BRADENTON, Fla. — The Tuomey Healthcare System in South Carolina, on the losing end of a massive fraud judgment, is fighting what it says are the federal government's efforts to improperly subordinate bondholders.
Federal prosecutors want Tuomey to increase the $50 million bond already held in escrow to $70 million while the health system appeals an October court decision ordering it to pay $39.9 million for violations of the False Claims Act plus $237.5 million in civil fines.
"Tuomey cannot post the bond sought by the government without breaching the bond covenants and exposing its board to the risk of claims alleging breach of fiduciary duties," attorneys for the 301-bed hospital system argue in a legal filing posted on the Municipal Securities Rulemaking Board's EMMA filing system Wednesday.
After the court affirmed the award, Standard & Poor's lowered its ratings to CCC from BB on about $52 million of outstanding revenue bonds issued in 2006 by the South Carolina Jobs Economic Development Authority.
The outlook was revised to developing from negative. The 2006 bonds are insured by CIFG Assurance North America.
On Jan. 15, a customer bought $15,000 of bonds maturing in 2035 for 59 cents on the dollar to yield 8.7%.
Tuomey also has outstanding about $21 million of unrated 1998 bonds insured by Ambac Assurance Corp., as well as $16.4 million of unrated, uninsured bonds that it repurchased in 2010 that remain on the hospital's balance sheets.
The hospital is seeking a stay, or delay, in paying the judgment until the outcome of the appeal is known.
If forced to make payment, Tuomey said its "ability to operate as a going concern will be immediately impaired."
If the escrowed bond amount is increased, the hospital said it likely would be forced to file for bankruptcy to obtain an automatic stay without posting a bond, in order to pursue its "constitutional right" to appeal.
Prosecutors said the government "recognizes that Tuomey lacks the resources to pay the judgment awarded, and therefore also lacks the resources to post a bond or other acceptable collateral in the full amount required by" rules of the court.
However, prosecutors said they believe the hospital can afford to post an additional $20 million bond without harming its ability to provide health care services.
The underlying case involves violations of the Stark Law and the False Claims Act, which are being widely pursued by federal prosecutors.
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, a 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.
The escrow was established after Tuomey appealed after losing the initial 2010 trial in the case.
That appeal led to the 2013 retrial that resulted in the $277 million judgment against the hospital system.
The court denied the hospital's request for an appeal of the ruling, but Tuomey is appealing the size of the award.
In October, S&P downgraded the 2006 bonds due to the potential size of the judgment.
"Given the increasing likelihood that Tuomey may have to pay a sizable settlement and the related uncertainty surrounding the subsequent effects on Tuomey's financial profile, we believe a lower rating is warranted," S&P said. "The CCC ratings connote our view that Tuomey is currently vulnerable to nonpayment."
S&P also noted that the hospital system's financial performance in June 2013 was "well behind budgeted expectations."