The U.S. Department of Justice (“DOJ”) recently intervened in an qui tam suit alleging false and fraudulent claims involving the acquisition of physician practice locations by a health system (the “Health System”) and subsequent management of the health system’s hospital service locations by a physician group (the “Group”).  DOJ alleged that these arrangements were prohibited by the Anti-Kickback Statute.  This case demonstrates DOJ’s willingness to take on more complicated regulatory structures and allege Anti-Kickback Statute violations, where appropriate. 

On April 11, 2022, DOJ issued a press release announcing that it had intervened in an ongoing qui tam suit against the Health System that sought to establish a comprehensive cancer treatment service line by acquiring numerous physician office locations from the Group and converting the locations to provider-based locations of the Health System’s individual 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 individual 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.

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 qualfied healthcare 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.

This case is significant because DOJ has rarely examined management arrangements between health systems and physician groups, historically, particularly the type of complex regulatory structures required to implement and operationalize service line management agreements. The Health System and the Group both appear to have relied on qualified healthcare counsel to structure the arrangements at issue and obtained independent valuation opinions to support the fees paid by the Health System to the Group.  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. 

The allegations in this case 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 onquiries 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 relationship 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 internvene appears to be statements from Group members during interviews, and DOJ also sought to intervene against the Group. 

In addition to the 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 services provided through acute care hospital-based locations.  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 the instant case, converting the Group’s 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.

This case also highlights both the importance of fair market valuation opinions and the risks involved if valuation opinions do not support the terms of the deal.  DOJ has alleged that, to support an increase in the fees under the management services agreement, 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.

Practical Implications for Providers

  • Providers need to carefully consider the ongoing operational and compliance monitoring responsibilities that entering into a partnership between a health system and a physician group entails.  Arrangements for these types of partnerships can be structured (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 health systems and physician groupd may be subject to closer scrutiny from federal authorities in the future.  As this case demonstrates, even when set up properly, ongoing monitoring is crucial to ensure that parties can defend the arrangement, as necessary.
  • Parties to management services agreements between hospitals and physician groups 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.