Could Pharmasan Settlement Be Harbinger for More Corporate Admissions of Wrongdoing?

A Wisconsin firm and an affiliated company that provisionally operate as laboratories have agreed to pay a hefty sum and enter into a corporate integrity agreement to settle federal allegations of health care fraud—but a phrase in its settlement was quite rare.

"Pharmasan agreed that the United States could prove that: Pharmasan falsely billed Medicare for ineligible food sensitivity testing for nearly five years; Pharmasan employees knew that Medicare prohibited payment for food sensitivity testing; and Pharmasan employees submitted false information to Medicare disguising the type of test that Pharmasan was performing so that Medicare would pay for the services. Pharmasan also agreed that the United States could prove that it knowingly submitted claims for laboratory services that violated Medicare billing rules," said a statement issued by the U.S. Department of Justice. In addition to that admission, Pharmasan Labs, Inc. and the affiliated NeuroScience, Inc. in Osceola, Wis., and the owners of the two companies, Gottfried and Mieke Kellermann, agreed to pay $8.5 million to settle False Claims Act allegations. That included $2.85 million seized by federal agents in March of last year, and another $5.66 million the businesses and the Kellermanns will pay directly.

Most settlements lack such a direct admission. The settlement agreement does further state, however, that agreement that the government could prove such facts is not an admission "that liability arises from the facts" and the parties agree that the Settlement Agreement and the facts agreed to are not an admission of liability. Pharmasan and the Kellermanns also reserved the right to contest the admissibility or use of the Settlement Agreement in any future litigation and the right to argue the statement of facts isn't admissible to prove liability under federal evidence rules.

"It is rare," said Jeremy Sternberg, a partner in the Boston office of Holland & Knight and a former federal prosecutor who specializes in government enforcement cases for corporate clients. "I have seen that before in a deferred prosecution agreement in a criminal case, not in a settlement of a civil case."

"I am not sure what it reflects," he said. "It may just be that the case was so strong that the government just wasn't willing to allow a denial."

However, Sternberg noted that such a change in tack by the Justice Department could make it more challenging to represent clients.

According to the complaint, the two corporate entities sold naturopathic and homeopathic products, as well as a lab kit for customers to help market additional sales of the supplements. Medicare bars reimbursement of any tests not authorized by a physician, take-home tests performed by individual patients, or tests that are not medically necessary. The government alleges the companies submitted claims to Medicare for tests with specific billing codes omitted or incorrect codes. In one example, allergy tests were submitted with CPT code 86256, which covers fluorescent antibody assays.

The complaint also asserts that in a prior unrelated matter Gottfried Kellerman was convicted of making false statements to a government agency and conspiracy to make false statements with the intent to defraud, and has evaded deportation related to the conviction for nearly 20 years. The complaint further alleges that Pharmasan and Neuroscience were founded "to defraud Government Healthcare Programs."

The two companies agreed to enter into a five-year corporate integrity agreement, the scope of which was more than 40 pages long. That will include Pharmasan and Neuro- Science hiring a compliance officer, a minimum of three hours of compliance training for each of its employees, and a mechanism for employees to report any compliance issues outside of their chain of management command. And both companies would have to notify the Office of the Inspector General of the Department of Health and Human Services if it sells any of its assets or plans to acquire another business. The companies could be fined as much as $2,500 a day for failure to comply with any of the provisions of the agreement.

"As this settlement demonstrates, health care fraud will be aggressively pursued in Wisconsin," said John W. Vaudreuil, United States Attorney for the Western District of Wisconsin, in a statement. "We will continue to work with our law enforcement partners to ensure that health care providers who lie to the United States, and place profits ahead of their legal and ethical responsibilities, are held accountable."

The settlement ends what had been a particularly fractious saga for Pharmasan, which included accusations that a laboratory manager had engaged in the illegal billing and a failed attempt to keep many of the documents pertaining to the case sealed as privileged. The case began as a qui tam action, brought by Richard Forrest, the Kellermans' insurance billing manager. The DOJ statement didn't name Forrest but said he would receive $1.12 million from the settlement.

"We are glad to resolve these issues with the government and be moving forward," said Gottfried Kellermann in a statement. "We are committed to continuing to provide our patients and doctors with the diagnostic testing services that they need to address patient medical issues."

The statement also suggested Forrest had played a role in the problematic claims, indicating the companies sued him for "diverting billing reimbursements to his own accounts, among other causes of action." NeuroScience and Pharmasan won a $548,477.32 judgment last year against Forrest, records show, although that is the fraction of what it and Pharmasan agreed to pay the federal government.

Court records also indicate that Forrest, who is not an attorney, represented himself in the matter and lost by default— the legal equivalent of not contesting a legal matter at all. Forrest could not be reached for comment.

In another settlement announced in late November, Piedmont Pathology Associates, Inc. and Piedmont Pathology, P.C. in Hickory, N.C., agreed to pay $500,000 to settle false claims charges. That case also began as a qui tam suit, brought by a former Piedmont sales person who alleged that the two entities exchanged licenses for electronic medical record software in exchange for physician referrals, in violation of federal anti-kickback statutes.

"Financial relationships between physicians for referrals can alter a physicians' judgment as to what's necessary and appropriate for a patient," said Bill Nettles, the U.S. Attorney for the District of South Carolina. "Our goal in this settlement was not only to recover money for improper health care claims, but to deter similar conduct and, in turn, promote health care affordability."

In this case, the whistleblower received $75,000 of the settlement—the maximum allowed under federal law—as well as attorneys fees and other legal costs.

Takeaway: The Pharmasan/NeuroScience settlement was particularly tough, and could potentially signal a change in strategy regarding how the U.S. Justice Department negotiates civil false claims settlements.