U.S. files suit against Memphis hospitals for unlawful kickbacks scheme involving local clinic

MEMPHIS, Tenn. — The United States has filed suit against Methodist Le Bonheur Healthcare (MLH) and Methodist Healthcare Memphis Hospitals (Methodist) for paying unlawful kickbacks to a local clinic in exchange for patient referrals.

A release from the Department of Justice said the hospitals violated the False Claims Act (FCA) and Anti-Kickback Statue (AKS) by allegedly paying West Clinic, P.C. (West) in exchange for West’s patient referrals.

The U.S. seeks to recover hundreds of millions of dollars from the lawsuit.

The government began investigating the alleged scheme in response to a lawsuit filed under the qui tam, or whistleblower, provisions of the False Claims Act, which allows private citizens with knowledge of false claims to bring civil suits on behalf of the government and to share in any recovery.

The qui tam action was initially filed on May 30, 2017, by Jeffrey H. Liebman, the former President of Methodist University Hospital, the release said.

In December 2019, David M. Stern, M.D., the former Executive Dean and Vice Chancellor at the University of Tennessee Health Sciences Center, who served on the Board of Directors of MLH from 2011 to 2017, joined the lawsuit. Stern was also a member of the Executive Cancer Council and the Steering Committee for the West Cancer Center.

The complaint details the unlawful kickbacks, disguised through a sophisticated business integration wherein Methodist purchased substantially all of the outpatient locations of the largest oncology practice in the Memphis area, owned by West, the release said.

At the time of the arrangement, Methodist lacked a comprehensive cancer treatment center.

The multi-agreement transaction purported to be a lawful way to allow West’s patients to be treated at Methodist locations by West-employed physicians for outpatient and inpatient services, with West providing management services to Methodist’s adult oncology service line.

As a result of the deal, Methodist would receive increased Medicare reimbursements relating to the cancer care. The parties described it as a “partnership” to achieve a cancer “center without walls,” where patients would go to Methodist-owned facilities for all their cancer-related care in what was called the West Cancer Center, the release said.

However, there was never any formal partnership created, as to do so likely would have violated regulatory requirements.

As part of Methodist’s business combination with West, Methodist made a separate for-profit $7 million investment in ACORN Research, LLC (ACORN), an entity in which West and its Medical Director and shareholder, Dr. Lee Schwartzberg, had a personal financial interest.

Through the deal, Methodist provided an immediate influx of millions of dollars in cash to West through its purchase of certain assets, as well as the ACORN investment, which resulted in a repayment of $3.5 million in debt owed to West and its shareholder, Dr. Schwartzberg, officials said.

Kickbacks for the revenues Methodist generated from the West referrals, however, were disguised as payments Methodist made to West during the seven years of the deal, and expressly for certain services that were supposed to be – but were not – provided under the management services agreement, officials said.

As a result of the transaction, Methodist, which prior to the deal had no outpatient cancer treatment, was able to establish a new stream of income in the reimbursements for outpatient treatment that previously went to West. Methodist also realized a huge increase in referrals for inpatient services from West, which previously referred the bulk of its patients to Methodist’s competitors, including Baptist Memorial Hospital.

By purchasing West’s outpatient locations, Methodist was able to bill Medicare not only for the facility and professional components of outpatient treatment but also for the chemotherapy and other drugs provided, for which Methodist could recoup a staggering discount in costs through the 340B Discount Drug Program, resulting in $50 million in profits to Methodist in one year alone.

Methodist knew that it would be a violation of the AKS to compensate West in exchange for the volume or value of referrals to Methodist, yet, as the referrals to Methodist increased over the seven years of the deal, so did Methodist’s payments to West under the management agreement, officials said.

Methodist also knew that West had not been providing all the management services at all the locations required by the MSA. For the management services West was performing, Methodist often was double-paying West, as it was paying West separately for these services pursuant to other agreements.

Methodist knowingly agreed to pay West millions of dollars in kickbacks for the revenues Methodist expected to, and ultimately did, realize from West’s referrals.

The arrangement lasted from January 1, 2012, through December 31, 2018, and continued even after Methodist knew that the United States was investigating these allegations following the filing of the whistleblowers’ lawsuit, the release said.

The matter is being investigated by the Department of Health and Human Services, Office of Inspector General. Assistant U.S. Attorney Kara F. Sweet represents the United States.

The claims in which the United States has intervened are allegations only, and there has been no determination of liability.

Methodist Le Bonheur Hospital released the following statement:

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.