Labs in Court: Could Elizabeth Holmes Get a New Trial?

A roundup of recent cases and enforcement actions involving the diagnostics industry.

Federal Judge Mulls New Trial for Elizabeth Holmes

Case: The Elizabeth Holmes case just keeps getting weirder. The latest twist involves prosecution witness Adam Rosendorff who showed up at the convicted Theranos founder’s home to express the guilt he felt for testifying against her at trial. Rosendorff, who served as Theranos’ lab director, was intercepted by Holmes’ boyfriend, William “Billy” Evans. According to Holmes’ lawyers, Rosendorff told Evans that “he tried to answer the questions honestly” but that the prosecutors “tried to make everyone look bad” and portray the things that happened at Theranos to appear worse than they really were. The suggestion of witness manipulation was serious enough for the federal judge to postpone sentencing, originally scheduled for Oct. 17, and hold a new evidentiary hearing to get to the bottom of what happened and decide whether to grant Holmes a new trial.

Significance: The hearing is still going on as of the date we went to press. It’s a bit of a long shot, but there’s still a chance that the judge will declare a mistrial. And if that happens, you can bet that Sunny Balwani’s lawyers will seek a new trial of their own. If the judge rejects the motion for a new trial, sentencing will occur between November and January, with Holmes facing up to 20 years in prison and a $250,000 fine for each of the four counts.

California Health System Settles Reference Lab Billing Fraud Charges for $13 Million

Case: The feds charged Sutter Health and its affiliates with fraudulently billing Medicare and other federal health programs for urine toxicology screening tests that were actually performed by third-party reference labs. While denying the allegations, the northern California health system has opted against risking a trial and agreed to pay $13,091,452 to settle the case, $6.5 million of which it has already paid, with the balance to be paid within 30 days.

Significance: It’s not unusual for a lab or hospital to provide specimens to an independent lab for testing. However, labs and hospitals that enter into these so-called reference testing arrangements need to be very careful to ensure that these tests are properly billed. Basic Rule: The reference lab should bill the hospital for the tests. The hospital would then bill Medicare on behalf of the beneficiary. By billing Medicare directly for the urine toxicology tests performed by the reference labs in this case, Sutter Health violated the False Claims Act. For a complete overview of reference lab billing rules, see, “Who’s Allowed to Bill for Laboratory Reference Testing?,” LCA, April 22, 2022.

OK for Health Plan to Terminate Provider Lab for Suspected Fraud

Case: Upon learning that an employee of one of its network providers, Quality Laboratory Services (QLS), had been indicted on Medicare and Medicaid fraud charges, Healthfirst did a post-payment audit of QLS claims. After finding “strong evidence” that QLS was performing tests not ordered by a treating practitioner, Healthfirst put QLS on “pre-payment review” status. Three months later, it terminated its contract with QLS. The lab then sued the health plan for breach of contract and violating state prompt payment laws, among other things. But the New York court found just cause for termination and dismissed all of QLS’ claims without a trial.

Significance: The decision to terminate QLS to prevent fraud and risk of patient harm was a “reasonable determination” supported by “an abundance of documentary evidence” of wrongdoing by the lab, the court explained. Termination wasn’t carried out in bad faith and state prompt pay laws don’t apply when there’s “a reasonable basis to conclude” that claims were submitted fraudulently [Quality Health Mgt., Inc. v. Healthfirst PHSP, Inc., 2022 N.Y. Misc. LEXIS 5396, 2022 NY Slip Op 33203(U)].

OSHA Fines Connecticut Lab $907K for Exposing Workers to Cancerous Chemicals

Case: Employees of Phoenix Environmental Laboratories complained repeatedly about the faulty ventilation at the site. Several staff members reported symptoms consistent with exposure to methylene chloride, a carcinogenic chemical used at the lab to analyze environmental samples. Management basically brushed aside the complaints and warning signs, leaving employees exposed to the chemical, sometimes above the U.S. Department of Labor’s Occupational Safety and Health Administration (OSHA) permissible exposure limit (PEL). As a result, OSHA cited the lab for six willful, 10 serious, and one other than serious violation. The proposed fine: $907,253.

Significance: Methylene chloride is a solvent used in paint strippers, aerosols, and certain drugs. It’s also used in research labs to perform extractions. OSHA requires labs that use or store methylene chloride to take measures to protect the health and safety of workers that may be exposed. The first step is to perform a hazard assessment and measurements to determine the level of exposure. If necessary, labs must use ventilation and other engineering controls to keep exposure below the PEL. If that’s not reasonably practicable, labs must furnish and ensure that lab workers use appropriate respiratory protective equipment and other personal protective equipment. In addition, there must be safe work procedures for operations involving use or exposure to methylene chloride along with training and supervision to ensure those procedures are followed.