Healthways Lawsuit Settlement: The $40M Kickback Case and HCA Link

In March 2009, Nashville-based Healthways, Inc. agreed to a $40 million lawsuit settlement to end a fifteen-year-old whistleblower case alleging that its Diabetes Treatment Centers of America subsidiary had paid physicians kickbacks in exchange for Medicare and Medicaid patient referrals. Of the total, $28 million went to the U.S. government and roughly $12 million covered legal expenses, other settlement costs, and the plaintiff’s attorney fees.¹ Healthways did not admit wrongdoing.

What DTCA Was Accused Of

Diabetes Treatment Centers of America was a program Healthways had run since 1983, back when it was still called American Healthcorp.² DTCA operated diabetes treatment centers inside hospitals around the country and contracted with local physicians to serve as medical directors at each facility.³

In 1994, former employee A. Scott Pogue filed a qui tam suit under the False Claims Act, styled United States ex rel. Pogue v. Diabetes Treatment Centers of America, Inc., in the U.S. District Court for the District of Columbia before Judge Royce C. Lamberth.⁴ Pogue alleged the medical director positions existed mainly to secure patient referrals and that the physicians were effectively paid referral fees, in violation of the federal Anti-Kickback Statute and the Stark Law.³ Every Medicare or Medicaid claim tied to those referrals was, on Pogue’s theory, a false claim.

Court filings described a business built around patient volume. Internal planning centered on “census,” profitability analyses treated encouragement of hospital admissions as a primary goal, and physician contracts often tied compensation to a percentage of the annual gross revenue generated by the DTCA facility where the doctor worked. One former medical director said the company “ostensibly paid us for our referrals.”⁵

Why the Case Took Fifteen Years to Settle

The federal government chose not to intervene, so Pogue’s team pursued the case on the government’s behalf without the Department of Justice taking an active litigation role.⁶ The case ground on for over a decade.

The turning point came in 2008, when Judge Lamberth denied DTCA’s motion for summary judgment and found that a reasonable jury could conclude the company knowingly violated the Anti-Kickback Statute and the False Claims Act. The ruling gutted DTCA’s advice-of-counsel defense. According to the court, the company’s own lawyers had warned about compliance problems, specifically the need for fair market value evaluations and time logs for physician services, and DTCA had “deliberately ignored” them. The court also noted evidence suggesting the company may have misled its own counsel by not disclosing that physician pay was tied to referral volume, and found that DTCA had failed to perform contemporaneous fair market value assessments until at least 1995, relying instead on “personal judgment” and “rules of thumb.”⁵ With trial ahead, settlement talks intensified.

Terms of the Settlement and the Company’s Position

Healthways announced the $40 million deal on March 13, 2009, subject to final approval by the Department of Justice.⁶ CEO Ben Leedle Jr. said the company continued to believe it had conducted its DTCA business “in full compliance with applicable law” but had concluded that settling was “in the best interests of the Company and its shareholders,” citing legal costs, management distraction, and the uncertainty of trial.¹

Financial Impact on Healthways

The $40 million charge hit the first quarter of 2009 and reduced earnings by $0.73 per diluted share. Healthways’ prior earnings guidance had not accounted for it, but the company said guidance was otherwise unchanged.⁶

Healthways also amended its credit facility so the charge would be excluded from EBITDA calculations under its financial covenants. Even after paying the settlement, the company projected $50 to $70 million in cash flow from operations for 2009 and reported $315 million in combined cash and available credit as of late February 2009.⁶

The HCA Connection

The Pogue lawsuit also touched the massive HCA healthcare fraud settlement announced by the Department of Justice in June 2003. HCA paid $1.5 million separately to resolve allegations that its West Paces Medical Center in Atlanta had paid kickbacks for the referral of diabetes patients, a matter directly connected to the Pogue whistleblower case, identified in government records as U.S. ex rel. Pogue v. American Healthcorp, Inc. et al.⁷ The Pogue complaint named numerous medical entities and individual physicians as defendants alongside DTCA and its parent, and the HCA-related resolution addressed one slice of that broader set of allegations.

What Happened to Healthways After the Settlement

Healthways was founded in 1981 as American Healthcorp, began running DTCA hospital-based diabetes centers in 1983, and expanded in the 1990s into disease management programs for patients with chronic conditions.² It rebranded as American Healthways in 2000 and later shortened the name to Healthways.⁸

In 2016, Healthways divested its total population health services business to Sharecare, and on January 10, 2017, the company rebranded again as Tivity Health, Inc., trading on NASDAQ under the ticker TVTY.⁹ Under the Tivity Health name, the company focused on its SilverSneakers fitness program for older adults and its WholeHealth Living network of specialty providers.¹⁰

1
Nashville Post. Healthways Has $40M Deal to Settle 15-Year-Old Suit
2
CMS.gov. American Healthways Disease Management History
3
vlex. U.S. Ex Rel. Pogue v. Diabetes Treatment Centers of America, Inc.
4
CourtListener. United States Ex Rel. Pogue v. Diabetes Treatment Centers of America, Inc.
5
CCB Journal. Lessons From False Claims Act Case Alleging Violation of Anti-Kickback Act
6
SEC. Healthways, Inc. Press Release
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U.S. Department of Justice. Largest Health Care Fraud Case in U.S. History Settled
8
Encyclopedia.com. American Healthways, Inc.
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GlobeNewsWire. Healthways, Inc. Is Now Tivity Health, Inc.
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Tivity Health. Tivity Health Homepage