Kusserow on Compliance: Breaking news: Tuomey saga punctuated with DOJ settlement

The federal False Claims Act (FCA) case against Tuomey Healthcare System, which is generally viewed as the landmark case with regard to the Stark law, has finally come to a close. On October 16, 2015, the Department of Justice (DOJ) announced that Tuomey, a system based in Sumter, North Carolina, agreed to resolve the $237 million judgment against it by paying $72.4 million to the federal government. The health care system also agreed to be sold to Palmetto Health, which was described by the DOJ as a multi-hospital health care system in Columbia, South Carolina.


The judgment against Tuomey was based on the submission of false claims under the FCA (31 U.S.C. § 3729) related to violations of the Stark Law (42 U.S.C. § 1395nn), a statute that prohibits hospitals from billing Medicare for certain services that have been referred by physicians with whom the hospital has an improper financial relationship. The laws includes exceptions for many common hospital-physician arrangements, but generally requires that any payments that a hospital makes to a referring physician be at fair market value (FMV) for the physician’s actual services and not take into account the volume or value of the physician’s referrals to the hospital. After a jury found that Tuomey had filed more than 21,000 false claims in violation of the Stark Law and awarded the government the $237 million judgment, the Fourth Circuit confirmed the verdict and judgment. In short, Tuomey was found to have financially rewarded doctors for referring thousands of patients.

In its appeal, Tuomey argued that it relied upon legal advice of attorneys in the development of the compensation packages, but the court rejected the argument by noting that other advice that was obtained by the health care system raised concerns over the proposed arrangements but that advice was disregarded. The court noted evidence that Tuomey entered into the arrangements to prevent the physicians from performing their services outside the hospital in office or at ambulatory surgery centers. The case also included the arrangements that exceeded FMV by a significant amount. As a result, physician income dramatically increased under the agreement. The compensation took into account the physicians’ actual or anticipated referrals to Tuomey.

Lessons learned

  • Immediately investigate any questions raised about an arrangement.
  • Commercial reasonableness analysis must be thorough and supportable.
  • Productivity bonuses should not begin until after work is performed.
  • Independent FMV determination is needed as a safeguard, but it must be defensible.
  • A provider should avoid arrangements if it is afraid to keep accurate records of deliberations of such arrangements.
  • Avoid any deals that do not feel right, no matter what advisors say.
  • No consideration can be made of the value or volume of referrals a physician may bring.
  • Do not go opinion shopping or disregard legal and expert advice about an arrangement.
  • If relying on advice of counsel defense be prepared to open those files.
  • Ensure agreements clearly define specific duties and services to be performed.
  • Never take into consideration the volume or value of referrals in any agreement.
  • Once agreements are in force, verify performance before making payments.
  • Use outside experts to review arrangements and do not rely upon the attorneys who created the arrangements.
  • Settle cases as quickly as possible to avoid the sheer magnitude of potential damages.

For more on the Tuomey case, visit the Tuomey section of the Kusserow on Compliance page.

Richard P. Kusserow served as DHHS Inspector General for 11 years. He currently is CEO of Strategic Management Services, LLC (SM), a firm that has assisted more than 3,000 organizations and entities with compliance related matters. The SM sister company, CRC, provides a wide range of compliance tools including sanction-screening.

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Copyright © 2015 Strategic Management Services, LLC. Published with permission.


E.D. Mo.: Contraceptive accommodation judgment final for for-profit employers, non-profits are still looking up

A district court found no just reason to delay the entry of a final judgment on the claims of for-profit entities that successfully challenged the government’s accommodation allowing religious organizations to opt-out of the contraception mandate under the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148). The court reasoned that the final judgment was proper because the portion of the case dealing with non-profit entities, which was likely to be the subject of another appeal, was unlikely to substantially affect the portion of the case dealing with for-profit entities. Accordingly, the court held that it would be unjust to the for-profit plaintiffs to further delay their award of fees and expenses to await the outcome of the non-profit portion of the litigation (Sharpe Holdings, Inc. v. HHS, October 9, 2015, Noce, D.).


Under the ACA, employers with fifty or more full-time employees must offer a health plan for employees including “minimum essential coverage.” As part of this, plans typically are required to cover all FDA-approved contraceptive methods without copayments or deductibles. An accommodation is available to religious entities that object to the mandate but are not exempt as “religious employers.” Such an organization can either execute an EBSA Form 700, certifying that it is a nonprofit entity holding itself out as a religious organization and that it opposed the provision of contraceptive services, or notify HHS in writing with the name of the organization, the nature of the objection, and certain plan information.


