The Department of Justice (DOJ) said April 11 it has intervened in a whistleblower lawsuit against Methodist Le Bonheur Healthcare (MLH) in Memphis, Tennessee, and Methodist Healthcare Memphis Hospitals (collectively, Methodist) that was set in motion by the former president of an MLH hospital and a former MLH board member. Methodist is accused of violating the Anti-Kickback Statute (AKS) and False Claims Act (FCA) by paying West Clinic P.C., which owns outpatient oncology clinics, for patient referrals through compensation and management arrangements entered into in its quest to build a cancer center “without walls,” according to the U.S. Attorney’s Office for the Middle District of Tennessee.[1] West, which is known as West Cancer Center, isn’t named in the complaint.
In addition to challenging the motive of the alliance, DOJ alleged that Methodist planned to increase its access to 340B drug discounts by acquiring West’s cancer clinics, an unusual allegation in an FCA lawsuit.
Methodist bought the assets of West and entered into arrangements to lease its nonphysician employees and compensate physicians for their professional and management services from 2012 through 2018, paying West $300 million. There were no plans for Methodist to employ the physicians. “Notwithstanding the contracts and the requirements therein that purported to provide a lawful way for Methodist to pay West in exchange for referrals, the conduct of Methodist and West show that those agreements were largely meaningless paper,” DOJ alleged in its April 11 complaint.[2]
DOJ Intervenes in FCA Case Over Alliance
The whistleblowers are Jeffrey Liebman, former president of Methodist University Hospital, and David M. Stern, M.D., former MLH board member and member of the executive cancer council and the steering committee for the West Cancer Center. They raised concerns about aspects of the alliance, according to the whistleblowers’ third amended complaint.[3] For example, when Stern learned that West physicians would share in Methodist’s 340B “drug profits” for chemotherapy and oral cancer medications, he told then-Methodist CEO Gary Shorb that “it was very unusual for 340B drug profits to be used to increase physicians’ incomes,” the complaint alleged. “Dr. Stern repeatedly objected to the use of 340B drug profits to fund payments to West physicians as inappropriate and excessive. Dr. Stern argued that the 340B drug profits should be used for indigent care, cancer research, and for the development of an NCI-designated cancer center in Memphis. Dr. Stern was repeatedly rebuffed” by Shorb and then-Methodist Chief Financial Officer Chris McLean.
But DOJ will have a hard time proving its case “unless they have a true smoking gun,” said attorney Andrew Ruskin, with K&L Gates in Washington, D.C. He doesn’t see any in the complaint. “Clearly there was a lot of desire to do this the right way” (e.g., Methodist getting fair market valuations for the physician compensation). Ruskin added that he finds it “offensive” that the complaints talk about 340B drug savings “as evidence of trying to” pay off the physicians. “Hospitals come together with other hospitals and with physicians to recognize savings through synergies and efficiencies all the time. How is the fact you are trying to save money on drugs different from other efficiencies? It bothers me because it’s a buzzword, and they shouldn’t use buzzwords to try to pique someone’s interest when the case is otherwise in weak territory.”
The complexity of any alliance, with multiple arrangements, heightens the compliance risk, said attorney Bob Wade, with Barnes & Thornburg LLP in South Bend, Indiana. From a compliance perspective, “all the links in the chain have to be separately analyzed and managed,” he said. “There needs to be a compliance process where you have oversight of all the services rendered so you don’t have services bleeding over from one compensation arrangement to another.”
DOJ: ‘There Was Never Any Formal Agreement’
According to the DOJ complaint, West was attractive to Methodist, which didn’t have a dedicated inpatient cancer unit or outpatient cancer clinics as of 2011, while West had the largest market share of cancer patients in the Memphis area, but lacked radiation oncology, surgical oncology (apart from breast surgeons) and pathology. So they joined forces from 2012 through 2018, with “visions of becoming a nationally accredited program,” the complaint alleged. But “there was never any formal agreement between Methodist and West that documented a legal partnership.”
Instead, they executed an asset purchase agreement, leased employee agreement, professional services agreement and management services agreement (also known as a co-management agreement). With its December 2011 asset purchase agreement, Methodist bought certain tangible and intangible assets of West, including most equipment, inventory and offices in West’s outpatient cancer treatment locations in Tennessee and one in Mississippi for $10.5 million. They became Methodist outpatient departments on Jan. 1, 2012.
