United States ex rel.Drakeford v. Tuomey Healthcare Sys., Inc.

• Decision Date: 30 March 2012
• Docket Number: No. 10–1819.,10–1819.
• Parties: UNITED STATES of America ex rel. Michael K. DRAKEFORD, M.D., Plaintiff–Appellee, v. TUOMEY HEALTHCARE SYSTEM, INCORPORATED, Defendant–Appellant, v. Womble, Carlyle, Sandridge and Rice Law Firm; Wesmark Ambulatory Surgery Center, LLC; James Arthur Goodson, III, M.D.; Kim Saccone, Movants.American Hospital Association, Amicus Supporting Appellant.
• Court: U.S. Court of Appeals — Fourth Circuit

675 F.3d 394

UNITED STATES of America ex rel. Michael K. DRAKEFORD, M.D., Plaintiff–Appellee,

v.TUOMEY HEALTHCARE SYSTEM, INCORPORATED, Defendant–Appellant,

v.Womble, Carlyle, Sandridge and Rice Law Firm; Wesmark Ambulatory Surgery Center, LLC; James Arthur Goodson, III, M.D.; Kim Saccone, Movants.American Hospital Association, Amicus Supporting Appellant.

No. 10–1819.

United States Court of Appeals, Fourth Circuit.

Argued: Jan. 20, 2012.Decided: March 30, 2012.

ARGUED: William Walter Wilkins, Nexsen Pruet, LLC, Greenville, South Carolina; Arthur Camden Lewis, Lewis, Babcock & Griffin, LLP, Columbia, South Carolina, for Appellant. Tracy Lyle Hilmer, United States Department of Justice, Washington, D.C., for Appellee. ON BRIEF: Kirsten E. Small, Nexsen Pruet, LLC, Greenville, South Carolina; Mary G. Lewis, W. Jonathan Harling, Lewis & Babcock, LLP, Columbia, South Carolina; Daniel M. Mulholland, III, Horty, Springer & Mattern, PC, Pittsburgh, Pennsylvania, for Appellant. Tony West, Assistant Attorney General, Michael D. Granston, Michael S. Raab, Niall M. O'Donnell, United States Department of Justice, Washington, D.C.; G. Norman Acker, III, Assistant United States Attorney, Office of the United States Attorney, Raleigh, North Carolina, for the United States. Sandra L.W. Miller, Womble Carlyle Sandridge & Rice, PLLC, Greenville, South Carolina; Kevin Mitchell Barth, Ballenger, Barth & Hoefer, LLP, Florence, South Carolina, for Michael K. Drakeford, M.D. Melinda R. Hatton, Maureen D. Mudron, American Hospital Association, Washington, D.C.; Jonathan L. Diesenhaus, Jessica L. Ellsworth, Hogan Lovells US LLP, Washington, D.C., for Amicus Supporting Appellant.

Before: DUNCAN, WYNN, and DIAZ, Circuit Judges.

Vacated and remanded by published opinion. Judge DUNCAN wrote the opinion, in which Judge DIAZ joined. Judge WYNN wrote a separate opinion concurring in the result.

OPINION

DUNCAN, Circuit Judge:

This appeal arises from the district court's order granting final judgment to the United States upon equitable ¹ claims of payment by mistake of fact and unjust enrichment against appellant Tuomey Healthcare System, Inc. (“Tuomey”) arising out of alleged violations of the Social Security Act, and awarding damages in the amount of $44,888,651.00, plus pre-and post-judgment interest.

In the underlying action, the United States alleged that Tuomey entered into compensation arrangements with certain physicians that violated section 1877 of the Social Security Act, commonly known as the Stark Law, 42 U.S.C. § 1395nn. Because the Stark Law does not create its own right of action, the United States sought relief under the False Claims Act (“FCA”), 31 U.S.C. §§ 3729–33.² The United States further asserted equitable claims premised on the alleged Stark Law violation, including payment under mistake of fact and unjust enrichment. A jury returned a verdict finding that Tuomey did not violate the FCA, but responded affirmatively to a special interrogatory regarding whether it had violated the Stark Law. The district court set aside the jury verdict and ordered a new trial on the FCA claim. It further ordered that, based on the jury verdict, the United States was entitled to judgment on its equitable claims.

Because we conclude that the district court's judgment in the United States' favor violated Tuomey's Seventh Amendment right to a jury trial, we vacate the judgment and remand for further proceedings. Because we are remanding this case, we also address other issues raised on appeal that are likely to recur upon retrial.

I.

A.

We begin by setting out the statutory framework that forms the basis for the United States' allegations in the underlying proceeding. We first set forth the provisions of the FCA, as relevant to this appeal. We then discuss the pertinent provisions of the Stark Law.

1.

