Case of the Month: Fraud or Legitimate Rural Hospital Lab Outreach Business?

A North Carolina lawsuit pitting one of the nation's largest health insurers and a national hospital management company raises novel legal issues that test the legal limits of provider contracts between insurers and hospital outreach labs.

What Happened
In February 2017, hospital management firm LifeBrite paid $400K to acquire a bankrupt rural outreach hospital in North Carolina. Part of the lure was the hospital's network status with Blue Cross Blue Shield North Carolina (BC). But within14 months, it all went terribly wrong. BC kicked LifeBrite out of its network after discovering what it saw as $11 million worth of fraudulent lab billings. LifeBrite sued the insurer for reneging on $15.5 million in lab reimbursement payments.

Now BC is firing back in the form of a counterclaim accusing LifeBrite of using the hospital as a false billing "front" to "turn a trickle of legitimate monthly billing [for toxicology urine drug tests] averaging $37,400 into an $8.5 million fraudulent river of gold." The suit contends that LifeBrite billed BC at inflated rates for more than 500,000 urine toxicology tests at inflated rates, the "vast majority" of which were "conducted by an affiliated lab that had no relationship with BC, or any connection to the hospital's patients, the community or medical necessity," according to the counterclaim.

Outreach or Overreach?
This isn't your conventional fraud case. Neither side disputes that the tests were ordered or delivered. Nor does BC contend that LifeBrite tried to conceal what it was doing. The real question is whether LifeBrite had the right to bill for the tests given that they were performed by an outside lab for non-hospital, out of network patients.

BC argues that the "plain language" of the contract limits reimbursement to "tests performed by the hospital, at the hospital and for hospital patients."

LifeBrite says that BC is just trying to get out of the contract and doesn't understand its business model as a provider of "outsourced high complexity testing" to other hospitals, which it says is permitted by Medicare. BC may not like the lab outreach model but that isn't the basis for a fraud claim, according to LifeBrite. It also contends that the higher reimbursement rates charged to insurers that BC cites as false billing is a legitimate part of the operational appeal of a for-profit hospital to operate a critical-access rural hospital and keep it financially viable.