Methodist University hospital building
The federal government has decided to intervene in a 340B-related whistleblower lawsuit involving Methodist University Hospital in Memphis, Tenn.

Feds Take Over Prosecution of Whistleblower Suit Against Tenn. Health System Alleged to Have Paid Cancer Docs Illegally for Referrals that Boosted 340B Profits

The federal government has decided to intervene in a whistleblower lawsuit that accuses a Tennessee health system of paying Memphis-area cancer physicians for referrals that allegedly generated about $70 million a year in profits for the health system from billings on 340B purchased drugs.

According to the whistleblowers’ legal complaint, the funding for the improper payments to doctors at the West Clinic came from Methodist Le Bonheur Healthcare’s (MLH) 340B drug profits from its business agreement with the clinic.

The state of Tennessee is also a party to the suit against MLH, which accuses the health system of “knowingly defrauding federal and state healthcare programs” including Medicare and Medicaid.

In a statement in response to the U.S. Justice Department’s (DOJ) decision, MLH said, “We are confident that a balanced and accurate assessment of our affiliation with West Clinic will present an entirely different picture than the one alleged in the suit and now led by the Justice Department, which is why we believe the claims are without merit and why we will vigorously defend ourselves.”

340B Profit Sharing Alleged

Critics of large acute care hospitals that participate in 340B have long accused the hospitals, with little or no evidence, of misusing the 340B program for profit.

The whistleblowers in this case allege no specific 340B program violations. They did, however, tell a federal district court that MLH intended from the beginning “to buy West’s referrals,” that West “dramatically increased Methodist’s drug profits from the 340B program,” and that MLH “channeled a portion of those profits to West through disguised payments” under a professional services agreement.

The complaint said during a meeting in the summer of 2014 with one of the whistleblowers, the health system’s former CFO told the whistleblower that “the complexities of the 340B program itself and the ‘lack of sophistication’ of the federal government to detect this arrangement of channeling 340B drug profits to West made this strategy a ‘safe’ way to move forward.”

Lawsuit Filed in 2017

The suit was filed under seal in 2017 by Jeffrey Liebman, the former CEO of Methodist University Hospital, MLH’s flagship hospital, and Dr. David Stern, a former vice chancellor of the University of Tennessee Health Science Center who served on MLH’s board of directors.

A federal district judge on March 11 granted DOJ’s motion to intervene, meaning DOJ takes over the prosecution of the case that Liebman and Stern filed on the government’s behalf. If MLH ultimately decides to pay a penalty to settle the case, Liebman and Stern will get a percentage.

DOJ intervenes in such cases only about 20% of the time, typically only when it thinks it will win, lawyers say. DOJ originally declined to intervene in 2019 but reserved the right to do so later. It said in an October 2021 court filing it decided to do so after West clinic physicians named as co-defendants with MLH settled with the whistleblowers and agreed to cooperate with them by providing documents and making witnesses available for interviews. DOJ said it based its decision on new evidence that arose from West’s cooperation.

Business Arrangement’s Details

According to an amended complaint that Liebman and Stern filed in May 2021 after the West Clinic defendants settled and began cooperating with them, over a seven-year partnership that ended in 2018, MLH channeled more than $125 million to West physicians “in excess of their professional collections.” The whistleblowers said these payments “took into account the value of West’s referrals to the Methodist system, including chemotherapy drug referrals with lucrative profit margins under the 340B drug discount program.”

Before the partnership, West owned and operated five outpatient oncology clinics and Methodist owned none and “had had minimal inpatient or outpatient services for cancer patients,” the complaint said. “Methodist negotiated to own these five West cancer clinics and acquire all of these revenue streams from West’s referrals.”

“It would be brazenly illegal under the [Anti-Kickback Statute] and Stark laws for Methodist to write a check each month for drug profits to the West physicians from their referrals,” the complaint continued. “Consequently, Methodist devised a scheme to pay the West physicians through disguised inflated payments under the Professional Services Agreement that violated Methodist’s own valuation opinion and exceeded collections for West’s professional services by over $125 million during the years 2012-2018.”

