equitable claims, i.e., whether Tuomey violated the Stark Law. In granting judgment to the government on the equitable claims, the district court impermissibly resolved that common issue before a jury had adjudicated it, thereby depriving Tuomey of its right to a jury trial.

That error was not harmless, as both sides introduced conflicting evidence regarding whether Tuomey’s contracts with the physicians violated the Stark Law.

Turning to issues that are likely to recur on remand, we reject Tuomey’s argument that the physicians were not making referrals – as that term is defined in the Stark Law – pursuant to the contracts. We further conclude it is for the jury to determine whether the contracts violated the fair market value standard by taking into account anticipated referrals in computing the physicians’ compensation.

Vacated and remanded.

Concurrence

Wynn, J., concurring in result: Because I agree the proper disposition of this case is to vacate the district court judgment against defendant Tuomey and remand for further proceedings, I concur in the result. I write separately because I come to that conclusion on different grounds and because I am unable to join in part III of the majority opinion, which I find to be advisory in nature.