BRADENTON, Fla. — Standard & Poor's revised the outlook to negative on its CCC rating of South Carolina's Tuomey Healthcare System due to the legal risk associated with a massive $277 million fraud judgment and "substantial" operating losses.
The negative outlook applies to about $52 million of outstanding revenue bonds issued in 2006 by the South Carolina Jobs Economic Development Authority. The bonds are insured by CIFG Assurance North America.
Tuomey also has outstanding about $21 million of unrated 1998 bonds insured by Ambac Assurance Corp., and $16.4 million of unrated, uninsured bonds that it repurchased in 2010.
The 301-bed hospital in Sumter, S.C., is appealing a demand by federal prosecutors that Tuomey add another $20 million in escrow to the $50 million already posted while attorneys appeal the judgment imposed by the court Sept. 30 after a jury found Tuomey violated the Stark Law and the False Claims Act.
"We understand Tuomey would be at risk of violating several bond covenants if the courts grant the government's request," said S&P analyst Margaret McNamara. "While we understand Tuomey is continuing to work toward a settlement, significant uncertainty remains as to whether the parties will reach an agreement that Tuomey finds acceptable."
Tuomey has "sustained substantial operating losses, generating extremely weak debt service coverage of just 1.06 times" though it continues to make timely principal and interest payments, she said.
The negative outlook reflects Tuomey's continued weak operating performance and the possibility of the system filing for bankruptcy if cash reserves are depleted, McNamara said.
The rating could be lowered if Tuomey files for bankruptcy or defaults on bond payments, she added.
A federal jury found Tuomey's compensation arrangements with 19 referring physicians that had part-time employment agreements were not permitted under the Stark Law, resulting in nearly 22,000 violations of the False Claims Act and more than $39 million in overpayments to Medicaid and Medicare.
The Stark Law limits payments that physicians can receive from hospitals for certain procedures or referrals for Medicare and Medicaid patients if the physician has a financial relationship with the hospital.
In a recent court filing, prosecutors said the case against Tuomey "illustrates why Congress enacted the [False Claims Act] and has, over a century and a half, acted to strengthen it."
The hospital, which receives more than 40% of its revenues from Medicare, decided to pay the physicians a portion of the facility fees generated by their work to thwart competition for lucrative outpatient procedure referrals, federal attorneys said. "As a result, Medicare and its beneficiaries were forced to pay higher prices for services that could, in the majority of cases, have been performed at a lower cost to both," they said.
Tuomey's attorneys cite a number of reasons in their appeal why the judgment should be overturned, including the fact that its board of trustees relied in good faith on what turned out to be erroneous advice of counsel regarding the legality of the financial agreements with the physicians. Prosecutors, however, said Tuomey's board ignored subsequent legal advice that raised red flags about the agreements.
The American Hospital Association and the South Carolina Hospital Association submitted a joint friend-of-the-court brief in Tuomey's case saying it raises concern about the extent hospitals can rely on legal advice "to ensure that their business transactions comply with the many complicated and challenging regulatory regimes governing the delivery of health care."
The associations said permitting hospitals to be penalized in a "draconian fashion," such as the $277 million against Tuomey, after relying on the advice of attorneys, will create catch-22 situation and jeopardize the ability of hospitals to meet the health care needs.
Without "expert advice hospitals cannot ensure that their transactions comply with the Stark Law, but even if they obtain and rely on such advice they are still in jeopardy," the associations argued.
Tuomey's case has been ongoing since a doctor brought a civil action under the "qui tam" provisions of the False Claims Act in 2005, which permits the doctor to share in damages. The federal government intervened in the case in 2007.
The hospital is in Sumter County, which had a population of 108,052 in 2012.
