United States Ex Rel. Michael K. Drakeford, M.D., v. Tuomey

Facts

D is a nonprofit hospital. Most of the physicians that practiced at D were not directly employed but instead were members of independent specialty practices. The trend was that doctors who previously performed outpatient surgery at D began doing so in their own offices or at off-site surgery centers. D suffered a substantial loss in fees. D stood to lose $8 to $12 million over a thirteen-year period. D sought to negotiate part-time employment contracts with a number of local physicians. D was well aware of the Stark Law 42 U.S.C. § 1395nn. Under that law 'a hospital may not submit for payment a Medicare claim for services rendered pursuant to a prohibited referral.' D sought the advice of its longtime counsel, Nexsen Pruet, on the Stark Law implications from the new employment contracts. Pruet engaged Cejka Consulting, a national consulting firm that specialized in physician compensation, to provide an opinion concerning the commercial reasonableness and fair market value of the contracts. D conferred with Richard Kusserow, a former Inspector General for the United States Department of Health and Human Services, and later, with Steve Pratt, an attorney at Hall Render, a prominent healthcare law firm. Under the contracts, each physician was paid an annual guaranteed base salary. That salary was adjusted based on the amount the physician collected from all services rendered the previous year. The bulk of the compensation was earned in the form of a productivity bonus, which paid the physicians eighty percent of the amount of their collections for that year. The physicians were also eligible for an incentive bonus of up to seven percent of their earned productivity bonus. D agreed to pay for the physicians' medical malpractice liability insurance as well as their practice group's share of employment taxes. The physicians were also allowed to participate in D's health insurance plan. D agreed to absorb each practice group's billing and collections costs. The physicians could maintain their private practices but were required to perform outpatient surgical procedures exclusively at D. The physicians also agreed not to perform outpatient surgical procedures within a thirty-mile radius of D for two years after the expiration or termination of the ten-year contracts. Drakeford (P), an orthopedic surgeon, believed that the proposed contracts violated the Stark Law because the physicians were being paid in excess of their collections. He refused to enter into a contract. D suggested a joint venture as an alternative business arrangement, whereby 'doctors would become investors . . . in . . . a management company that would provide day-to-day management of the outpatient surgery center,' and both D and its co-investors would 'receive payments based on that management [structure].' Drakeford (P) declined. D and Drakeford (P) sought the advice of Kevin McAnaney, an attorney in private practice with expertise in the Stark Law. McAnaney had formerly served as the Chief of the Industry Guidance Branch of the United States Department of Health and Human Services Office of Counsel to the Inspector General. McAnaney wrote a 'substantial portion' of the regulations implementing the Stark Law. McAnaney advised that the contracts raised significant 'red flags' under the Stark Law. McAnaney warned D that the contracts presented 'an easy case to prosecute' for the government. Drakeford (P) sued D under the qui tam provisions of the FCA, alleging that because the part-time employment contracts violated the Stark Law, D had knowingly submitted false claims for payment to Medicare. P intervened in the action and filed additional claims seeking equitable relief for payments made under mistake of fact and unjust enrichment theories. In the first trial the jury returned a verdict finding that, while D had violated the Stark Law, it had not violated the FCA. The court granted P's motion for a new trial. The court granted a new trial as to the entirety of the claim. The district court entered judgment for the government on its equitable claims based on the jury's finding of a Stark Law violation and ordered D to pay damages of $44,888,651 plus pre-and post-judgment interest. On appeal, the judgment was vacated concluding that the jury's finding of a Stark Law violation was a common factual issue necessary to the resolution of both the equitable claims and the FCA claim. Because the district court rendered the jury's verdict finding a Stark Law violation a 'legal nullity' when it granted the government's motion for a new trial, the appeals court held that the court deprived D of its Seventh Amendment right to a jury trial by entering judgment on the equitable claims. The case was remanded for a new trial as to all claims. A new presiding judge allowed P to introduce the previously excluded deposition testimony and also allowed McAnaney to testify. The jury found that D violated both the Stark Law and the FCA. It found that D had submitted 21,730 false claims with a total value of $39,313,065. The district court trebled the actual damages and assessed an additional civil penalty, for a judgment of $237,454,195. D appealed. 

Issues

Rule of Law

Holding and Decision

Legal Analysis

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