September 2024 Labs in Court

The U.S. Department of Justice (DOJ) has recently announced a number of settlements that are consistent with trends we have seen over the past year. The settlements relate in part to medical necessity and commission-based payments to independent contractors. In addition, settlements have emphasized the benefits of self-disclosure and include a rarer case of a violation of the Stark law in the laboratory context. 

Laboratory Settles with DOJ for Nearly $5.4 Million for Paying Independent Contractor Marketers Commission Based on Volume of PGx Testing Referred

On July 24, 2024,¹ the DOJ announced a settlement with a clinical laboratory to resolve allegations that the lab paid independent contractor marketers commissions to induce them to arrange for or recommend that healthcare providers order pharmacogenetics (PGx) testing from the lab. The lab paid some marketers between 33 and 50 percent of the Medicare or Medicaid reimbursements it received for PGx testing referred by the marketers’ accounts. In other cases, the lab paid marketers a flat fee for each test referred to it.²

The laboratory was allegedly informed that the payment of commissions to independent contractor marketers did not comply with the Anti-Kickback Statute (AKS) but continued to enter into contracts with marketers and pay commissions to them. The lab did not terminate its contracts with the marketers until after the Centers for Medicare & Medicaid Services (CMS) suspended Medicare payments in late 2020.²

The case was originally brought by two qui tam relators who were co-founders of a former third-party marketer for the lab. Although the government claimed damages of nearly $58 million, the settlement² was based on the laboratory’s ability to pay, which the government determined by auditing financial disclosures by the lab.

Precision Oncology Company Settles with DOJ to Settle False Claim Allegations for Lab Tests After Cooperation with Government

On July 16, 2024,³ the DOJ announced a settlement in which a precision oncology company will pay roughly $914,000 for submitting claims for laboratory services that violated the Stark Law. The government alleged that a physician contacted the company’s HR department to recommend a close friend of the physician’s family member for a position as an account manager, who the company ultimately hired. The physician also recommended a different position for his step-daughter once she graduated from college. Although the step-daughter was rejected for that position, the family friend was later promoted and the step-daughter was hired to fill the resulting open position. The physician ordered significantly more tests from the company per quarter after both hirings. However, the government noted in its settlement⁴ that the company took significant steps, including a voluntary self-disclosure, that entitled it to credit for cooperation.

Three Laboratories Settle with the DOJ for Manipulating Diagnosis Codes

The DOJ announced on July 11, 2024,⁵ that it settled with three clinical laboratories—all of which had a common owner—to resolve liability under the False Claims Act based on the labs inserting diagnosis codes into beneficiaries’ reimbursement submissions. These diagnosis codes were generated by the labs, and not by patients’ treating providers. 

The case began as a qui tam whistleblower complaint filed by a former billing representative employed by one of the labs. The relator alleged that the laboratories used an automated method of adding diagnosis codes to claims to assure reimbursement would be made by Medicare or Medicaid and assure a higher reimbursement rate. The diagnosis codes were selected based on the CPT code ordered by beneficiaries’ physicians. The relator alleged that this practice was contrary to the U.S. Department of Health and Human Services Office of Inspector General’s (HHS-OIG’s) 1998 Compliance Program Guidance for Clinical Laboratories, which prohibits laboratories from “us[ing] computer programs that automatically insert diagnosis codes without receipt of diagnostic information from the ordering physician or other authorized individual.”⁶

Although the government claimed damages of approximately $108 million, the settlement was based on each laboratory’s ability to pay. The labs agreed to pay a total of $2.45 million.⁵

Toxicology Lab Settles False Claims Act Case with DOJ Related to Opioid Treatment Programs

On July 10, 2024,⁷ the DOJ announced a $1 million settlement with a California-based laboratory for urine drug testing that was improperly billed to Medicare. The settlement amount was based on the laboratory’s ability to pay. The basis of the government’s claims arises from new Medicare regulations effective in January 2020 under which CMS pays a bundled rate to Opioid Treatment Programs (OTP) for various opioid use disorder treatment services, including toxicology testing. The laboratory admitted as part of the settlement that from January 1, 2020 to March 14, 2023, it billed Medicare separately for confirmatory urine drug testing instead of agreeing to a direct billing arrangement with the OTP, as required.

