Recent Litigation Shines Spotlight on Hospital and Physician Group Transactions - McDermott Will & Emery

Recent Litigation Shines Spotlight on Hospital and Physician Group Transactions


The US Department of Justice recently intervened in an qui tam alleging false and fraudulent claims involving the acquisition of physician practice locations by a health system and subsequent management of the health system’s hospital service locations by a physician group. The Department of Justice alleged that these arrangements were prohibited by the Anti-Kickback Statute.


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In Depth

On April 11, 2022, the US Department of Justice (DOJ) issued a press release announcing that it had intervened in an ongoing qui tam suit against a health system (Health System) that sought to establish a comprehensive cancer service line by acquiring numerous physician office locations from a physician group (Group) and converting the locations to provider-based locations of the Health System’s hospitals. The Health System also engaged the Group to provide professional services and to manage the cancer center service line across the Health System’s hospitals. DOJ alleged that the management of the cancer center service line by the Group following the acquisition was constructed to provide unlawful kickbacks to the physician owners of the Group, violating the federal Anti-Kickback Statute and the False Claims Act.

Summary of Allegations

The key arrangement at issue in the litigation arose from the Health System’s acquisition of five physician office locations from the Group, and associated arrangements for the subsequent operation of the Health System’s cancer center service line between December 26, 2011, and February 23, 2019. The Health System and the Group relied on several different contractual relationships to achieve a cancer center partnership:

  1. An asset purchase agreement, pursuant to which the Health System purchased assets of the Group, including substantially all equipment, inventory and offices of the Group’s existing outpatient cancer service locations
  2. An employee lease and administrative services agreement, pursuant to which the Health System obtained the services of all non-physician clinical and non-clinical personnel employed by the Group
  3. A professional services agreement (PSA), pursuant to which the Health System obtained the professional services of physicians for the cancer center service locations
  4. A management services agreement (MSA), pursuant to which the Health System paid the Group for the management of both inpatient and outpatient services furnished by the cancer center service line.

The MSA required the Group to provide extensive management services to several Health System hospitals. The MSA incorporated both a base management fee and various incentive compensation components. The Health System and the Group obtained several independent third-party valuation opinions to support the fees under the MSA, including the six inpatient oncology service locations included in the MSA, both at the outset of the arrangement and as the fees under the MSA were modified over time.

DOJ alleged that the Health System acquired physician practice assets and then entered into the subsequent management agreement with the Group for the cancer center service locations to avoid a formal joint venture or other partnership that would have been noncompliant with regulatory requirements. The Health System allegedly failed to follow the requirements of the contractual arrangements with the Group and paid the Group for the management of the cancer center service line without requiring the Group to actually furnish the management services contemplated by the agreement between the parties. DOJ specifically alleged, based on statements from Group witnesses, that the Group did not actually provide any management services at some of the inpatient service locations included in the MSA and reflected in the fees paid by the Health System to the Group. Several of the Health System’s hospitals included in the MSA allegedly did not maintain inpatient cancer units and did not require management. The MSA contemplated that the Group would provide six part-time medical directors (presumably for the six inpatient locations), but DOJ alleged that the Group only ever formally identified two Group physicians to serve as medical directors. Similarly, while the MSA required the Group to maintain documentation demonstrating the management services furnished by the Group’s physicians, allegedly no documentation or exhibits were created to set forth the duties and responsibilities of the medical directors, and the Health System allegedly never requested documentation of the management services furnished before paying the Group.

Over the eight years that the cancer center arrangements were in place, the Group sought an increase in compensation under the MSA. The Health System and the Group obtained several valuation opinions from valuators to support the higher fees. DOJ alleged that the parties used several different valuation firms and provided financial information that did not match the services contemplated to be furnished under the MSA’s terms.

DOJ also alleged that the Health System and the Group repeatedly referred to the arrangements for the cancer center service line as a “partnership” and referred to the MSA as a “co-management” agreement, even though the Group was purportedly managing the Health System’s cancer service line. DOJ also alleged that the Group continued to operate as an independent physician practice, even though the Group’s employees were leased on a full-time basis to the Health System. The Group’s separate operations included growing the Group’s business that was unrelated to the Health System by opening new locations.

Between 2012 and 2018, the Health System paid the Group more than $280 million for professional services under the PSA and more than $27 million for management services under the MSA. DOJ alleged that over the entire duration of the financial arrangement between the Health System and the Group, the Health System paid, either directly or indirectly, more than $300 million to the Group, including other payments to the Group.

DOJ reviewed the Medicare reimbursement paid to the Health System for services furnished through the Group’s physicians and referrals for inpatient services from the Group’s physicians and estimated that Medicare paid the Health System approximately $353 million for such services. DOJ also compared the reimbursement received by a separate health system that formerly received the majority of the referrals from the Group for cancer services and alleged that the other health system’s inpatient and outpatient reimbursement for services from the Group’s physicians was “cut in half” over the course of the financial relationship between the Health System and the Group.

In August 2018, the Group notified the Health System that it wanted to unwind the arrangements between the parties. This notification occurred after the Health System was served with a civil investigative demand seeking information related to the underlying qui tam suits, but the Health System alleged that this was the natural end to the parties’ partnership. The Group paid the Health System for assets and real estate used in the arrangement, and the parties’ arrangements came to an end in February 2019.

Procedural History

The qui tam suit was originally filed by the former CEO of one of the Health System’s hospitals, and a former member of the Health System’s board of directors also joined the case as a relator (collectively, the Relators). After investigating for two years, both DOJ and the state of Tennessee originally declined to intervene on September 3, 2019.

