Labs in Court: A Focus on Individual Accountability

Over the past few years, the U.S. Department of Justice (DOJ) and other enforcement agencies have ramped up their efforts to hold individuals accountable in civil and criminal healthcare fraud actions.¹ That trend continues to play out in recent False Claims Act (FCA) settlements and other healthcare fraud matters involving the laboratory industry. 

Multiple Individuals and Providers Settle False Claims Act Case Focused on Toxicology Testing²

Case: On September 27, five individuals, a hospital, and a laboratory collectively agreed to pay over $7.2 million to resolve FCA allegations. These allegations involved the knowing submission of false claims to federal healthcare programs for laboratory tests that were not medically necessary or that were tainted by federal Anti-Kickback Statute (AKS) violations. Specifically, the DOJ claimed that the hospital, Physicians’ Medical Center (PMC), billed for urine drug tests referred by nonmedical entities, such as homeless shelters and peer-to-peer recovery centers, that did not use the test results for medical diagnosis or treatment. Instead, they used the test results to monitor compliance with the conditions of their programs.

According to the DOJ, a PMC sales representative was aware of how the nonmedical entities used the test results and allegedly benefited financially because his salary was based in part on the amount paid to PMC for the tests at issue. In addition, a director of one of the peer-to-peer recovery centers who also worked as a specimen collector for PMC arranged for a physician to order the testing, despite knowing that the testing was not intended for medical treatment.

After PMC closed, the above-mentioned sales representative engaged in the same fraudulent scheme while working for another laboratory, Bluewater Toxicology. The DOJ also alleged that another Bluewater sales representative violated the AKS when he provided cash and other benefits to a physician for referring laboratory tests to Bluewater. One of the benefits involved Bluewater placing specimen collectors in the physician’s office who performed unrelated work for the practice. The physician and his wife (who worked as the practice’s office manager) entered into settlement agreements related to the alleged AKS violations.

To resolve the allegations, which were brought forth in a qui tam lawsuit, the individuals (the PMC and Bluewater sales representatives, the recovery center director, the physician, and the physician’s wife) paid between $5,500 and just over $713,000 to resolve their liability under the FCA. The value of the individual settlements included consideration of their ability to pay, which means that they would have paid an even larger settlement amount if they had the financial resources to do so.  

Significance: Though healthcare fraud settlements involving toxicology testing have become commonplace over the past few years, this case is unusual in that it involves individual liability imposed on a sales representative who engaged in the same fraud scheme at two different laboratories. It therefore demonstrates how a government investigation can trace an individual across multiple employers to uncover problematic conduct.

Former Hospital CEO Pays More than $5.3 Million to Resolve False Claims Act Allegations³

Case: On October 2, a former hospital CEO agreed to pay more than $5.3 million to resolve allegations that he violated the AKS by providing payments to physicians for laboratory referrals. Jeffrey Madison, the CEO of Little River Healthcare, allegedly agreed to a scheme where the hospital paid commissions to recruiters who used management service organizations (MSOs) to pay kickbacks to physicians to induce their laboratory testing referrals. To resolve the case, Madison accepted responsibility, paid the monetary fine, and is now excluded from participating in federal healthcare programs for 25 years.

The DOJ alleged that Madison knowingly signed false certifications in Medicare cost reports regarding the hospital’s compliance with the AKS. These AKS violations served as predicate offenses under the FCA because the conduct caused the submission of false claims to federal healthcare programs. In addition, Madison caused Little River to pay a physician $2,000 each month, purportedly for medical director fees. However, the physician never performed medical director duties, and thus these payments were allegedly kickbacks to induce the physician to submit laboratory referrals to Little River. 

In remarks about the action, Damien M. Diggs, U.S. Attorney for the Eastern District of Texas, stated, “Seeing past a corporate entity and holding individuals responsible for making the decisions to engage marketers to pay providers for their laboratory referrals is what justice requires.”³

Significance: The efforts of the MSO kickback investigation resulted in 46 physicians entering settlement agreements, demonstrating that the DOJ is prioritizing individual liability.

This settlement resulted from a larger investigation led by the Civil Division’s Commercial Litigation Branch, Fraud Section; the U.S. Attorney’s Office for the Eastern District of Texas; the Office of Inspector General for the Department of Health and Human Services; and the Defense Criminal Investigative Service. The United States has recovered more than $52 million from settlements involving kickbacks paid to physicians through MSOs, and multiple individuals have pled guilty or were convicted at trial for their respective roles in the scheme.

