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December 2023 Labs in Court

by Glenn S. Demby | Nov 24, 2023 | Essential, Lab Industry Advisor, Labs in Court

A settlement for kickback allegations, prison time for lab owners convicted of COVID-19 fraud, and 10x Genomics gets OK for lawsuit.

Exagen Pays More than $650,000 to Settle Specimen Processing Fees Kickback Charges

Case: In a case that began as a qui tam whistleblower lawsuit, the government accused Exagen, Inc. of paying kickbacks to physician groups in the form of specimen processing fees in exchange for ordering the company’s autoimmune diagnostic tests and then billing Medicare and other federal healthcare programs for those tests in violation of the False Claims Act. Rather than go to trial, the California life sciences company agreed to settle the charges for $653,143, of which the whistleblower will get 16 percent.¹

Significance: On June 25, 2014, the U.S. Department of Health and Human Services Office of Inspector General (OIG) published a Special Fraud Alert warning that “Specimen Processing Arrangements” in which labs pay physicians for collecting, processing, and packaging blood specimens, whether on a per-specimen or per-patient-encounter basis, may constitute illegal remuneration under the Anti-Kickback Statute (AKS).² While Fraud Alerts and other OIG guidance aren’t laws, they do carry legal significance since they explain the government’s interpretation and understanding of the fraud laws. Accordingly, labs are expected to be aware of and compliant with this guidance. Thus, as part of the settlement agreement, Exagen had to admit that it was aware of the 2014 OIG Special Fraud Alert. However, despite understanding the liability implications, it didn’t terminate the specimen processing arrangements with referring physicians until 2021.³ (For more on specimen processing fee liability risks and how to manage them, see “Compliance Perspectives: Managing Kickback Liability Risks of Specimen Processing Fees,” G2 Intelligence, October 9, 2018.)⁴

California Lab Owners Face Up to 20 Years in Prison for COVID-19/RPP Add-On Test Fraud

Case: On October 5, the owner of California toxicology lab Matias Clinical Laboratory, Inc., dba Health Care Providers Laboratory (HCPL), pleaded guilty to taking advantage of the relaxed coverage rules for COVID-19 tests implemented by the Centers for Medicare & Medicaid Services (CMS) during the public health emergency (PHE) to bill Medicare for $359 million worth of medically unnecessary respiratory pathogen panels (RPPs).⁵ According to court documents, Lourdes Navarro, 64, conspired with her husband and HCPL co-owner Imran Shams to obtain nasal swab specimens for COVID-19 testing from residents and staff at nursing homes, rehabilitation, and other facilities, sometimes via the payment of kickbacks. HCPL then bundled the modestly priced COVID-19 tests with more costly respiratory tests in the form of RPPs designed to detect multiple pathogens, without regard to patients’ needs for such tests.⁶ Navarro, who will be sentenced on January 23, faces up to 20 years in federal prison, as does Shams, who has also pleaded guilty to conspiracy and has a January 9 sentencing date.⁵

Significance: About two months into the PHE, CMS temporarily eliminated physician order requirements to allow labs to bill Medicare for COVID-19 and other respiratory pathogen tests ordered by nurses and other non-physician practitioners. The OIG has been sounding the warning on potential add-on testing fraud by labs from almost the moment that CMS issued the policy.⁷ Last December, the agency issued a report confirming its suspicions by finding that 378 of the 19,577 labs that received payments for COVID-19 tests from February through December 2020 billed Medicare on the same claim for add-on tests, including RPPs.⁸ The case against HCPL is one of the first enforcement actions to reclaim these ill-gotten COVID-19 add-on RPP test revenues, but it likely won’t be the last.

Government Need Not Show Defendants Knew Patients were Federally Insured to Prove Anti-Kickback Statute Violation

Case: A Texas federal court convicted seven codefendants of participating in a $40 million conspiracy involving kickbacks for surgery referrals at Forest Park Medical Center in Dallas channeled through a pass-through entity for sham marketing and billing services never provided. All seven defendants appealed, contending that the government didn’t produce ample evidence to prove they violated the AKS ban on knowingly and willfully soliciting or receiving any remuneration “in return for referring an individual to a person for furnishing…of any item or service for which payment may be made in whole or in part under a [f]ederal health care program.” While basically conceding that the government had proven the kickback arrangement beyond a reasonable doubt, they claimed their conduct didn’t meet the “knowing and willful” element of the AKS because there was no proof they had knowledge that the patients involved were federally insured and that payment would thus be made under a federal healthcare program. The Court of Appeals for the 10^th Circuit rejected the argument and upheld the convictions.⁹

Significance: In a case of first impression for the 10^th Circuit, the court ruled that a conviction under the AKS doesn’t require that defendants have knowledge that payment for the services they refer may be made by a federal healthcare program. All the government has to show is that the defendants “knowingly agreed to accept remuneration for referring patients that could be federally insured.” Essentially, the evidence showed that the defendants knew that paying kickbacks for surgical referrals was illegal even if they didn’t know that some of the patients involved might be federally insured [United States v. Shah, 2023 U.S. App. LEXIS 26057, __ F.4th __].⁹

10x Genomics Gets Greenlight to Sue Parse Biosciences for Genomics Patent Infringement

Case: Last August, 10x Genomics filed a lawsuit seeking a court declaration that Parse Biosciences’ Evercode Whole Transcriptome assay and a soon-to-be-launched single-cell ATAC-seq (assay for transposase-accessible chromatin by sequencing) product infringed a half dozen of its genomic patents organized into two “families”:¹⁰

three so-called Giresi patents covering lab methods for determining the areas of the human genome that are available for transcription and translation into proteins, and

three Brenner patents for tagging nucleotide sequences so as to indicate from which cell they’re derived.

Parse moved for dismissal, contending that the subject matter of the Giresi and Brenner patents are based purely on natural phenomena and abstract ideas about how genomics work and thus not subject to patent protection. The Delaware federal court disagreed and allowed 10x to proceed with the lawsuit.

Significance: Not all new inventions and discoveries can be patented. Under US patent law (35 U.S.C. §101), patents may be granted only for “any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof.”¹¹ In a 2014 case called Alice Corp. Pty. v. CLS Bank Int’l, the US Supreme Court carved out three key exceptions to patentable concepts under Section 101: laws of nature, physical phenomena, and abstract ideas, finding that these exceptions are “’the basic tools of scientific and technological work’ that lie beyond the domain of patent protection.”¹² For lab companies in the genomics development space, the takeaway from the Delaware case is the ruling that the Alice Corp. exceptions didn’t apply to the 10x patents. The Giresi patents weren’t just “inventors’ hypotheses” about a natural phenomenon, namely, the behavior of a transposon when introduced to an open chromatin. They were an actual process for improving lab methods based on an engineered insertional enzyme complex “not found in nature.”¹³ Similarly, the Brenner patents were based on an actual engineered tagging process, not simply abstract ideas [10X Genomics, Inc. v. Parse Biosciences, Inc., 2023 U.S. Dist. LEXIS 163144, __ F.Supp.3d __].¹³