Tuomey: Liability Exposure for Officers and Directors of Nonprofit HospitalsPDF
By now probably everyone interested in health care regulatory matters has heard about the Oct. 2, 2013 opinion in the Tuomey Healthcare System, Inc. qui tam action out of South Carolina. A federal judge ordered Tuomey, a 242-bed nonprofit hospital, to pay $276.8 million for various federal Stark and False Claims Act violations (the fine was reduced the next day by $39 million to correct a math error by the judge). Approximately a week prior to the decision, Tuomey had announced that its CEO and COO would soon step down. The fallout is expected to continue, because the judgment is thought to be greater than the system’s annual revenue.
Where does this leave past and present Tuomey officers and directors? While they were not sued in the qui tam action, they likely have incurred expenses over the six-year course of the litigation. Moreover, claims now might be made against them, as this is the highest such penalty ever assessed against a community hospital. However, in an opinion issued in early September (see related materials below), the attorney general of South Carolina found that state law does not permit Tuomey to indemnify its officers and board trustees for any claims in which such individuals are not made a party to the proceeding. Additionally, indemnity would not be available if they were found to have violated their duties of care, loyalty, good faith and fair dealing.
The court’s decision and the attorney general’s opinion bring urgency to the need for officers – and even more for independent (community) trustees and directors – of nonprofit hospitals to confirm that they are protected from such liabilities. They must understand where state law and their organization’s articles and bylaws leave them. But, perhaps more importantly, they must focus carefully on the directors and officers insurance their organization has purchased. D&O policies are not all created equal, are not simply a one size fits all proposition and must be carefully reviewed to ensure that all potential liability risks for individual officers and directors are identified and covered.