The investigation—which has garnered considerable attention from the laboratory industry over the past few years—related to a partnership between two hospitals (including Little River) and a laboratory. These rural hospitals billed insurers for tests performed by the laboratory as hospital outpatient services, which are paid at a much higher rate than what the laboratory would have received. 

By using a network of marketers who operated MSOs with physician investors, the hospitals essentially paid the physician investors for their laboratory referrals. The hospitals paid a portion of their laboratory revenues to the marketers, and they in turn paid part of their share to the referring physicians, who ordered the laboratory’s tests from the hospitals or directly from the laboratory. The laboratory’s executives and sales staff used the MSO kickbacks to gain and increase referrals and then to increase their revenues, bonuses, and commissions.⁴

Physician Who Allegedly Accepted Kickbacks Agrees to Cooperate and Pays $625,000 False Claims Act Settlement⁵

Case: In another recent FCA settlement, Dr. Eric Troyer and his practice agreed to pay a total of $625,000 to both the United States and the State of North Carolina to resolve alleged FCA violations arising from laboratory kickback schemes. The DOJ alleged that from August 2015 to November 2021, Troyer and his medical practice received kickbacks from a laboratory in Anderson, South Carolina, in return for Troyer’s referrals. Troyer received illegal payments for phlebotomy services, office space rental, and a lease for a chemistry analyzer machine. 

The United States previously resolved allegations involving other physicians in South Carolina, North Carolina, and Texas who received kickbacks from the same South Carolina laboratory. Those settlements also involved other individuals, such as a physician’s office manager and independent marketers.

Significance: As part of the settlement, Troyer agreed to cooperate with the DOJ’s ongoing investigation, meaning there will likely be others held accountable for this scheme.  

Precision Diagnostics Settles False Claims Act Case Involving Kickback and Medical Necessity Claims⁶

Case: Precision Diagnostics, which is one of the largest urine drug testing laboratories in the country, agreed to pay $27 million to resolve alleged violations of the FCA and similar state statutes for billing federal healthcare programs for medically unnecessary urine drug tests. The settlement also resolved allegations that Precision Diagnostics provided free items to physicians who agreed to refer laboratory testing business. Though this settlement did not involve any individual defendants, it is nonetheless worth noting given the laboratory’s size and the settlement amount.

The DOJ claimed that Precision routinely billed federal healthcare programs for “excessive and unnecessary” urine drug testing for nearly a decade. Precision allegedly used “custom profiles” for ordering physicians, which were essentially blanket orders that caused physicians to order urine tests without an individualized assessment of medical necessity, in violation of federal healthcare program rules.

The DOJ also alleged that Precision’s provision of free urine drug test cups to physicians—who agreed to return the specimens to Precision for testing—violated the AKS, which generally prohibits laboratories from giving physicians anything of value in exchange for referrals of tests.

The settlement resolves three qui tam lawsuits in which the DOJ partially intervened, only as to Precision’s liability. One of the whistleblowers involved will receive more than $2.7 million. In connection with the settlement, Precision entered into a five-year Corporate Integrity Agreement. However, Precision did not admit liability as a condition of the settlement.⁷

Significance: Although this settlement did not include individual defendants, at times, the government pursues physicians after securing a settlement from a company. Considering the scope of the conduct at issue and the DOJ’s reiteration of its focus on individual accountability, it’s possible that the DOJ could announce individual settlements in the future.

References:

1. 1. https://www.mintz.com/insights-center/viewpoints/2406/2024-02-06-enforcemintz-dojs-continued-focus-individual
   2. https://www.justice.gov/usao-edky/pr/hospital-laboratory-referring-physician-and-lab-employees-pay-more-72-million-resolve
   3. https://www.justice.gov/opa/pr/texas-hospital-ceo-pay-over-53m-settle-kickback-allegations-involving-laboratory-testing
   4. https://www.justice.gov/usao-edtx/pr/five-defendants-convicted-health-care-kickback-conspiracy
   5. https://www.justice.gov/opa/pr/north-carolina-physician-and-medical-practice-agree-pay-625000-settle-kickback-allegations-0
   6. https://www.justice.gov/opa/pr/precision-toxicology-agrees-pay-27m-resolve-allegations-unnecessary-drug-testing-and-illegal
   7. https://www.justice.gov/opa/media/1371901/dl