Several for-profit entities—Sharpe Holdings, Inc.; Ozark National Life Insurance Company; N.I.S. Financial Services, Inc.; CNS Corporation—and non-profit entities—CNS International Ministries, Inc. (CNS) and Heartland Christian College (HCC)—challenged the contraception mandate and the accommodation, arguing that both imposed a substantial burden on their exercise of religion in violation of the Religious Freedom Restoration Act of 1993 (RFRA) (42 U.S.C. §§ 2000bb to 2000bb-4) and the Free Exercise Clause of the First Amendment of the U.S. Constitution. A Missouri district court found that the for-profit employers demonstrated a reasonable likelihood of success on the merits of their claims and granted a temporary restraining order in favor of the employers (see Court grants for-profit employer’s request for temporary restraining order enjoining enforcement of contraception mandate, Health Law Daily, January 2, 2013). Subsequently, the court granted a permanent injunction to the for-profit employers and awarded the employers $138,632.50 in attorneys’ fees and expenses.


The claims of the non-profit employers reached the Eighth Circuit on appeal. The appellate court held that the accommodation offered by CMS to the ACA contraceptive mandate substantially burdened the exercise of religion of the non-profit religious educational institutions and was likely not the least restrictive means of furthering the government’s compelling interest in safeguarding public health and ensuring equal access to health care for women (see Accommodation process substantially burdens religious exercise, Health Reform WK-EDGE, September 23, 2015). The Eighth Circuit’s holding resulted in a circuit split, because seven circuits have held that the accommodation is consistent with the RFRA and Supreme Court precedent. The Supreme Court is expected to address the issue presented by one of the eight appellate court cases (see Looking higher, Fed Gov’t asks SCOTUS to resolve religious mandate challenges, Health Reform WK-EDGE, October 7, 2015).

Final judgment

The court reasoned that “it would be unjust to withhold the award of fees and expenses to the for-profit plaintiffs’ until further resolution of the non-profit plaintiffs’ case which could continue but, barring an unforeseen circumstance, will have no effect on the for-profit plaintiffs.” Because the case has been ongoing since 2012 and the for-profit entities’ motion was not opposed so long as the court determined that there was no just reason for delay, the court entered a final judgment.

The case is No. 2:12-cv-00092-DDN.

FTC offers Third Circuit a primer on how to properly evaluate ‘product hopping’

 The Federal Trade Commission (FTC) filed an amicus brief with the U.S. Court of Appeals for the Third Circuit explaining that the U.S. District Court for the Eastern District of Pennsylvania “made significant analytical errors” in granting summary judgment to brand-name drug manufacturer, Warner Chilcott PLC, in a dispute with generic competitor, Mylan Pharmaceuticals, Inc., involving allegations that Warner Chilcott unlawfully suppressed generic competition and maintained its monopoly power through a strategy called “product hopping.”

In its brief, the FTC takes no position on the ultimate merits of the lawsuit, but claims that in examining whether “product hopping” is unlawful, the district court erroneously expressed a “broad-brush opposition to product-hopping liability in any circumstances” and failed to account for the unique aspects of the pharmaceutical marketplace, including the nature of competition between brand name drugs and their generic equivalents. The FTC argues that the Third Circuit should remand the case to the district court with instructions to apply the antitrust principles discussed in its brief.

Typical “product-hopping” scheme defined

A typical product-hopping scheme may arise when generic rivals are expected to win FDA approval to compete with a company’s profitable brand-name drug using automatically substitutable equivalents. First, the brand-name company introduces minor changes to the drug’s formulation, such as therapeutically insignificant tweaks to dosage levels or to the form of administration (such as capsules vs. tablets). Second, before generic equivalents have a chance to enter the market, the brand-name manufacturer takes various steps to extinguish demand for the original version. For example, the manufacturer might restrict or eliminate the supply of the original formulation, increase its effective price to patients, or flood physician offices with free samples of the revised formulation to divert prescriptions to the revised formulation.

In addition, because automatic pharmacy substitution ordinarily requires an FDA determination of therapeutic equivalence—an “AB rating,” and because an AB rating is specific to dosage and form, a pharmacist cannot automatically substitute a generic drug that differs even slightly from the dosage or form of the prescribed brand-name drug. The generic entrant is thereby faced with trying to make conforming changes to its own product, which it cannot sell without starting a new FDA approval process. Therefore, according to the FTC, “the brand-name manufacturer’s well-timed tweaks to its drugs can create an ever-retreating horizon of generic competition at the expense of consumers.”


