Compliance Perspectives: Private Sector Joins the Battle against Lab Fraud

The crackdown on lab fraud has been going on for decades. But now the dynamics are changing. While federal prosecutors and private whistleblowers continue to supply most of the impetus, they have been joined by a new and powerful ally: the private sector.

Shareholders
One manifestation of this new trend in lab fraud enforcement is the proliferation of securities fraud lawsuits against labs by their own shareholders. The pattern: Investors charge the lab with making misleading statements and omissions about business to inflate stock value. Later, when the truth is revealed, stock prices plunge and investors are left holding the bag.

The most recent example is the class action lawsuit against Foundation Medicine Inc. Established in 2009, Foundation is a molecular diagnostics company known for its next-generation sequencing-based cancer assays including FoundationOne for solid tumors and FoundationACT for circulating tumors. At up to $7,200 per test, Foundation is heavily reliant on major insurance coverage. So when the Cambridge, Mass.-based company made statements suggesting imminent Medicare coverage of the tumor tests, its common stock took off.

But in July 2015, after nearly 18 months of optimism, the bubble burst. The company disclosed that the expected Medicare approval wouldn't be forthcoming any time soon and slashed its financial guidance for the year. The immediate response was a 24% ($7 per share) stock decline. More bad coverage news and deeper guidance cuts in caused further stock losses in November.

Foundation's investors have now filed a class action lawsuit in Massachusetts federal court claiming that the officers knew all along that the representations about Medicare coverage of the tumor tests were false. From now through Sept. 26, the trial lawyers are looking for investors who bought Foundation stock during the affected period (February 2014 to November 2015) to participate in the suit, including those willing to serve as the lead plaintiff.

Other Notable Securities Fraud Cases against Labs

While it may be the most recent, Foundation is hardly the only lab to be sued by its shareholders for securities fraud. Others include:

Theranos: In November 2016, investors filed a series of class action lawsuits alleging that the privately held blood testing firm and its CEO made false claims about its relatively bloodless finger-prick technology to inflate the value of its securities. "Thousands of investors were spoon-fed continuous lies touting the company's 'world-changing' technology that would 'revolutionize' the industry," according to an attorney representing one group of plaintiffs. In April 2017, a California federal judge refused to dismiss the case against Theranos.

Alere: In October 2016, shareholders sued Alere and its officers for making misstatements and omissions about the company's sales in Latin America, Africa and China and overall financial condition to inflate share value and attract acquisition suitors ahead of announcing its $5.8 billion merger deal with Abbott in February 2016. When the truth about the company's finances came to light in the spring, share prices plunged and Abbott tried to pull out of the deal before eventually agreeing to go through with the acquisition at a reduced price.

NantHealth: A series of March 2017 securities fraud class action suit by shareholders accuse the California-based precision medicine company of making misleading statements about a $12 million contract with the University of Utah and overstating the number of reported test orders to inflate share value ahead of the company's initial public offering.

Consumers—Overbilling
Consumer lawsuits represent another form of private sector fraud action against labs. Perhaps the most notable examples are the current patient suits charging Quest and LabCorp with overbilling lab tests. Separate federal court complaints, each of which may become a class action, in New Jersey (vs. Quest) and North Carolina (vs. LabCorp) contend that the labs billed "fees far in excess of the market rates negotiated at arm's length with third party payers such as insurance companies." According to one of the plaintiffs' lawyers, the patients "had no agreement with the respective labs, and when their insurance companies did not pay their claims, the labs unilaterally charged them excessive, nonmarket-based rates."

The Quest lawsuit cites the example of a couple who were each billed $328.85 for an MTHFR genetic test done in November 2013. Aetna denied coverage, saying the tests were "experimental or investigational." If Aetna had paid for the tests, Quest would have received much less than the $328.85 it billed the patients, the complaint alleges.

The plaintiff's attorney in the LabCorp case cites the example of a patient who was charged $616 for a vitamin D test. Horizon BlueCross Blue Shield refused to pay for the test. But it did pay LabCorp for the 6 other tests the patient received. Payment amount: $63.65, or just 17 percent of the aggregate rack rate of $370. LabCorp then billed the patient for the vitamin D test at the full rack rate of $616, the attorney claims.

Consumers—Misrepresentation
Consumers have also sued labs for misrepresenting their products. Once more, Theranos has been in the eye of the storm. Those same bloated statements by the company about the capabilities of its finger-pricking technology cited in the shareholders' lawsuits spurred consumers to bring a class action lawsuit in Arizona.

But this time, the strategy didn't work. In June 2017, a federal judge tossed out most of the claims against Theranos. For one thing, there was no proof that the consumers ever actually used the product. Thus, for example, at least 3 consumers said that multiple vials of blood were drawn. The problem with that contention is that vials aren't part of the finger-pricking technology.

Note: The private consumer fraud case should not be confused for the consumer fraud case brought by Arizona that Theranos settled with the State Attorney General in April. (For more on the case, see Theranos Announces Settlement Agreements with CMS and Arizona Attorney General.

Creditors
The massive Health Diagnostics Laboratory, Inc. (HDL) case spawned a new form of private sector action against lab fraud: creditor lawsuits against bankrupt labs. In April 2015, HDL agreed to pay $47 million to settle False Claims Act claims involving alleged kickbacks and medically unnecessary testing. The DOJ accused HDL (and another lab called Singulex) of inducing physicians to refer to them for blood testing, including medically unnecessary large multi-assay panels, by paying them sham specimen processing and handling fees of between $10 to $17 per referral and routinely waiving copayments and deductibles. The government also contended that the labs had an illegal sales contract with a marketing firm named Blue Wave.

In June 2015, roughly two months after the settlement, HDL filed for Chapter 11. But bankruptcy would not bring closure. HDL's creditors sued HDL and Blue Wave for $600 million. The creditors also targeted the physicians who accepted kickbacks for referring patients to HDL.

Private Insurers
Perhaps the biggest private sector threat to labs that cheat are private insurers seeking to recover falsely billed lab services. Cigna's $84 million lawsuit against HDL is a notable example, as is the current case by UnitedHealthcare against Dallas-based Next Health LLC and its genetic lab testing subsidiaries for allegedly fraudulent billing of over $100 million in services generated by illegal kickbacks for physician referrals.

Takeaway: While most labs are honest, lab fraud is still big business. And so is recovering the money paid out as a result of fraud. For decades, the government and private whistleblowers have cornered the market in fraud recovery. But now the private sector has gotten into the act, including private insurers, investors, consumers and even bankruptcy creditors.