Court Refuses to Dismiss Lab Owner’s FCA Complaint Against Rival Company

A federal trial court in Ohio has refused to dismiss a False Claims Act (FCA) lawsuit by a lab owner who alleged that a competing lab performed and billed for kidney tests not ordered by treating physicians and paid kickbacks to induce physicians to refer business to it (United States ex rel. Daugherty v. Bostwick Laboratories, S.D. Ohio, No. 1:08-cv-00354-SAS-KLL, 12/18/12). The U.S. District Court for the Southern District of Ohio rejected the defense argument that the lawsuit was jurisdictionally barred because the question of whether physicians are allowed to mark up the technical component of lab tests has been publicly debated for years. The public disclosure bar also is inapplicable, the court said. The court also rejected the defense argument that the complaint should be dismissed because it failed to specify a single case where it billed a medically unnecessary fluorescence in situ hybridization (FISH) test to federal health care programs. Defendant Bostwick Laboratories argued that any FISH test it ran without a treating physician’s signature was medically necessary in order to allow the pathologist to reach a diagnosis, which is an exception to the rule that all tests paid for by federal health care programs must be ordered by the treating physician. At this early stage of the litigation, the court said, the only question before it was whether the complaint stated a plausible claim. Noting that it will become clearer through the discovery process whether the exception applies, the court concluded that the relator set forth sufficient factual allegations from which a court may plausibly infer that Bostwick conducted a fraudulent billing scheme. Further, the court said, the relator sufficiently alleged that Bostwick violated the anti-kickback statute and the Stark self-referral law. Given that compliance with those statutes is a condition of payment from the government, the complaint fell within the ambit of the FCA, the court said. Test for Bladder Cancer According to the opinion, relator Michael Daugherty is the president of LabMD, an Atlanta-based urology and uropathology laboratory. He claimed he was personally familiar with Bostwick Lab’s procedures and personnel because Bostwick provided diagnostic testing on samples submitted to his company’s predecessor for two years. The specific service at issue is the FISH test for bladder cancer. As the court explained, urologists concerned about the possibility of bladder cancer routinely order urine cytology, where a urine sample is sent to a lab and examined under a microscope to determine whether cancerous or precancerous cells are present. If the cells are present, the American Urological Association recommends a cystoscopy, a procedure in which the bladder and the urethra are examined using a thin, lighted instrument called a cytoscope. Other Food and Drug Administration-approved noninvasive tests, such as the FISH test, are used to assist in the diagnosis and surveillance of bladder cancers. However, the FISH test is an adjunctive test, meaning that it received FDA approval for use “in conjunction with and not in lieu of current standard diagnostic procedures.” The FISH test has both a technical component and a professional component. The former refers to the preparation of the sample and the addition of the fluorescent DNA probes to the specimen, which is then incubated. The latter refers to the analysis of the sample after incubation and the interpretation of the analysis. The relator alleged that Bostwick engaged in a scheme to defraud the government by reflexively conducting the FISH test without the ordering physician’s consent and submitting the claim to Medicare and Medicaid and other federally funded programs. The relator also alleged that in exchange for getting all of certain types of lab work from urology practices, Bostwick performed the technical component of the FISH test and then drafted a report for the professional component, which the urology practice’s pathologist then signed and billed for as though they had conducted it. Bostwick also allegedly charged certain physicians less to perform the technical component of the FISH test, so that they could then bill Medicare for a higher amount, thus profiting from the arrangement. In order for the public disclosure bar to apply, the court observed, the transactions that form the basis of the relator’s complaint must have been publicly disclosed in a criminal, civil, or administrative hearing; a congressional, administrative, or government report, hearing, audit, or investigation; or from the news media. Bostwick argued that public disclosure occurred in April 2009, when its general counsel sent a letter to urology practices advising them of its markup program, which allowed physicians to purchase the technical component of certain tests at a below-rate charge and then bill Medicare for the full amount. In the letter, the general counsel expressed his opinion that Bostwick could do this because the anti-markup rule was inapplicable to lab tests that require physician supervision. Bostwick also cited a June 2009 meeting in which representatives from the American Society for Clinical Pathology, the American Clinical Laboratory Association, the College of American Pathologists, and some large independent labs met with officials from the Centers for Medicare and Medicaid Services (CMS) to discuss this loophole concept and the anti-markup rule. According to Bostwick, this meeting, along with several articles discussing the loophole and the anti-markup rule, constituted public disclosure under the applicable statute. The court disagreed. The general counsel’s letter to clients does not fall within the ambit of a public disclosure because it cannot legitimately be seen to be a criminal, civil, or administrative hearing; a congressional, administrative or Government Accountability Office report, hearing, audit, or investigation; or from the news media, the court said. While the court found that the articles Bostwick cited were legitimate examples of news media, and the CMS meeting was an administrative hearing, it concluded that the disclosures made in those fora did not contain enough information to disclose the fraudulent transactions in their entirety because they did not identify Bostwick specifically and they did not discuss the incentives provided by Bostwick. Kickbacks Alleged The court also refused to dismiss the relator’s claim that Bostwick Lab provided remuneration to physicians in order to induce them to refer business its way, in violation of the anti-kickback and Stark laws. The court found that as part of its application to participate in the federal health care programs, Bostwick signed a supplier agreement certifying that “I understand that payment of a claim by Medicare is conditioned upon the claim and the underlying transaction complying with such laws, regulations, and program instructions (including, but not limited to, the federal anti-kickback statute [AKS] and the Stark law).” Noting that violations of the AKS and Stark laws are material as a matter of law, the court concluded that “had the government known about the referral inducement programs alleged in the amended complaint, the government may very well have rejected payment of claims tainted by those programs.” The court also concluded that the relator sufficiently alleged facts from which the court could infer that Bostwick offered or provided something of value to physician practices in exchange for referrals—the opportunity to bill for the professional component of tests that the physicians did not perform. “Such an arrangement, where Bostwick incurs all costs associated with the tests but where the physician practice gets to reap the payment from the federal health care program, is . . . clearly an arrangement whereby something of value was given in order to induce referrals, exactly the scenarios contemplated by the AKS and the Stark Laws,” the court concluded. Finally, the court said the fraud allegations were sufficiently specific to survive dismissal under Federal Rule of Civil Procedure 9(b). While the relator did not attach actual fraudulent claims to the complaint, he gave a representative example of an impermissible reflex FISH test that identified a Florida urology practice that had not ordered or consented to a FISH test but for whom it was nonetheless done for a specific patient on a specific date. He further alleged that a Bostwick representative admitted that it was company policy to conduct reflex FISH testing without a physician’s order. The court concluded that the relator provided the requisite who, what, where, when, and how of the alleged fraud.