The FCA is a statutory scheme designed to discourage fraud against the federal government. 31 U.S.C. § 3729(a)(i) provides, in relevant part, that “any person who ... knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval ... is liable to the United States Government for a civil penalty of not less than $5,000 and not more than $10,000 ... plus 3 times the amount of damages which the Government sustains because of the act of that person.” Section 3729(b)(1) defines the term “knowingly” to “mean that a person, with respect to information ... has actual knowledge of the information; (ii) acts in deliberate ignorance of the truth or falsity of the information; or (iii) acts in reckless disregard of the truth or falsity of the information,” with the additional provision that “no proof of specific intent to defraud” is required. Section 3729(b)(2) further defines, in relevant part, the term “claim” as “any request or demand, whether under a contract or otherwise, for money or property ... that ... is presented to an officer, employee, or agent of the United States.”

2.

The Stark Law was enacted to address overutilization of services by physicians who stood to profit from referring patients to facilities or entities in which they had a financial interest. The Stark Law, and regulations promulgated pursuant thereto (“Stark Regulations”) ³ prohibit a physician who has a “financial relationship” with an entity—such as a hospital—from making a “referral” to that hospital for the furnishing of certain “designated health services” ⁴ for which payment otherwise may be made by the United States under the Medicare program. 42 U.S.C. § 1395nn(a)(1); 42 C.F.R. § 411.353(a).⁵ A hospital may not submit for payment a Medicare claim for services rendered pursuant to a prohibited referral. 42 U.S.C. § 1395nn(a)(1)(B); 42 C.F.R. § 411.353(b). The United States may not make payments pursuant to such a claim, and hospitals must reimburse any payments that are mistakenly made by the United States. 42 U.S.C. § 1395nn(g)(1); 42 C.F.R. § 411.353(c), (d). However, when a physician initiates a service and personally performs it, that action does not constitute a referral under the Stark Law. 42 U.S.C. § 1395nn(h)(5); 42 C.F.R. § 411.351.

The Stark Law and Stark Regulations define a “financial relationship” to include “a compensation arrangement” in which “remuneration” is paid by a hospital to a referring physician “directly or indirectly, overtly or covertly, in cash or in kind.” 42 U.S.C. §§ 1395nn(a)(2), (h)(1); 42 C.F.R. § 411.354. An indirect financial relationship exists if, inter alia, there is an indirect compensation arrangement between the referring physician and an entity that furnishes services. An indirect compensation arrangement exists if, inter alia, the referring physician receives aggregate compensation that “ varies with, or takes into account, the volume or value of referrals or other business generated by the referring physician for the entity furnishing” services. 42 C.F.R. § 411.354(c)(2)(ii) (emphasis added).⁶

The Stark Regulations provide that certain enumerated compensation arrangements do not constitute a “financial relationship.” 42 C.F.R. § 411.357. Significantly for our purposes, a subset of indirect compensation arrangements do not constitute a financial relationship if the compensation received by the referring physician is (1) equal to the “fair market value for services and items actually provided”; ⁷ (2) “not determined in any manner that takes into account the volume or value of referrals or other business generated by the referring physician” for the hospital; and (3) “commercially reasonable.” ⁸ 42 C.F.R. § 411.357(p). Subsection 411.357(p) is known as the “indirect compensation arrangements exception.” See, e.g., 72 Fed.Reg. at 51,014.

B.

We now turn to the contracts that gave rise to this litigation. Tuomey is a private, nonprofit corporation incorporated in the State of South Carolina. It owns and operates Tuomey Hospital, located in Sumter County, South Carolina. Tuomey Hospital provides inpatient and outpatient health care services. Most of the physicians who provide medical services at Tuomey Hospital are not employed by Tuomey but rather practice medicine through specialty physician groups organized as professional corporations.

In early 2003, the members of Sumter County's gastroenterology specialty group informed Tuomey that they were considering whether to perform outpatient surgical procedures in-office, rather than at Tuomey Hospital. Other specialty physician groups that performed outpatient procedures at Tuomey Hospital were also considering whether to relocate such procedures. The loss of these outpatient surgical procedures posed a serious financial concern for Tuomey. To dissuade the specialist physicians from performing their outpatient procedures elsewhere, Tuomey sought to enter into agreements with specialist physicians to perform outpatient procedures solely at Tuomey Hospital. Specifically, during 2004 and 2005, Tuomey negotiated with all of the specialist physicians on its medical staff. One of those physicians was appellee Dr. Michael Drakeford, an orthopedic surgeon, with whom negotiations unsuccessfully ended in 2005.

Between January 1, 2005, and November 15, 2006, Tuomey entered into compensation contracts with 19 specialist physicians. All of the contracts included essentially the same terms. Each contract specified that the physician was required to provide outpatient procedures at Tuomey Hospital or at facilities owned or operated by it. Under each contract, Tuomey was solely responsible for billing and collections from patient and third-party payors for outpatient procedures, and the physician expressly reassigned to Tuomey all benefits payable to the physician by third party payors, including Medicare and Medicaid. Tuomey agreed to pay each physician an annual base salary that fluctuated based on Tuomey's net cash collections for the outpatient procedures. Tuomey further agreed to pay each physician a “productivity bonus” equal to 80...