DOJ’s intervention decision occurred relatively late in this case and after considerable litigation between the Relators and the Health System. In February 2021, the Group entered into a settlement agreement that resulted in the Group’s dismissal from the case without prejudice as to the United States. Pursuant to the terms of the settlement with the Relators, the Group provided documents to the Relators and agreed to make witnesses available for the Relators to intervene. The Relators filed a third amended complaint that incorporated information learned from the Group to make new allegations in the case. A key new allegation included in the third amended complaint related to statements made during interviews by members of the Group that they provided no inpatient management services during the affiliation with the Health System. Only after these new allegations were made and DOJ conducted its own interviews of individuals affiliated with the Group did DOJ decide to intervene in the case.

DOJ stated during proceedings related to its motion to intervene that it would seek to assert claims against the Group if permitted to intervene in the litigation. In its order filed March 11, 2022, the district court failed to find good cause to reinsert the Group in the litigation, concluding that it would prejudice the Group and would cause undue delay. Accordingly, DOJ’s complaint in intervention was limited to claims against the Health System.

This case is ongoing, and there have been no judicial findings regarding the allegations at issue. The Health System has not yet filed a response to the complaints in the case but has indicated that the arrangements were structured by counsel and that it may be considering an advice of counsel defense. The Health System has vigorously denied and defended against DOJ’s assertions and allegations, and has indicated that it intends to continue to litigate the case and defend itself against the allegations.

Practical Implications

DOJ has rarely examined management arrangements between health systems and physician groups, particularly the type of complicated regulatory structures required to implement and operationalize service line management agreements. The Health System and the Group both appear to have relied on health regulatory counsel to structure the arrangements at issue and obtained independent valuation opinions to support the fees paid by the Health System to the Group. This case demonstrates DOJ’s willingness to take on more complicated regulatory structures and allege Anti-Kickback Statute violations where, in DOJ’s view, doing so appears warranted by the underlying facts of an arrangement.

The allegations in this case appear to raise significant questions with respect to the Group’s behavior rather than that of the Health System. In particular, the partnership between the Group and the Health System resulted from proactive outreach from the Group to both the Health System and a competitor. The Group solicited requests for proposals from both the Health System and the competitor before ultimately establishing the partnership with the Health System. The Group also allegedly changed its practice patterns and referrals for inpatient cancer care after the relationship with the Health System was established, according to DOJ’s complaint. An important reason for DOJ’s reversal of its original decision not to seek intervention appears to be statements from Group members during interviews, and DOJ also sought to intervene against the Group.

In addition to the notable allegations and unique features of this enforcement action, it is notable what the government did not include in its complaint. When hospitals acquire physician practices (or assets associated with physician practices), a common business goal is to take advantage of favorable reimbursement that is available for hospitals. In this case, the Health System acquired the physician practice locations and converted the locations to provider-based locations of the Health System’s hospitals. Medicare pays for services furnished at “provider-based” locations at a higher rate than services furnished in “freestanding” (i.e., not part of a Medicare hospital) locations. Provider-based status can also be relevant with respect to services covered and paid by non-Medicare payors. Provider-based status is also relevant for purposes of the 340B drug pricing program for participating covered entities that wish to register a provider-based facility as a “child site” eligible to purchase drugs at 340B prices. In this case, converting the former physician practice locations to provider-based status enabled the Health System to take advantage of favorable 340B drug pricing for drugs used at the cancer care service locations at issue. A Medicare regulation establishes a series of detailed operational and administrative requirements that must be satisfied in order for a location to qualify as a provider-based location of a hospital. The Medicare provider-based regulation is intended to ensure that all provider-based locations of a hospital function as an integral part of the hospital. Neither the Relators nor DOJ alleged that the cancer care service locations at issue failed to comply with these Medicare reimbursement requirements.

While the Relators’ operative complaint includes broad allegations related to purported violations of the Anti-Kickback Statute and Stark Law, DOJ’s complaint in intervention is narrowly focused on the Anti-Kickback Statute allegations.

Key Takeaways

  • Carefully consider the ongoing operational and compliance monitoring responsibilities that entering into a partnership between a health system and a physician group entails. Agreements for these types of partnerships can be constructed (with health regulatory counsel advice) as low-risk arrangements but require significant time and expense. More importantly, the time and expense of monitoring the arrangement to ensure it remains consistent with guidance from legal counsel is significant. Providers should ensure that appropriate legal and compliance resources are devoted to providing regular oversight and monitoring of partnerships and management arrangements between health systems and physician groups. Arrangements that involve significant compensation between the health system and a physician group may be subject to closer scrutiny from regulators in the future. As this case demonstrates, even when set up properly, ongoing monitoring is crucial to ensure that parties can defend the arrangement if necessary.
  • Parties to management arrangements between a hospital and a physician group should carefully review the fair market value support documenting the service fees paid to the physician group, and should ensure that the arrangement is bolstered by supporting documentation such as timesheets, regular meeting minutes and other appropriate contemporaneous documentation.
  • This case highlights both the importance of fair market valuation opinions and the risks involved if valuation opinions do not support the terms of a party’s agreement. DOJ alleged that, to support an increase in the fees under the MSA, the parties obtained multiple valuations and used the higher valuation to support increased fees. Both parties to an arrangement should invest appropriate time and attention to ensure valuation opinions properly reflect the terms of the parties’ business arrangements, including modifications to fees and services over the course of an arrangement.