U.S. EX REL. DRAKEFORD v. TUOMEY HEALTHCARE SYSTEM No. 10-1819.
675 F.3d 394 (2012)
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.
United States Court of Appeals, Fourth Circuit.
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.
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.
DUNCAN, Circuit Judge:
This appeal arises from the district court's order granting final judgment to the United States upon equitable
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.
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
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.
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."
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")
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).
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";
We now turn to the contracts that gave rise to this litigation. Tuomey is a private,
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 percent of the net collections. Moreover, each physician was eligible for an incentive bonus that could total up to 7 percent of the productivity bonus. Each contract had a ten-year term and provided that the physicians would not compete with Tuomey during the term of the contract and for two years thereafter.
Pursuant to the contracts, the physicians performed outpatient procedures at Tuomey facilities. The outpatient procedures generated two billings: a professional fee for the physician for his or her services, also known as the "professional component"; and a facility fee for Tuomey for providing the space, the nurses, the equipment, etc., also known as the "facility component" or "technical component."
In October 2005, Drakeford filed an action in the District Court for the District of South Carolina under the qui tam provisions of the FCA, 31 U.S.C. § 3730(b). In September 2007, the United States intervened in Drakeford's qui tam action as to the issue of whether Tuomey submitted false claims as a result of the contracts with the physicians.
Specifically, Count I alleged that Tuomey knowingly presented, or caused to be presented, false and fraudulent claims for payment or approval to the United States, including those claims for reimbursement for services rendered to patients who were referred by physicians with whom Tuomey had entered into financial relationships— i.e., the contracts—in violation of the Stark Law. Count I further sought the amount of the United States' damages, trebled as required by law, and such civil penalties as are required by law.
Count IV alleged that the United States had compensated Tuomey as a result of mistaken understandings of fact. Specifically, it alleged that Tuomey was not entitled to receive payment from the United States for services rendered by any physician who was in a financial relationship prohibited by the Stark Law, and that the United States paid Tuomey for such prohibited claims under the mistaken belief that Tuomey was entitled to receive payment for these claims. Accordingly, the United States claimed that Tuomey was liable to it for the amount of the payments made in error to Tuomey by the United States.
Count V alleged that by obtaining government funds to which it was not entitled, Tuomey was unjustly enriched. The United States claimed that Tuomey was liable to it for such amounts, or the proceeds therefrom, to be determined at trial.
The government's claims under the FCA were tried to a jury in March 2010. At the conclusion of the evidence, the district court instructed the jury that the United States had brought the case
The district court further instructed the jury regarding the elements of a Stark Law violation, as well as the elements of an FCA violation. With regard to the Stark Law, the district court instructed the jury to conduct a two-step inquiry to determine whether Tuomey violated the statute. At step one of the inquiry, the jury was to determine whether the contracts are indirect compensation arrangements as defined by the Stark Law and Stark Regulations. For the jury to find in favor of the government, it was required to prove that the physicians received aggregate compensation from Tuomey, and that such compensation varied with or otherwise took into account the volume or value of the physicians' referrals to Tuomey. If the jury answered step one in the affirmative, at step two of the inquiry, it was to determine whether Tuomey had proven by a preponderance of the evidence that the contracts fell within the indirect compensation arrangement exception. The district court further instructed the jury to determine the number and value of the claims for services that the physicians referred pursuant to the contracts, and for which Tuomey received payment from Medicare.
With regard to the FCA claim, the district court instructed the jury:
J.A. 989. With respect to the second element of an FCA violation, i.e., whether the claims were false or fraudulent, the district court instructed the jury:
J.A. 990. With respect to the third element of an FCA violation, i.e., whether Tuomey knew the claims for payment were false or fraudulent, the district court instructed the jury:
J.A. 990-91. The district court further instructed the jury with respect to damages under the FCA:
The district court provided the jury with a verdict form, with respect to which it instructed the jury:
On March 29, 2010, the jury reached a verdict. In subsection A of the verdict form, the jury indicated that it found that Tuomey violated the Stark Law. In subsection B of the verdict form, the jury indicated that it found that Tuomey did not violate the FCA. Because the jury found no FCA violation, it indicated no response to either the second or third interrogatories in subsection B, i.e., the amount of damages, if any, and the number of false claims, if any.
