BRADENTON, Fla. — The Tuomey Healthcare System in South Carolina Tuesday notified investors that Standard & Poor's has downgraded its bonds below investment grade because of a federal court ruling that could render it insolvent.
S&P, which rates THS's 2006 bonds, downgraded the debt two notches to BB from BBB-minus, and said the outlook is negative.
The 242-bed hospital located in Sumter County had $88.8 million of outstanding long-term debt issued in 2001, 2008, and 2006, according to the Sept. 30, 2012 audit released Tuesday.
The 2006 bonds, originally issued in the amount of $74.5 million by the South Carolina Jobs-Economic Development Authority, were insured by CIFG Assurance NA. Proceeds were used to add 35 beds to an existing patient tower and refund $36.25 million of debt sold in 1995.
S&P said it downgraded the bonds because of a May 8 federal court ruling that found Tuomey Healthcare violated the Stark Law and the False Claims Act during a retrial of a previous case.
The Stark Law limits payments that physicians can receive from hospitals for certain procedures or referrals, known as designated health services, for Medicare and Medicaid patients if the physician has a financial relationship with the hospital.
In Tuomey's case, the jury found that compensation arrangements with 19 referring physicians that had part-time employment agreements were not permitted under the Stark Law, resulting in nearly 22,000 false claims and more than $39 million in overpayments.
In a post-trial phase of the case, the court will act on motions and will consider whether to impose civil penalties that could exceed $300 million, the hospital notice to investors said.
"While the full ramifications of the court ruling are currently unknown, the government could potentially seek significant damages," said S&P analyst Margaret McNamara.
The rating agency's negative outlook reflects the uncertainty around the ongoing litigation with the federal government, and continued operating volatility.
"We believe a $40 million settlement is affordable at the BB rating barring any changes to Tuomey's current operational performance and enterprise profile," McNamara said. "We, however, believe any settlements beyond $40 million would cause us to reassess Tuomey's financial profile and could cause us to lower the rating further."
If the case is resolved adversely to the health care system, it could reasonably anticipate being out of compliance with certain covenants in the master trust indenture or THS could be rendered insolvent "if the amount of the judgment is trebled and statutory penalties [are] assessed," Tuomey's statement to investors said.
"Since this case is still ongoing, Tuomey cannot predict the ultimate outcome of this matter and it is not appropriate for Tuomey to make any further comment about the case at this time," the hospital said.
The ruling in the case is "not inconsistent with previous rulings," according to Kim Looney, a partner at Waller Lansden Dortch & Davis LLP who specializes in healthcare law. The law firm is not involved in the case.
"I think one of the reasons the judgment [could be] so high is because there were agreements with 19 physicians resulting in almost 22,000 claims - that is an extremely large number of claims representing a large dollar amount of reimbursement from Medicare," Looney said.
A recent bulletin authored by Looney advised legal counsel to "carefully structure" hospital-physician arrangements in light of the Tuomey opinion.
"When establishing physician compensation, anticipated referrals of [designated health services] cannot be considered," Looney wrote. "Physicians should be compensated only for the professional services they personally perform and such compensation should be fair market value."