“Methodist’s disguised scheme accomplished the same objective of rewarding the physicians for the value of their referrals, including lucrative chemotherapy referrals, to the Methodist-acquired cancer clinics and Methodist hospitals,” the complaint said.

The complaint said during an April 2011 meeting with the whistleblowers, MLH’s former CFO “stated that West physicians’ referrals would increase Methodist’s drug profits under the 340B Program by an estimated $15 million per year.” The complaint said the former CFO and MLH’s former CEO, who also attended the meeting, described an arrangement under which one-third of the 340B drug profits would be paid to West physicians in addition to their base pay under the professional services arrangement.

The complaint said that Stern, one of the two whistleblowers, said at the meeting “it was very unusual for 340B drug profits to be used to increase physicians’ incomes.”

“Dr. Stern believed that the 340B drug profits should be used to bolster programs at the nascent cancer center—recruitment, equipment, clinical trials, and infrastructure,” the complaint said. “He disagreed with using the drug profits to enrich the incomes of referring physicians.”

“The actual 340B profits from West physicians’ referrals were much higher than originally projected and increased to $63.73 million by 2016,” the complaint said.

It said at meetings with Methodist and West executives from 2011 through 2016, “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 the health system’s former CFO and CEO, the complaint said. “In those meetings there were many discussions about the importance of 340B profits to the finances of the entire Methodist system as well as the relationship between West physicians and the Methodist system.”

The complaint said during the meetings the former MLH CFO “stated that he had calculated drug profits under the 340B Program from the West physicians’ referrals and how to use those new profits to move the main focus of the cancer service line to the wealthier suburbs despite the intent of the 340B program to assist vulnerable or uninsured patients’ access to prescription medicines and health services.”

The complaint said the former CFO “boasted that this strategy was the way to incentivize the doctors to join with Methodist, make more money, and move away from the urban campus to the wealthiest suburb with higher reimbursement rates from more cancer patients with commercial insurance, Medicare, and Medigap coverage.”

According to the complaint, MLH’s partnership with West Clinic ended in 2018, “the same year that changes to the 340B Program went into effect reducing the Medicare payment rates for drugs purchased by hospitals through the Program. Under the final rule implemented in January 2018, Medicare payments for outpatient drugs to hospitals in the 340B Program were reduced by approximately 28.5%.”

Health System Responds

In its statement in response to DOJ’s decision to intervene in the lawsuit, MLH said its seven-year affiliation with the West Clinic “not only succeeded in achieving superior cancer care but expanded access to services and eased cancer treatment disparities in the mid-south. Such arrangements are common; many health care systems around the country have entered into similar agreements with medical specialty practices.”

“MLH compensated West Clinic for the clinical services its physicians provided and for managing the hospital’s oncology program, according to business terms developed with the advice of respected outside experts,” the statement said. “As we said when the litigation began: We uphold the highest standards and comply with all legal and regulatory requirements. MLH entered into the arrangement to elevate cancer care in its community. MLH’s professional agreements with West Clinic provided needed medical services for cancer patients and our payments for those services were appropriate.”

“Despite the litany of allegations in the complaint, this case boils down to a dispute over the appropriate level of payments MLH made to West Clinic for the services provided by its physicians,” the statement said. “The lawsuit amounts to after-the-fact second guessing of the compensation structure that respected outside experts representing MLH and West Clinic determined reflected fair market value for such services.”

“The lawsuit seeks to portray customary and legal business arrangements between MLH and West Clinic physicians as illegal activities, in effect penalizing the hospital for forging a successful partnership with West Clinic that did exactly what it was intended to do: create an integrated cancer diagnosis, treatment and surgical service that improved cancer care and led to better patient outcomes for the Memphis community,” MLH said.