The agreement stated that Methodist had obtained a fair market value opinion on the purchase price, which didn’t factor in the volume or value of referrals. Methodist, which serves Medicaid and indigent patients, also was able to “capitalize on” the 340B drug discount program through the new outpatient sites, according to the complaint.
Methodist also leased West’s 193 nonphysician employees and separately compensated physicians under the professional services arrangement based on their work relative value units (wRVUs). “An initial FMV [fair market value] opinion was obtained in early October 2011 to determine the rates per wRVUs based on physician specialty and group level,” the complaint said. The opinion didn’t reflect benefits, however, and a new valuation wasn’t obtained until 2016. The physicians also were paid for their management services under the management services/performance improvement agreement (MSA), which required them to provide management services for the inpatient and outpatient adult oncology service line at six Methodist facilities and the cancer centers. Methodist also made a separate, for-profit $7 million investment in West-affiliated ACORN Research LLC, which West’s medical director and shareholder, Dr. Lee Schwartzberg, had a financial interest in, the complaint alleged.
“Methodist’s internal documents show that it expected revenues to increase from $1.25 billion to $1.45 billion with the West transaction,” the complaint alleged.
DOJ: Some Management Services Weren’t Provided
Some of the management services that Methodist paid West for were never provided, according to the complaint. For example, “Methodist and West acknowledged to the United States that much of the management services required under the MSA did not occur in the first two years,” the complaint alleged.
DOJ alleged that Methodist and West repeatedly referred to the West Cancer Center as a “partnership” even though West had sold its assets to Methodist and was required to provide services to the hospitals through the other agreements. “Had a legal partnership been formalized, it likely would have run afoul of HHS guidance as to such arrangements, which may violate the AKS and/or the Stark Law,” the complaint alleged.
Both Methodist and West continued to think of the West cancer centers “as still being West,” the complaint alleged. In fact, West employees who were leased full time to Methodist provided services to West for business unrelated to Methodist.
“The contracts are key to Methodist being able to bill Medicare for the outpatient services and obtain the 340B Program discounts. If the contracts are a fiction, Medicare should not have reimbursed Methodist for the outpatient claims, and Methodist never would have been able to realize the profits from the 340B Program,” the complaint alleged. “If the contracts were real, then Methodist gave West rent-free space and paid for the salaries of West’s employees to perform work to further the business of West.”
Lawyer: Methodist May Be Able To ‘Extricate Itself’
West told Methodist in August 2018 it planned to unwind the deal and ultimately paid Methodist $16 million for the assets and $51 million for the real estate.
Ruskin said Methodist may be able to “extricate itself from this case, but only after significant cost” and the distraction of the investigation. A lot of the Sturm und Drang could have been prevented “by making sure that everyone was onboard with framing it in their minds as an acquisition, rather than a partnership. Framing it that way would have resulted in the use of the proper characterization of the matter in all of the communications surrounding the arrangement and would have lessened the likelihood of DOJ interest,” Ruskin said.
In a statement, MLH said, “The government’s complaint recycles a familiar set of allegations that mischaracterize the relationship between MLH and West Clinic. As we have said many times since this lawsuit was made public more than two years ago: The affiliation’s compensation structure was designed by respected outside experts who determined it reflected fair market value for such services. Our payments were appropriate, and MLH received the services due under affiliation agreements. The government’s belated decision to intervene in the suit two years after it declined to do so has changed nothing about the case. We are proud that our partnership with West succeeded in creating an integrated cancer diagnosis treatment and surgical service that not only improved cancer care, but provided care where it was needed most, reduced health disparities and led to better patient outcomes for the Memphis and Mid-South communities. Indeed, it is undisputed that the affiliation brought much needed cancer care to our community and delivered the highest level of services. MLH will refute the government’s allegations in detail in the appropriate legal forum. We are confident that we will demonstrate that MLH’s affiliation with West Clinic was proper and reflected customary and legal business arrangements, and that the affiliation with West was in keeping with our mission to provide high-quality, cost-effective patient and family-centered care.”
Contact Ruskin at andrew.ruskin@klgates.com and Wade at bob.wade@btlaw.com.