Subsequent to the jury's verdict, the parties made several post-verdict motions. Tuomey moved for judgment in its favor on the government's equitable claims, including payment under mistake of fact and unjust enrichment. The United States, in response, moved for judgment in its favor on those claims. The United States further moved for judgment as a matter of law under Federal Rule of Civil Procedure 50 on the FCA claim, or alternatively for a new trial under Federal Rule of Civil Procedure 59 on that claim, based on its assertion that the district court erroneously excluded certain evidence regarding Tuomey's knowledge.
On June 3, 2010, the district court conducted a hearing with respect to those post-verdict motions. The district court stated that it would deny the government's Rule 50 motion, but grant the government's Rule 59 motion. Although the government sought a new trial only on the issue of knowledge under the FCA, the district court declined to grant a new trial solely "on the limited question of knowledge," but instead granted a new trial "on the whole issue of the [FCA]." J.A. 1119-20. The district court nevertheless indicated that it would grant a judgment in the United States' favor on the equitable claims based on the jury's finding that Tuomey had violated the Stark Law.
On July 13, 2010, the district court issued two orders. In the first, the district court granted the government's motion for
That same day, the district court entered a judgment indicating that the United States should recover from Tuomey on Counts IV and V of its complaint in the amount of $44,888,651.00, plus pre- and post-judgment interest. The judgment further indicated that "[t]his action was tried by a jury, with the [district judge] presiding, and the jury has rendered a verdict by answering special interrogatories."
On appeal, Tuomey makes several arguments. Most significantly, Tuomey contends that the district court violated its Seventh Amendment rights by basing its judgment with respect to the equitable
The Seventh Amendment states that: "In Suits at common law ... the right of trial by jury shall be preserved, and no fact tried by a jury, shall be otherwise re-examined in any Court of the United States, than according to the rules of the common law." U.S. Const. amend. VII; see also Fed.R.Civ.P. 38(a) ("The right of trial by jury as declared by the Seventh Amendment to the Constitution ... is preserved to the parties inviolate."). We have held that the Seventh Amendment right extends "to all suits, whether at equitable or arising under federal legislation, where legal rights are involved." Pandazides, 13 F.3d at 828.
The Seventh Amendment demands that facts common to legal and equitable claims be adjudicated by a jury. Beacon Theatres, Inc. v. Westover, 359 U.S. 500, 510-11, 79 S.Ct. 948, 3 L.Ed.2d 988 (1959)
We now apply the foregoing principles to this case. As already noted, whether
Here, the district court failed to do precisely that. Although it tried the FCA claim to a jury, and the jury returned a verdict on that claim that indicated that Tuomey had violated the Stark Law but had not violated the FCA, the district court set that verdict aside when it granted the government's motion for a new trial under Rule 59, specifically ordering that the new trial would encompass the whole FCA claim, including whether Tuomey had violated the Stark Law.
Having concluded that the district court denied Tuomey's Seventh Amendment right to a jury trial, we must decide whether the denial constituted harmless error. Error is harmless only if the district court would have granted judgment as a matter of law to the prevailing party, i.e., if "the evidence is such, without weighing the credibility of the witnesses, that there is only one conclusion that reasonable jurors could have reached." Pandazides, 13 F.3d at 827 (quoting Keller v. Prince George's Cnty., 827 F.2d 952, 955 (4th Cir.1987)). Error is not harmless where both sides introduce sufficient conflicting evidence on the relevant questions such that the district court could not have granted a motion for judgment as a matter of law. Id. at 833.
Here, both sides introduced conflicting evidence regarding whether Tuomey's contracts with the physicians violated the Stark Law. We find that the record before us is insufficient to assess whether the district court could have granted judgment as a matter of law. Notably, as we discuss below in Part III, the jury must determine on remand whether the contracts took into account the volume or value of referrals. If it so finds, the jury must further determine whether Tuomey could bear its burden of proof with respect to the indirect compensation arrangement exception. Finally, if the jury finds that the contracts created a financial relationship—as defined by the Stark Law—between Tuomey and the physicians, it must determine the number and value of claims Tuomey presented to Medicare for payment of facility fees resulting from the facility component referrals made by the physicians, and for which it received payment.