The alleged product-hopping scheme in this case involves delayed-release doxycycline hyclate, a prescription drug used primarily to treat severe acne. Warner Chilcott markets a brand-name form of the drug sold under the name Doryx. Mylan alleges that, before generic entry, Warner Chilcott engaged in anticompetitive product-hopping by curtailing the availability of the original formulation in order to shift the market to three successive product reformulations that offered little or no therapeutic benefit to consumers. Mylan claims that this conduct impeded meaningful generic competition and preserved Warner Chilcott’s monopoly profits, not because the market valued the reformulations on the merits, but because Warner Chilcott had successfully manipulated the pharmaceutical regulatory system.

District court ruling

To prove unlawful monopolization under Section 2 of the Sherman Act, Mylan must prove two elements: (1) the possession of monopoly power by Warner Chilcott in the relevant market; and (2) its willful acquisition or maintenance of that power through anticompetitive means, as distinct from competition on the merits.

In granting summary judgment to Warner Chilcott, the district court concluded that no reasonable juror could find, based on “uncontradicted evidence” of “the interchangeability of Doryx with other oral tetracyclines,” that Warner Chilcott had monopoly power. The court also concluded that, even if Warner Chilcott had monopoly power, the product-hopping scheme would not have violated the Sherman Act.

In making its ruling, the district court accepted Mylan’s claims that Warner Chilcott “made the Doryx ‘hops’ . . . primarily to defeat generic competition” and that the hops “prevented Mylan from taking advantage of more profitable means of distributing its generic Doryx.” Nevertheless, the district court held that Mylan could have competed against Warner Chilcott through means other than automatic substitution and faulted Mylan for not promoting its generic versions of Doryx through advertising and marketing. The court also characterized automatic substitution as a “regulatory windfall” to generic manufacturers and concluded that Warner Chilcott’s efforts to deny Mylan the benefits of that mere “windfall” were “hardly predatory.”

Mylan appealed the district court’s ruling to the Third Circuit.

FTC arguments

In its brief, the FTC first argues that in deciding that Warner Chilcott did not possess monopoly power the district court erred by ignoring the unique characteristics of the pharmaceutical market. Monopoly power, under previous court decisions, may be established through direct evidence, such as prices substantially above the competitive level, or indirect evidence, such as a large share of a relevant market subject to entry barriers. In addition, the U.S. Supreme Court has stated that antitrust inquiries must be attuned to the particular structure and circumstances of the industry at issue.

Therefore, according to the FTC, the district court was mistaken when, in denying monopoly power, it found a broader market here on the basis of outward evidence that many dermatologists view other oral tetracyclines as therapeutically interchangeable with Doryx. The functional interchangeability between products, however, is the beginning, not the end of the analysis, according to the FTC. The FTC believes that the district court’s monopoly-power analysis needs to go farther and ask whether the prospect of substitution is strong enough to keep prices at competitive levels. The FTC bases this argument on evidence that price competition from other interchangeable drugs “is often so attenuated in the absence of automatic substitution that brand-name manufacturers can maintain prices substantially above the competitive level, the key criterion for monopoly power.”

The FTC also argues that the district court erred in granting summary judgment on the alternative ground that, even if Warner Chilcott had monopoly power, its product hopping did not constitute the willful maintenance of the power through anticompetitive means. The FTC believes that the district court’s reasoning reflects a misunderstanding of how competition works in the drug industry and, in effect, “embraces a rule of nearly per se legality for product-hopping conduct by brand-name manufacturers. This approach, the FTC argues, contradicts the decisions several courts.

For example, on May 22, 2015, the Second Circuit in New York v. Actavis PLC, 787 F.3d at 655, decided that a pharmaceutical manufacturer can violate Section 2 of the Sherman Act if it uses a product-hopping scheme to foreclose rival generic manufacturers from their most efficient distribution channel: automatic substitution at the pharmacy for AB-rated drugs. In that case, the brand-name manufacturer altered the formula for an anti-Alzheimer’s drug to avoid automatic generic substitution, and it took various steps, including sharply limiting supply of the original version, to ensure that most physicians would prescribe only the reformulated version before the expected date of generic entry. The Second Circuit concluded that because the brand-name manufacturer’s product switch was accomplished through something other than competition on the merits, and it had the effect of significantly reducing usage of generic products and protecting its own monopoly, it was anticompetitive.

