Governmental Intervention in Qui Tam Case Signals Warning to Hospital Acquisitions of Oncology Practices

Earlier this month, the federal government intervened in a qui tam action originally filed in 2017 against a Tennessee hospital system, Methodist Le Bonheur Healthcare and Methodist Healthcare-Memphis Hospitals (collectively, “Methodist”), related to an allegation of violations of the Anti-Kickback Statute which caused false claims resulting in several million dollars in damages to Medicare.

Hospitals and oncology practices contemplating hospital deals will benefit from understanding the structure of the Methodist arrangement now being scrutinized by the government. The qui tam action arose from an arrangement in which Methodist: (i) purchased the assets of a lucrative oncology practice, (ii) leased the non-physician employees of that entity, (iii) entered into a professional services relationship with the entity for use of its oncologists, and (iv) received a suite of management services from the practice. Through these agreements, the practice’s patients were treated at hospital owned locations (including former practice sites) by practice-employed physicians (subject to the professional services agreement with Methodist) for outpatient and inpatient services; as it relates to the inpatient adult oncology services, the practice was responsible for providing management services to the hospital. Hospitals that acquired oncology practices are well served to re-examine the structure of similar arrangements.

The government is examining related parts of the hospital-practice deal. For example, Methodist, through its for-profit subsidiary, invested $7M in a separate entity in which the practice and its medical director had a personal financial interest. The government alleges that the hospital was aware that this investment, allegedly disguised as a contribution to an entity focused on bringing community-based oncologists into clinical trials, was in fact used to pay back the debt owed to the practice and its medical director and to compensate both for referrals to Methodist.

As cited in the complaint, based upon these transactions, Methodist, which prior to the deal had essentially no outpatient cancer treatment, was able to establish a new stream of income through reimbursements for not only the facilities and professional components of outpatient treatment, but also for chemotherapy and other drugs provided. Additional financial benefits to the deal included the hospital’s substantial profit ($50M profit in one year) arising from its qualification for, and participation in, the controversial 340B drug program. Methodist also realized a significant increase in referrals for inpatient services from the practice, which previously referred its patients to Methodist’s competitors. Each aspect of the arrangement contributed to the transaction’s value.

While several fair market value appraisals were obtained by the parties, the compensation arrangements in the professional services agreement and the management services agreement were ultimately deemed by the government to have missed an important safe harbor qualification—that the compensation be set forth in advance. Additionally, the practice failed to provide a significant portion of the management services for which it was paid pursuant to applicable contracts. Accordingly, the payments allegedly did not meet an applicable safe harbor to the Anti-Kickback Statute and the compensation is being considered by the government as impermissible remuneration. Furthermore, the government alleges that the hospital knew it was paying for the referrals from the practice. Specifically, “[t]he complicated structure was designed so that physicians and hospitals could align in a manner that would avoid regulatory issues. When, as here, the formalities of the structure are overlooked, Methodist cannot rely on the contracts to insulate it from liability for what in reality were unlawful kickbacks.”

Over the last ten years, many hospitals around the country have acquired oncology and other subspecialty practices. Hospitals would be wise to retain objective outside counsel to analyze the structure of these deals, including re-evaluation of the management services, fair market value analysis, compliance with safe harbors and the role of 340b profits. Frier Levitt routinely structures such arrangements with an eye toward conservative compliance.