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August 2023 Labs in Court

by Glenn S. Demby | Jul 31, 2023 | Essential, Lab Compliance Advisor, Labs in Court

Last month’s key cases involved the outcome of a UHC lawsuit and fines for misleading claims about a COVID-19 test.

Texas Court Sides with UHC in $90 Million Lab Fraud Case Against Next Health

Case: UnitedHealthcare (UHC) sued Next Health, LLC and its labs for allegedly using an elaborate “network of shell companies and marketers” to funnel kickbacks to referring physicians, resulting in over $90 million in fraudulent claims for medically unnecessary drug tests provided to UHC members.¹ Next Health’s corporate owners pled guilty and were sent to prison for criminal conduct related to the case. With its owners in jail, Next Health fought a delaying action in discovery by dragging its feet on UHC’s attempts to obtain materials linking the owners’ crimes to the lawsuit. The delaying and “contumacious conduct” grew so bad that the judge threatened to impose case-ending sanctions against Next Health if there were “any further shenanigans.”¹ But the warning fell on deaf ears. The final blow was the revelation that Next Health had deliberately destroyed lab records, including its LabDaq laboratory information database, and then attempted to cover up its cover-up—leading the Texas federal court to decide the case in UHC’s favor.

Significance: The first takeaway from the case is the reminder that a lab’s potential liability for healthcare fraud isn’t limited to Medicare and government health programs. Private sector payers also have the resources and resolution to go after labs that pay kickbacks for referrals and engage in false billing—so making an enemy of any private payer, let alone the biggest health insurer in the country, is extremely unwise. Attempting to conceal or destroy evidence the way Next Health did in this case only compounds the egregiousness.

The court’s verdict? Enough is enough. Letting Next Health get away with this behavior “would only serve to embolden other dishonest parties to game the system by flouting discovery orders” [United Healthcare Servs., Inc. v. Next Health LLC, 2023 U.S. Dist. LEXIS 47219, 2023 WL 2589237].¹

SEC Fines Co-Diagnostics $250,000 for Misleading COVID-19 Test Claims

Case: The U.S. Securities and Exchange Commission (SEC) claims that Co-Diagnostics issued misleading press releases about its Logix Smart Test for COVID-19 during the early days of the pandemic when such tests were desperately needed. According to the July 5, 2023 SEC cease-and-desist order, the Utah-based testing firm exaggerated the diagnostic specificity and commercial availability of what, at the time, was a test cleared by the FDA for research use only.² The SEC considered this a deliberate attempt to prop up its stock price and avoid being delisted on Nasdaq—a move that saw Co-Diagnostics’ share price rise to $3.08 (an increase of 18.9 percent day-to-day and 48 percent over the prior 30 calendar days) the day the first misleading press release emerged. In addition to the $250,000 penalty against the company, the SEC hit the firm’s corporate counsel, who signed off on its annual reports, with a separate $40,000 fine.³

Significance: The SEC also accused Co-Diagnostics of engaging in nepotism and failing to disclose transactions involving the company’s executives, including employing the CEO’s son as director of sales and marketing (total compensation: $91,352 in fiscal year 2018, $224,900 in 2019, and $1,113,440 in 2020). Engaging the consulting firm co-owned by the son of its then CFO did little to help Co-Diagnostics’ case. All this information was material and, by failing to disclose it, the SEC concluded that the firm had run afoul of the Securities Act of 1933 and Securities Exchange Act of 1934.^2,3

Kentucky Substance Abuse Center Settles Urine Drug Test False Billing Charges for $300,000

Case: Recovery Services, LLC, has agreed to pay $300,000 to settle charges of falsely billing Kentucky Medicaid for medically unnecessary urine drug tests (UDTs). The U.S. Attorney’s Office for Eastern Kentucky accused the alcohol and drug addiction recovery services center of submitting claims for UDTs performed on patients who didn’t receive the individualized medical assessments Medicaid requires for coverage. Recovery Services, formerly called Recovery Chestnut, also allegedly billed for UDTs for residential patients, despite only being licensed to provide outpatient services. Kentucky Medicaid doesn’t cover UDTs performed by outpatient providers on residential patients.⁴

Significance: As of June 30, 2023, the U.S. Department of Justice (DOJ) has reported 10 high-ticket cases involving fraudulent UDT billing. The Recovery Services case is the fifth reported civil settlement and, at $300,000, the smallest. The price tags of the others:

$5.9 million by Texas lab Genotox Laboratories Ltd. for a scheme involving payment of alleged kickbacks in the form of value-based commissions to marketers and use of illegal standing orders disguised as customized profiles⁵

$5 million by Georgia lab Ellis Pain Center and its physician owner for routinely billing high-cost quantitative UDTs that the center lacked the equipment to provide⁶

$1.74 million by Kentucky lab VerraLab JA and Blue Waters Assessment and Testing Services for falsely billing UDTs ordered by a family court for non-medical purposes⁷

$625,000 by Georgia Pain Management, its physician owner, and Samson Pain Center for false billing of medically unnecessary UDTs and non-reimbursable E&M services reported with Modifier 25.⁸

Winning at Criminal Trial Doesn’t Automatically Entitle Fraud Defendants to Legal Fees

Case: Should defendants accused of criminal fraud have their legal costs reimbursed if they end up beating the rap? The case posing this question involved the owner of an occupational therapy clinic found not guilty of conspiracy to commit healthcare fraud and pay kickbacks, among other charges, after a three-week trial. Claiming that the case was unjust, she asked the New York federal court to order the government to repay her $845,750 legal bill. The court declined.

Significance: In 1997, Congress passed a law called the Hyde Amendment allowing federal district courts to award criminal defendants who win in court “a reasonable attorney’s fee and other litigation expenses.” But just winning the case isn’t enough. To award attorney’s fees, the court must find that the government’s position in the case “was vexatious, frivolous, or in bad faith.”⁹ This is a deliberately demanding standard and the court ruled that it wasn’t met in this case, citing the substantial amount of evidence of guilt the government presented along with the consistent way it was presented, all of which contradicted the defendant’s contention that the prosecution’s case was “baseless and shifting” [United States v. Bakry, 2023 U.S. Dist. LEXIS 112524, __ F.Supp.3d __, 2023 WL 4243377].