Finally, the FTC addressed the fact that the district court seemed to accept innovation as a basis for rejecting product-hopping in any context, no matter how trivial the revised formulation may be and no matter how aggressively the brand-name manufacturer shifts the market to the revised formulation prior to facing generic competition on the original formulation. According to the FTC, the district court’s position on innovation contradicts established antitrust doctrine, which states that judicial deference to product innovation does not mean that a monopolist’s product design decisions are per se lawful.

The FTC notes that genuine innovation is unlikely to be chilled simply because the antitrust laws may hold brand-name manufacturers liable for minor product tweaks that have little or no therapeutic value and serve only to avoid generic competition. The FTC also believes that a brand-name manufacturer is unlikely to face potential antitrust liability if it does not take steps to damage the market for the original formulation and instead allows the marketplace to choose between the original formulation and the revised version.

Looking higher, Fed Gov’t asks SCOTUS to resolve religious mandate challenges

The federal government filed its response to the Little Sisters of the Poor Home for the Aged, Denver, Colorado (Little Sisters) Supreme Court petition. The government asked the high court to weigh in on the claims of faith-based organizations which assert that their free exercise of religion has been burdened by the federal government’s accommodation allowing those organizations to opt out of the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148) contraception mandate. The White House offered support for the government’s response, acknowledging that the Supreme Court should resolve the dispute.

Mandate and accommodation

Under the ACA, employer-sponsored plans offered by employers with 50 employees or more must meet certain coverage requirements. In particular, those plans must cover all FDA-approved contraceptive methods without copays or deductibles. While some religious employers are exempt from those requirements, others religious entities—ones that do not qualify for the exemption—may participate in an accommodation. The accommodation is designed to allow such an employer to relieve itself of the ACA mandate by certifying to HHS that it is opposed to providing coverage for contraception services. As a result of that certification, a third-party administrator provides for the coverage of the objectionable contraceptives.

Procedural history

The Little Sisters initially challenged the accommodation before a circuit court, which denied its request for a preliminary injunction to avoid the accommodation. The Tenth Circuit upheld that denial on the grounds that the accommodation did not violate the Religious Freedom Restoration Act (RFRA) (42 U.S.C. § 2000bb). The court reasoned that the accommodation did not constitute a substantial burden on the religious exercise of the Little Sisters, or the other faith-based organizations that joined their challenge, because those organization would not have to provide, pay for, or facilitate contraceptive coverage (see Prayers for injunctions go unanswered in appellate review of contraceptive accommodation, Health Reform WK-EDGE, July 15, 2015).

After the decision

Following the Tenth Circuit’s decision, Little Sisters filed a petition with the Supreme Court and the Tenth Circuit entered an order stating that organization did not have to comply with the accommodation until the Supreme Court rules on its case (see Little Sisters granted relief from the heat, Health Reform WK-EDGE, August 26, 2015). Then, although the Little Sisters did not request a rehearing, following a poll of the active judges in the circuit, the Tenth Circuit entered an order denying a rehearing. Five justices dissented on the grounds that a rehearing en banc was appropriate. The dissent criticized the decision of the court, saying “the opinion of the panel majority is clearly and gravely wrong—on an issue that has little to do with contraception and a great deal to do with religious liberty” (see Judges call majority ‘clearly and gravely wrong’ in contraception mandate case, Health Reform WK-EDGE, September 9, 2015). The Fifth Circuit also denied a petition for a rehearing in a comparable contraception mandate case.

Government’s response

Now, the federal government has joined the calls for a Supreme Court resolution of the matter. The government’s response asserts that although the Tenth Circuit and six of its sister circuits have found the accommodation to be consistent with the RFRA and Supreme Court precedent, the Eighth Circuit, “recently reached the opposite conclusion” in Sharpe Holdings, Inc. v. HHS (see Accommodation process substantially burdens religious exercise, Health Reform WK-EDGE, September 23, 2015). Accordingly, the government asked the Supreme Court to resolve the circuit split. Although the government requested that the high court resolve the issue, the response suggests that the Supreme Court should grant the petition for writ of certiorari in Roman Catholic Archbishop of Washington v. Burwell instead of the one in Little Sisters v. Burwell (see Demanding a better answer, Catholics ask SCOTUS for review, Health Reform WK-EDGE, July 1, 2015). The government asserted that the Roman Catholic Archbishop of Washington case was the “most suitable vehicle” for resolving the mandate issue.