Health Diagnostic Laboratory Files for Bankruptcy Protection

What perhaps can be considered, in part, fallout from the OIG's Fraud Alert issued last year regarding payments by laboratories to referring physicians and vigorous government enforcement efforts in the sector, Health Diagnostic Laboratory (HDL) has filed for bankruptcy protection. On June 25, 2014, the U.S. Department of Health and Human Services' Office of the Inspector General (OIG) issued a fraud warning regarding payments by laboratories to physicians for processing samples. The OIG warned those payments could constitute an illegal kickback. According to the bankruptcy filing, even before that, the Department of Justice had issued a subpoena to HDL seeking information about its business practices.

Less than three months later, the Wall Street Journal published a frontpage story highlighting the fraud alert and putting HDL in the spotlight. In April of this year, the company entered into a $47 million settlement with the U.S. Department of Justice regarding how it would process samples. The settlement includes a five-year Corporate Integrity Agreement that requires HDL to implement specific procedures and actions with regard to Focus Arrangements—that is, arrangements that involve any payment or other benefit to referral sources. Those requirements include a review and approval process for such arrangements as well as a tracking system that will monitor all such arrangements including any payments to referral sources and will ensure services contracted for are provided according to the terms of such arrangements.

"The confluence of these events and associated media coverage, as well as certain payer issues and changes in billing practices in certain states that affected the fees earned by HDL from each sample test, caused significant disruption to the Company's business and negatively impacted HDL's recent financial performance," the company said in its bankruptcy filing.

Last year's revenue of $320 million was 15 percent below 2013's $375 million, and net income declined by two-thirds, from $45.2 million to $15.3 million. By the first quarter of this year, the average daily sample test volume dropped to half of what it was in 2013. The eroding numbers broke a covenant with at least one of HDL's lenders, causing a credit squeeze and necessitating the filing.

Facing lawsuits from both private payers and the federal government, its revenue dropping precipitously, in default of lending covenants and even the ability to pay its employees in question, HDL filed for bankruptcy protection earlier this month.

HDL filed for bankruptcy under Chapter 11 on June 7 in the Eastern Virginia district of U.S. Bankruptcy Court.

"While we regret the necessity of seeking protection under Chapter 11, it is the right path for us to take, and we see it as an opportunity to better position our company for continued growth and success while strengthening our finances—ensuring our viability as a company for decades to come," said Chief Executive Officer Joseph McConnell in a statement. "As we have seen in any number of industries—the airlines, automakers and retailers—Chapter 11 can lead to bright, self-sustaining and competitive futures."

In addition to the issues with its creditors, HDL is also fighting lawsuits from Cigna, Aetna, its former sales/marketing arm, as well as a whistleblower suit filed by Chris Riedel, a California-based lab owner who now specializes in qui tam lawsuits against competitors, claiming they are gaming how contracts are negotiated with private and public payers.

Takeaway: Department of Justice investigation and subsequent $47 million settlement leaves Health Diagnostic Laboratory attempting to remake itself after filing for bankruptcy protection.