Because we are remanding this case, we will briefly address other issues
As already noted, the Stark Law and Stark Regulations define a "referral," in relevant part, as the request by a physician for a service for which payment may be made under Medicare, but not including any services performed or provided by the referring physician. 42 U.S.C. § 1395nn(h)(5); 42 C.F.R. § 411.351. Neither the statute nor the regulation addresses whether a facility component that results from a personally performed service constitutes a referral. In promulgating the final rule on referrals, however, HCFA commented that the personal services exception does not extend to a facility fee a hospital bills for a facility component resulting from a personally performed service:
66 Fed.Reg. at 941.
Applying the Stark Law and Stark Regulations, as interpreted by the agency,
Having concluded that the physicians were making referrals to Tuomey, we now turn to the question of whether the contracts implicate the Stark Law's "volume or value" standard. As already noted, the regulatory definition of "indirect compensation arrangement" requires that the aggregate compensation received by the physician "var[y] with, or take into account, the volume or value of referrals or other business generated by the referring physician." 42 C.F.R. § 411.354(c)(2)(ii) (emphasis added). Notably, the government contends that Tuomey's conduct fits within this definition because it included a portion of the value of the anticipated facility component referrals in the physicians' fixed compensation.
In determining whether contracts that are found to have taken into account anticipated referrals implicate the "volume or value" standard, we look to the Stark Law, Stark Regulations, and the official agency commentary.
We begin by observing that the official agency commentary explains that "[a]rrangements under which a referring physician receives compensation tied to the volume or value of his or her referrals ... are the very arrangements at which [the Stark Law] is targeted." 66 Fed.Reg. at 868. We further note that the Stark Regulations and the agency commentary specifically address circumstances in which compensation that takes into account anticipated referrals implicates the "volume or value" standard. The Stark Regulations, for instance, define "fair market value," in pertinent part, as compensation that "has not been determined in any manner that takes into account the volume or value of anticipated or actual referrals." 42 C.F.R. § 411.351 (emphasis added). The official agency commentary to the Phase I rules notes that the Stark Law "establishes a straightforward test that compensation arrangements should be at fair market value for the work or service performed," and should not be "inflated to compensate for the physician's ability to generate other revenues." 66 Fed.Reg. at 877. It further notes that "[i]n order to establish a `bright line' rule, we are applying this interpretation of the volume or value standard uniformly to all provisions under [the Stark Law and Stark Regulations] where the language appears (for example, . . . indirect compensation arrangements)." Id. The commentary further specifies that compensation arrangements that take into account the volume or value of anticipated referrals implicate the volume or value standard:
Id. (emphasis added).
We conclude from the regulatory definition of fair market value and the applicable agency commentary that compensation based on the volume or value of anticipated
Accordingly, the question, which should properly be put to a jury, is whether the contracts, on their face, took into account the value or volume of anticipated referrals. As the Stark Regulations and the agency commentary indicate, compensation arrangements that take into account anticipated referrals do not meet the fair market value standard. Thus, 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.
For the foregoing reasons, we vacate the district court's July 13, 2010 judgment, and remand for further proceedings.
VACATED AND REMANDED
WYNN, Circuit Judge, concurring in the result:
Because I agree that the proper disposition of this case is to vacate the district court's judgment against Defendant Tuomey Healthcare System, Inc. and remand for further proceedings, I concur in the result reached by the majority opinion. I write separately because I come to that conclusion on different grounds, and because
At the outset, I emphasize my substantial agreement with the reasoning so ably articulated by my colleagues in the majority, particularly their observation that "the jury's interrogatory answer regarding the Stark Law is now a legal nullity." Ante at 405. Given that the district court set aside the jury's verdict in its entirety, it must follow that the jury's answer to an interrogatory, which was a necessary condition to the jury's verdict, must itself also be a nullity. Notwithstanding that ruling, however, in its order entering judgment against Defendant, the district court found as fact that "[p]ursuant to the jury verdict, Tuomey violated the Stark Law." J.A. 136.
Indeed, the sole basis for the district court's judgment against Defendant on the equitable claims was the jury's finding of a Stark Law violation.