Private Insurer Allowed to Proceed as a Relator Under the False Claims Act Against a Laboratory

In October 2022, a private insurance company filed a qui tam action against a toxicology laboratory based in Arizona for duplicative, excessive, and medically unnecessary urine drug testing billed to federal healthcare programs.⁸ The DOJ declined to intervene in June 2023 and the case was unsealed. Later that year, the laboratory filed a motion to dismiss, which was decided this summer. The court denied the laboratory’s motion to dismiss for failure to state a claim, holding that the insurer asserted sufficient plausible facts. The insurer alleges three basic schemes: (1) duplicative presumptive testing performed regardless of a positive or negative initial screen; (2) standing orders for definitive testing even if the presumptive was negative and based on stock language from the ordering provider across patients; and (3) drug class standing orders. As part of the allegations, the court recognized the inherent tension of the role of laboratories but noted that facts were plausibly alleged that the laboratory influenced and encouraged non-medically necessary testing.⁸ 

Although the allegations in this case are similar to many cases that we have previously highlighted, this case is somewhat unusual in that the qui tam relator is a commercial payer. This lawsuit is part of a growing trend of cases filed by non-traditional whistleblowers, such as insurance carriers, activists, investors, and special purpose entities created solely to file litigation (i.e., litigation-funding groups). Non-traditional relators may bring FCA claims for different reasons than traditional relators, such as former or current employees. For example, bringing FCA claims may be an effort to deter bad actors that conduct business with the relator, to advance a policy interest, or simply to recoup reimbursements for unnecessary testing. This case serves as a reminder that fraud can be alleged by both corporate insiders and outsiders.

References:

1. U.S. Department of Justice, Office of Public Affairs. “Admera Health Agrees to Pay Over $5M to Settle False Claims Act Allegations of Kickbacks to Third Party Marketers,” https://www.justice.gov/opa/pr/admera-health-agrees-pay-over-5m-settle-false-claims-act-allegations-kickbacks-third-party
2. U.S. Department of Justice, Office of Public Affairs. Settlement Agreement, https://www.justice.gov/opa/media/1361481/dl?inline
3. U.S. Attorney’s Office, Northern District of California. “Cooperating Cancer Testing Company Agrees to Pay Over $900,000 to Resolve Allegations of False Claims for Lab Tests,” https://www.justice.gov/usao-ndca/pr/cooperating-cancer-testing-company-agrees-pay-over-900000-resolve-allegations-false
4. U.S. Attorney’s Office, Northern District of California. Settlement Agreement, https://www.justice.gov/usao-ndca/media/1360656/dl?inline
5. U.S. Attorney’s Office, Middle District of Florida. “Three Clermont Labs Agree To Pay $2.45 Million To Settle False Claims Act Liability For Manipulating Diagnosis Codes,” https://www.justice.gov/usao-mdfl/pr/three-clermont-labs-agree-pay-245-million-settle-false-claims-act-liability
6. Federal Register / Vol. 63, No. 163. U.S. Department of Health and Human Services Office of Inspector General. Compliance Program Guidance for Clinical Laboratories. https://oig.hhs.gov/documents/compliance-guidance/806/cpglab.pdf
7. U.S. Attorney’s Office, District of Massachusetts. “Pacific Toxicology Laboratories Agrees to Pay $1 Million to Resolve Allegations of Fraudulent Billing,” https://www.justice.gov/usao-ma/pr/pacific-toxicology-laboratories-agrees-pay-1-million-resolve-allegations-fraudulent
8. United States ex rel. Allstate Insurance Co. v. Phoenix Toxicology and Lab Services, LLC, 2024 WL 2785396, Civil Action No. 22-6303 (RMB/AMD) (May 30, 2024 D.N.J.)