Laboratory Instrument Provider Accused of Health Care Fraud

A North Carolina-based manufacturer and provider of laboratory instruments and reagents, Carolina Liquid Chemistries Corp. (CLC) and its owners, were served with federal search warrants on May 7 seeking chemicals, documents, electronic devices, and communications with its clients as part of a federal investigation into alleged wire and health care fraud. The case is focused on Phil and Patti Shugart, owners of the company, and may be worth an estimated $135 million. The case involves the Federal Bureau of Investigation, the U.S. Department of Health and Human Services and its Office of Inspector General, the Food and Drug Administration (FDA), and the Department of Defense. No charges have been filed in the case, and documents have been sealed by the court. Part of the complex case involves CLC’s alleged practice of selling its instruments, reagents, and testing systems as quantitative drug testing systems when they were only FDA approved as qualitative or semiquantitative systems. Further, CLC tried to convince its clients that they could bill insurance companies, including the Medicare and Medicaid programs and TRICARE, for testing as if it were quantitative, garnering reimbursements as much as five times the amount allowed for screening qualitative or semiquantitative drug tests. According to a search warrant affidavit, the searches were justified based in part on electronic communications consisting of e-mails between Patti Shugart and a variety of individuals and entities, including a Medicare Administrative Contractor, Palmetto GBA, and several coding, billing, and testing experts. According to the investigator’s request for a search warrant, these e-mails and other sources of information, including interviews with employees and experts, provided enough cause to justify the searches at not only the company site but Shugart’s home as well. CLC Says Its Testing System Is an LDT According to the affidavit, the company told clients that they could seek higher reimbursement from Medicare and other health insurance companies by using billing codes that are set aside for quantitative testing. CLC executives also told clients that there was no need to send drug screens to other labs for confirmation testing because the CLC instruments provided a quantitative result. In addition, they told clients that the modified testing procedure used by CLC was a highly complex laboratory-developed test and since it provided an actual value as opposed to a positive or negative or a range of values like between 50 and 75 ng/dl, the quantitative 80000 series of codes could be used instead of the Medicare created “G” codes. Employees of CLC allegedly told prospective instrument purchasers, primarily physicians, that they could make much more money by using CLC’s equipment as opposed to other instruments and test systems available on the market. In one case, the investigator in the case was shown a document allegedly provided by CLC to a client that asserted that by using the 80000 series of CPT codes, the physician could get $476.22 per test. This is a significant increase in revenue as opposed to billing using the Medicare G codes, which would allow, at best, about $99 per test. In one partially quoted e-mail from Patti Shugart to a person believed to be a billing consultant, in response to a question regarding the testing and the equipment CLC was providing and what codes to use, Shugart said, “If they are using the product ‘off-label’ and they are using the number off the instrument as their final number and they have developed their own Lab Developed Test (LDT) and the best CPT that describes what they are doing is Quantitative, then use them.” This would seem to be a pretty loose determination of what an LDT is and who can claim that status for a test system. FDA Violations Also Alleged According to the affidavit, CLC never received any approval from the FDA to market or use its test for urine drug testing. This resulted in the systems sold by CLC to be misbranded and adulterated devices. Since they were sold nationally, the misbranded devices were introduced into interstate commerce, a violation of the Federal Food, Drug, and Cosmetic Act. Potential Outcomes and Questions Stemming From Case First, can CLC be prosecuted for causing false claims to be submitted as a result of their actions? The government would have to prove that claims were actually submitted by a CLC client in order to have a case against CLC for causing the overbilling that may have resulted by any physician who billed as CLC recommended. According to the documents available so far, that may be one of the outcomes resulting from this case. After all, CLC allegedly sold its instruments based on the promise of increased revenue that they could provide for a client as opposed to other testing systems if clients billed as CLC recommended. Another potential outcome is related to the use of laboratory-developed tests and systems. The first question is, are the CLC test systems really LDTs? That may be a difficult case for the Shugarts and CLC to make. For that to be the case, each of the physicians using the systems may have to make their own adjustments and then verify them according to Clinical Laboratory Improvement Amendments rules and regulations to use the systems for treating patients. If the case could be made, does that allow the providers using the systems to bill the quantitative 80000 drug-specific quantitative codes instead of the Medicare-derived G codes, G0431 and G0434? Another issue in this complex case is that the communications between the Medicare contractor and CLC may have provided the evidence that CLC executives did not stop marketing the test systems even in the face of very specific instructions that what they were doing was not correct. A more prudent course of action may have been to stop the practice while they sought the appropriate approval for their instruments and test systems. Even in that case, since they were not actually filing the claims, would they have to take some action to inform their clients to change the way they were billing until the issue is resolved? And finally, what liability exists for physicians who followed CLC’s billing recommendations? Implications for Laboratory Compliance Professionals Since no charges have been filed yet, compliance officers will have to wait for further developments in the case to gain a full understanding of what laws the government thinks have been violated. Investigators will have to sift through the materials collected during the search and seizure at the CLC facility and the Shugarts’ residence. There is no doubt that electronic communications, mainly e-mails, played a large role so far in this case. Also, there are important implications for instrument and reagent manufacturers that make coding and billing recommendations to their clients, particularly when those recommendations are based on demonstrating that increased revenues can be achieved by the purchaser if they follow the company’s advice. Compliance officers in both labs and instrument companies may want to review their policies and procedures concerning e-mails and coding recommendations by instrument manufacturers in light of this case as it develops. Takeaway: Manufacturers should be careful about making recommendations for the coding and billing of their tests based on potential increases in revenue. Laboratories and other providers should always make their own coding and billing determinations.