In addition, I cannot join Part III of the majority opinion, which, in my view, amounts to an advisory opinion on the issues of "whether the facility component of the services performed by the physicians pursuant to the contracts ... constituted a `referral' within the meaning of the Stark Law and Stark Regulations," as well as "whether ... the contracts implicate the `volume or value' standard under the Stark Law." Ante at 406; see United States v. Blair, 661 F.3d 755, 773 (4th Cir.2011) ("[R]endering advisory opinions on cases not before us is not the office of this court.").
Under the district court's order for a new trial on the entire Government's False Claims Act (FCA) claim against Defendant and the majority's holding here, no legal issues remain for us to resolve prior to further proceedings. We have fully disposed of the matters before this Court, and the conclusions set forth in Part III are thus unnecessary either to the disposition or to the retrial of this case. Accordingly, there is no need to delve into these questions now and potentially usurp the
To be sure, the three cases cited in the majority opinion for the proposition that an appellate court may properly "address other issues raised on appeal that are likely to recur," ante at 405-06, are distinguishable in two critical ways from the situation presented here: (1) each identified and rectified actual, specific errors of law committed by the district court or lower authority; and (2) each involved bench trials, not juries. See Levy v. Lexington Cnty., S.C., 589 F.3d 708, 716 (4th Cir.2009); Elm Grove Coal Co. v. Dir. O.W.C.P., 480 F.3d 278, 299 n. 20 (4th Cir.2007); Gordon v. Schweiker, 725 F.2d 231, 236 (4th Cir.1994).
By contrast, here, Part III does not identify any specific errors committed by the district court during the first trial; instead, it decides issues before they have been squarely presented to this Court, particularly given that the analysis takes place in the context of what the majority has recognized as a "legal nullity." Not only does the majority fail to point to any actual error in the analysis of the original trial judge in this case (who is now deceased), but we also have no indication that the new trial judge requires this Court's cold record guidance on these issues. Cf. Levy, 589 F.3d at 716 (finding that trial judge had applied the wrong analysis and, since the matter was remanded to that same judge for retrial, determining that the issues were likely to recur); Elm Grove, 480 F.3d at 299 (finding that two Administrative Law Judges ("ALJs") and the Benefits Review Board ("BRB") had made or upheld an erroneous discovery ruling and, since the relevant decision was vacated and the matter was remanded to the BRB and ALJs for proceedings to begin anew, determining that the same discovery issue was likely to arise again on remand); Gordon, 725 F.2d at 236-37 (remanding for reconsideration by the Secretary of Health and Human Services, not retrial in the district court, because the Secretary's arguments on appeal gave this Court a basis to believe that the issues would likely recur upon the Secretary's reconsideration).
Moreover, the majority opinion's own analysis strongly suggests that the issue of whether referrals took place is actually a mixed question of law and fact, which is properly left to the province of the jury. Further, the conclusion that "compensation based on the volume or value of anticipated referrals implicates the volume or value standard," ante at 409-10, does not provide additional guidance to the district court on remand. Rather, it interprets the relevant statute and regulations in a vacuum, without the defining parameters of an actual case or controversy—the hallmarks of an advisory opinion.
The majority opinion asserts that Part III "is not advisory in nature" because the issues decided are "`based on a concrete set of facts in the context of a live controversy between the parties.'" Ante at 406 n. 19 (quoting Rux v. Republic of Sudan, 461 F.3d 461, 476 (4th Cir.2006) (internal quotation marks and citation omitted)). Of course, such a statement is generally true of all of the issues in any case before an appellate court—yet prudence and judicial restraint require that we address only those questions necessary to the disposition of an appeal, lest we overstep our role. See Rux, 461 F.3d at 476 (quoting United States v. Fruehauf, 365 U.S. 146, 157, 81 S.Ct. 547, 5 L.Ed.2d 476 (1961), to support the proposition that an opinion is advisory if it passes "judgment upon issues" not "necessary for decision"). Here, Part III of the majority opinion purports to resolve issues not yet passed upon by a jury or a
Because I would vacate the district court's judgment against Defendant based on the "legal nullity" identified by the majority, rather than on Seventh Amendment grounds, and I see no need to pass upon legal issues no longer before this Court as a result of that same legal nullity, I respectfully concur in the result only.
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