PAM5533_2022

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 Acme and their insistence on referring them all to AllHealth. Drs. Kode and Mecenas had good relationships with the physicians at Acme 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.

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1.List all the potential lawsuits within this fact pattern. Consider the potential of multiple parties suing other parties in your answer.

2.Provide the following information for each potential lawsuit that may arise from the facts of the hypothetical. Make sure your answer includes the following:

1. 1. Name the plaintiff(s)and the defendant(s).
   2. Indicate the foundation of the suit, i.e., contract, tort, crime, or statutory regulation
   3. Detail the allegations of wrongdoing that each plaintiff avers.
   4. State the response and defense each defendant would assert.
   5. Indicate which laws are specifically implicated, for example:
      1. Stark
      2. Fraud, waste, and abuse
      3. False claims
      4. HIPAA
      5. EMTALA
      6. Antitrust
   6. Suggest what types of damages will be alleged for each suit.

3. Explain how you think each case would be resolved by a court.

1. 1. Indicate who you believe wins the lawsuit.
   2. 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.

Completion of this assignment is a course requirement.