Final Project Hypothetical: Acme General Hospital Acme General Hospital is a large referral hospital in Boston, Massachusetts. It has a full set of
services including a trauma center, surgical subspecialties, internal medicine, cardiac, neurology, gastroenterology, otolaryngology, obstetrics and gynecology, dermatology,
rheumatology, and pediatrics.
Acme General Hospital is a teaching hospital, providing high-end
tertiary and quaternary care and is a safety net provider.
Acme is part of the Vision in Health System which includes five community hospitals, a skilled
nursing facility (SFN), a rehabilitation hospital, a home health agency, ten surgery centers, and
five ambulatory facilities.
Costs associated with running Acme are going up and reimbursement rates are falling,
especially from government payers. In order to compete in this environment, Acme believes it
needs to grow its business in order to consolidate its clinical, as well as administrative, services.
It believes obtaining efficiencies of scale as a strategy is imperative for its future.
Acme learns that Blakely General, a community hospital in the Springfield, Massachusetts, area
has retained an investment banking company to review its options for staying independent or
joining a health system. The firm representing Blakely General is First Omega Corporation,
which is a division of a public company incorporated in the state of Delaware, having a principal
place of business on Park Avenue in New York City.
Blakely General’s primary source of business comes from referrals from a large physician-
owned practice in the greater Springfield area called Apex Med. Apex Med has 1,500 physicians
in its group, including primary care and sub-specialist physicians. Blakely and Apex Med have
had a long-standing relationship which is embodied in a Preferred Provider Arrangement
whereby Apex Med sends its referrals to Blakely for patients requiring services it cannot provide
and Blakely agrees to give Apex Med “preferred status” among the other providers who refer
patients to Blakely. This “preferred status” is important to Apex Med because it can assure its
patients of placement at a hospital when the need arises and it includes the assurance from
Blakely that it will not attempt to poach the patient and instead will communicate with the
referring physician throughout the patient’s stay at Blakely and then once discharged, the
patient will be returned to the referring physician.
Apex Med has one major competitor, Cerv Med, also a physician-owned practice. For the last
five years, Apex and Cerv have had an oral agreement they called the “employee allocation
arrangement.” Under this arrangement, Apex and Cerv agreed not to hire each other’s key
executive and physician employees. Unbeknownst to Apex Med, a former administrator, Lenora
Davidson, reported the “employee allocation agreement” to the Department of Justice (the
DOJ). The DOJ, initiated an investigation. It is days away from filing an antitrust action against
these two medical practice companies for violations of the Sherman Act.
Drummond is a large public company headquartered in St. Louis, Missouri, that, among other
things, buys physician organizations. Acquired physician organizations are combined with other
owned physician groups to achieve efficiencies of scale, including clinical protocols and
acquisition of equipment and pharmaceuticals. Drummond has been in discussions with Apex
Med in an effort to acquire them and bring them into the Drummond division which houses
medical practices.
Drummond makes an offer to purchase Apex Med for $50 million. Under the arrangement Apex
Med physicians, nurses, and administrators would become employed by Drummond. The
transaction is a purchase of all the membership interests in Apex Med LLC. The parties enter
into negotiations, draft a definitive agreement, receive all the necessary regulatory approvals,
and close the transaction. All of Apex Med employees become employed by Drummond.
Just as Drummond acquires Apex Med, Acme and Blakeley execute a bilateral standard form
Non-Disclosure Agreement (NDA) and further agrees to a 90-day standstill agreement, wherein
Blakeley agrees not to solicit or respond to other parties’ interest in a corporate transaction with
them and Acme agrees to devote its energies in doing all things necessary to effect a potential
acquisition of Blakeley.
A memorandum of understanding (MOU) is negotiated and executed by Acme and Blakeley
pursuant to which Acme would purchase Blakeley for $450 million. First Omega Corp. is acting
in a consulting capacity through its Managing Director, Sami King as Blakeley’s investment
banker. The transaction is contingent upon the usual steps including obtaining Board and
regulatory approvals and due diligence.
Not being happy with the huge commission he will earn if the transaction is completed, King
contacts a competitor of Acme, AllHealth, a large hospital system in Connecticut. He tells the
Chief Financial Officer of AllHealth that Acme is going to buy Blakeley and expand its catchment
area into Connecticut, potentially becoming a major competitor to AllHealth. The CFO of
AllHealth is alarmed, gathers the executive committee of the Board of Directors and proposes
that they approve a better offer for Blakeley. After a discussion, AllHealth outbids Acme with an
offer to buy Blakeley for $500 million.
King calculates his increased sales commission and
advises Blakeley’s Board of Directors to take the AllHealth offer. When several Board members
question King about the fact that Blakeley already has an agreement with Acme, he tells them,
in a forceful way, that they have a fiduciary duty to sell themselves to the highest bidder. He
says that duty is more important than the MOU or the stand-still agreement. Raj Patel, the
President of AllHealth is invited into the Board meeting with the Board of Blakeley. He tells the
Blakeley Board that Acme is a third-rate hospital with substantial financial problems and a track
record of routinely committing medical malpractice. The Blakeley Board accepts the AllHealth
offer but says it will do so only if AllHealth waives due diligence, all contingencies including a
financing contingency, and accepts all current and future liabilities, whether known, unknown,
threatened or implied.
After acquiring Apex Med, Drummond decides that its physicians should no longer refer cases
to Blakeley and instead it should send all of its business to Acme. Acme accepts the patient
referrals under a participation agreement whereby Acme provides Drummond lower in-patient,
surgery and procedures rates than it charges others.
Drs. Alana Kode and Jorge Mecenas were physicians who worked at Apex Med who were in
turn working for Drummond. They did not agree with Drummond’s decision to stop referring
cases to Blakeley and their insistence on referring them all to Acme. Drs. Kode and Mecenas
had good relationships with the physicians at Blakeley and did not want to upend those good
working relations. Each doctor, Kode and Mecenas, had employment agreements with Apex
Med, which were assumed by Drummond. In the employment agreement, each physician
agreed to work for a period of five years for Apex Med. In return for the agreement to work for
no less than five years, Apex Med agreed to pay off the costs of each physician’s medical
education loans. At the time of their resignation from Drummond, Drs. Kode and Mecenas had
worked for Apex Med for two years.
The fact pattern contains seven potential lawsuits related to topics covered in this course. Please explain how this fact pattern shows a violation of the Stark Law and answer the bullet points below.
Include all relevant factual information from the hypothetical in your response. In this process, be creative with the foundations in the common law and in statutory regulations to assert, deny, and/or defend claims each party may make against another. Assume that any claims made by one party against others are not settle-able and that the claimant is left with no alternative but to file suit.
1. List all the potential reasons why this fact pattern shows a violation of the Stark Law. Consider the potential of multiple parties suing other parties in your answer.
2. Provide the following information for the lawsuit that may arise from the facts of the hypothetical. Make sure your answer includes the following:
- Name the plaintiff(s)and the defendant(s).
- Indicate the foundation of the suit, i.e., contract, tort, crime, or statutory regulation
- Detail the allegations of wrongdoing that each plaintiff avers.
- State the response and defense each defendant would assert.
- Suggest what types of damages will be alleged for each suit.
3. Explain how you think the case would be resolved by a court.
- Indicate who you believe wins the lawsuit.
- State what types of damages, if any, you think may be awarded, and how might the court calculate them.
4. Describe any ethical issues which may not rise to the level of an actionable lawsuit.
