Tuomey: Physician Contracts, the FCA Judgment and the Later Settlement

The Tuomey physician compensation Stark case reached a $72.4 million settlement resolving a judgment over hospital contracts that tied physicians’ pay to Medicare referrals. The contracts kept outpatient procedures at the hospital, where each procedure generated both physician compensation and hospital facility revenue. For someone inside physician contracting or hospital finance, the case turns on a recognizable question: what was the hospital really paying to keep?

Tuomey Healthcare System was a nonprofit hospital in Sumter, South Carolina. An orthopedic surgeon who declined its proposed contract brought the qui tam case, and the government joined it. The surgeon’s objection went to the economics of the deal: physicians would receive more than their professional collections, while the hospital retained the facility fees their procedures generated.

The Hospital Revenue Behind the Contracts

Tuomey wanted to keep outpatient surgery from moving to physicians’ offices and competing surgery centers. The appeals court’s opinion describes what was at stake: Tuomey estimated losing $8 to $12 million over thirteen years from gastrointestinal procedure fees alone. The part-time employment contracts were its answer to that competition.

The professional fee and facility fee pay different parts of the same encounter. The Robert Wood Johnson Foundation’s 2008 report, Physician Self-Referral and Physician-Owned Specialty Facilities, explains why access to both streams creates a financial incentive beyond payment for a doctor’s time.

In Tuomey’s case, the court described expected losses of $1.5 million to $2 million a year from paying physicians above their collections, before counting facility fees. We see the bargain in those losses: the hospital could pay more for the doctors’ work than it collected because it wanted the facility business attached to it. The real prize.

What Is a Physician Self-Referral?

A physician self-referral occurs when a physician sends a patient for services to a facility with which the physician has a financial relationship. At Tuomey, the relevant relationship came through compensation, and the referral included the hospital facility component of a procedure the physician personally performed. The self-referral issue reached both the doctor’s pay and the hospital’s claim for that encounter.

The foundation’s research synthesis explains why these incentives matter to patients and government health care spending. Looking across self-referral studies, it concluded:

The report identifies incentives both to recommend additional services and to steer patients toward a financially connected facility. Tuomey’s contracts put the destination directly into the bargain by requiring outpatient surgery at its hospital. We see the patient-facing question in that requirement: whose interests were deciding where the procedure happened?

What the Physician Contracts Paid For

Tuomey signed part-time employment contracts with 19 physicians who could continue their private practices. Each received an annual base salary adjusted according to the previous year’s collections, a productivity bonus equal to eighty percent of that year’s collections, and eligibility for an incentive bonus of up to seven percent of the earned productivity bonus. The payment formula followed the work brought through the hospital.

The package extended beyond salary and bonuses. Tuomey paid malpractice insurance and the practice group’s share of employment taxes, offered participation in its health insurance plan, and absorbed billing and collection costs.

The contracts lasted ten years and required outpatient surgical procedures exclusively at Tuomey. They also restricted competing surgery within thirty miles for two years after the contracts expired or ended. A physician retained a private practice while committing the outpatient surgical business to the hospital for a long term.

The court examined how the contracts actually operated. More procedures meant more facility fees for Tuomey and more compensation for the physicians through their base salaries and productivity bonuses. Tuomey’s former chief financial officer confirmed that both the doctor and the hospital received more money each time a physician performed a qualifying Medicare procedure there.

The Warning Tuomey Tried to Leave Behind

Tuomey received a specific warning that the proposed contracts paid above fair market value for referrals. The hospital and the orthopedic surgeon jointly consulted a Stark specialist, who questioned compensation above collections before practice expenses were even deducted. He said the arrangement would not pass the “red face test” and presented “an easy case to prosecute.” The long contract term and restriction on competing procedures reinforced his warning about referral payments.

The court’s account describes what happened next: Tuomey refused to let the specialist put his concerns in writing and ended his engagement. A later adviser gave favorable opinions without being told about that earlier assessment. He relied on the valuation consultant’s conclusion without examining how it had been reached, and did not know the physicians’ earlier earnings or the hospital’s expected losses before facility fees.

We see a hospital seeking approval on an incomplete account of its own deal. Tuomey had asked for expert judgment, then kept the adverse judgment out of the information given to another adviser. The court described evidence of shopping for favorable opinions while ignoring negative assessments. The jury found that Tuomey knowingly submitted false claims.

How Does the Stark Law Affect Physician Self-Referrals?

The Stark Law bars Medicare billing for covered services referred through a prohibited financial relationship. In Tuomey’s case, the jury found that the physician contracts violated that rule and that the hospital knowingly submitted 21,730 false Medicare claims worth $39,313,065. The underlying claims were the government’s loss before the court increased damages and added civil penalties.

Tuomey argued that the government had received the services it paid for. The court’s answer was that Medicare could not pay for those prohibited referrals in the first place, so the loss was the full amount paid. The jury could also count inpatient claims generated by the affected physicians, even though their compensation contracts addressed outpatient procedures.

The hospital’s UB-92/04 forms connected the contracts to the claims for Medicare payment. The court accepted evidence identifying the attending or operating physician on the claim as evidence of a referral, linking the physician’s financial relationship to the hospital’s bill.

The Halifax Hospital case shows another way referral revenue entered physician pay. The government alleged that oncology bonuses included the value of drugs and tests the physicians ordered, and reported a court ruling that the oncologist contracts violated Stark. Tuomey’s formula followed collections from procedures performed at the hospital, while Halifax’s allegations focused on what went into the bonus calculation. In both, the useful question for an insider is which revenue earned the physician more money.

The Judgment and the Later Tuomey Settlement

The court entered a $237,454,195 False Claims Act judgment against Tuomey in October 2013. That judgment combined tripled damages with civil penalties.

The Justice Department announced the later settlement on October 16, 2015. We see a sharp gap between the judgment for knowing false claims and the smaller payment the government agreed to accept. The agreement required Tuomey’s sale to Palmetto Health. It also required an independent organization to review physician and other referral-source arrangements during a five-year Corporate Integrity Agreement.

What Evidence Does a Whistleblower Need?

Evidence in a physician compensation case connects the contract, the pay calculation, the referral revenue and the government claims. Tuomey shows why the response to a warning belongs in that same account: management’s knowledge was part of what the jury had to decide. A favorable valuation was only one piece of that story.

Someone in contracting may know what procedures the agreement committed to the hospital. A finance employee may know which collections drove compensation and which facility revenue made the arrangement attractive. A physician or compliance employee may know what concerns reached management and how management responded. We connect those perspectives with the billing evidence to assess the arrangement behind the Medicare claims.

How Much of a Settlement Does a Whistleblower Get?

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. For Tuomey, the Justice Department announced that the orthopedic surgeon would receive approximately $18.1 million as a whistleblower reward under the settlement.

You Know What the Contract Was Buying

If you saw a compensation model built around keeping hospital referrals, or a warning set aside to get the deal approved, talk with our whistleblower experts about that arrangement. We work with you to build your strongest hospital referral whistleblower case around the contracts, the money and the decisions you know, and bring in physician compensation whistleblower lawyers experienced in hospital referral cases. We stay beside you as partners throughout the case, with the healthcare expertise to connect the pay arrangement to the claims it produced.