McDonald Hopkins: Collection and handling payments under scrutiny

McDonald Hopkins

Jane Pine Wood, a specialist in health law and member of McDonald Hopkins, recently sent me the following Healthcare Alert that serves as a reminder the federal government is closely scrutinizing financial arrangements between laboratories and referring physicians.

Her email stated McDonald Hopkins put the alert together because:

[W]e are increasingly encountering situations where the laboratories and the health care providers may run afoul of federal and state fraud and abuse guidelines, particularly with respect to payments made by the laboratories to the health care providers for the collection, handling and/or processing of laboratory specimens that will be referred by the health care providers to the laboratories.

Many thanks to Ms. Wood for making this available to us.


On June 25, 2014, the Office of Inspector General (OIG) issued a special fraud alert entitled “Laboratory Payments to Referring Physicians.” The alert deals specifically with laboratories paying compensation to physicians and group practices for blood specimen collection, processing, and packaging activities, as well as the submission of patient data to a database or registry.

The Medicare and Medicaid anti-kickback statute is implicated when remuneration is paid in order to induce or reward referrals for any items or services reimbursed by a federal healthcare program. The alert cautions against arrangements that improperly take into account the volume or value of referrals that may induce a physician or physician group to use a particular laboratory or cause overutilization of testing services. The OIG highlights in this special fraud alert that certain arrangements are particularly suspect under the anti-kickback statute, including specimen collection, processing and packaging arrangements, and registry payments.


The OIG explains the risks associated with arrangements where a physician or physician group is paid by a laboratory for the collection, processing, and/or packaging of specimens. Specimen collection is reimbursed by Medicare only in certain circumstances, including where it is customary practice in the region and for that particular physician to charge for specimen collection separately. There are also separate CPT codes for processing and packaging specimens for transport to a laboratory. Since the laboratory payments to a physician or physician group for these services are often per-specimen or per-patient, the anti-kickback statute is implicated and the OIG cautions laboratories entering into these arrangements to consider, for purposes of determining fair market value, whether or not the physician is already compensated for the activity either through a bundled payment or through payments for overhead expenses. Certain characteristics that the OIG finds to be evidence that the arrangement may be unlawful include if:

  • The payments exceed fair market value, is calculated on a per-specimen or per patient method, or is offered on the condition of a certain number of orders.
  • The physician is already paid for the services by a third party, such as Medicare.
  • The payments go directly to a physician rather than the group practice that actually bears the cost of the services or where the services are performed by someone placed in the office by the laboratory.

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LabCorp and BioReference Laboratories sued for missing endometrial cancer

gavelMs. Jacquelyn Graulty has filed a lawsuit in Louisiana against LabCorp and BioReference Laboratories in which she alleges the laboratories were negligent in “preparing, testing, reading, reviewing, analyzing, categorizing, reporting, and storing” her Pap smear and histologic slides, and this led to a delay in the diagnosis and treatment of her endometrial cancer.  Ms. Graulty’s former gynecologist and medical practice are also named as defendants.

Factual Allegations

Ms. Graulty originally presented to gynecologist Dr. Susan Jeanfreu at Fleur De Lis OB/GYN Associates on November 11, 2008 with complaints of a “possible bacterial infection”.  Dr. Jeanfreu performed a Pap smear and sent it to LabCorp, which reported “Epithelial cell abnormality, atypical squamous cells of undetermined significance [ASCUS]”.

Approximately one month later, Ms. Graulty returned to Dr. Jeanfreu, who sampled her ectocervix and endocervix, which were also sent to LabCorp. LabCorp identified focal mild dysplasia with HPV-associated change in the ectocervix “not inconsistent” with the patient’s prior ASCUS Pap; the endocervical curettage was unremarkable.

A few days before LabCorp’s report came out, Dr. Jeanfreu performed a colposcopy, and determined Ms. Graulty had Cervical Intraepithelial Neoplasia I (CIN-I).

In September 2009, Ms. Graulty came back to Dr. Jeanfreu complaining of vaginal bleeding.  Dr. Jeanfreu altered Ms. Graulty’s birth control and performed another Pap smear, which LabCorp reported as normal.

In January 2012, Ms. Graulty returned to Dr. Jeanfreu with complaints of vaginal bleeding.  Dr. Jeanfreu again altered Ms. Graulty’s birth control, and performed another Pap smear.  This time the Pap was sent to GenPath, which is owned by BioReference Laboratories; GenPath reported the Pap smear was normal.  A pelvic ultrasound at that time showed diffuse adenomyosis.

Over the next six months Ms. Graulty continued to have vaginal bleeding and returned to Dr. Jeanfreu several times, who reportedly simply altered Ms. Graulty’s birth control regimen.

In July 2013, Ms. Graulty moved to Pennsylvania and started seeing a new gynecologist, Dr. Kerri McIntyre, for her continued vaginal bleeding. Dr. McIntyre discontinued Ms. Graulty’s birth control pills and ordered an ultrasound and lab tests, the results of which are not included in the lawsuit.

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Laboratory supervisor’s retaliation and wrongful discharge claims against hospital survive motion to dismiss


Cindy Flick, former Laboratory Section Supervisor at Lourdes Hospital in Paducah, Kentucky, filed a lawsuit against her former employer that alleged, among other things, the hospital solicited kickbacks from Agendia, and retaliated and wrongfully discharged her after she made her concerns known to her superiors.

A US District Court in Kentucky recently considered Lourdes’ motion to dismiss and allowed Ms. Flick’s claims that she was retaliated against, wrongfully discharged, and discouraged from reporting patient safety concerns to survive.


In March 2013, Ms. Flick realized Lourdes was waiting 14 days after a patient was discharged before it sent breast specimens to Agendia for molecular studies.  By waiting, Agendia was able to bill Medicare directly for the $9,325 testing instead of billing Lourdes, which would have had to pay Agendia out of its DRG payment.  While this was financially beneficial for Lourdes, Ms. Flick worried the delay violated the Medicare Claims Processing Manual and could harm breast cancer patients.

She took her concerns to the laboratory director, who claimed he did not know anything about the delay, and did nothing about it.  Ms. Flick then went to the Corporate Compliance Officer, who allegedly looked into the issue, and the practice ended soon thereafter.

Ms. Flick also alleged the laboratory director attempted to insert a clause into Lourdes’ contract with Agendia that “required [Agendia] to waive the charges if testing was ordered on inpatient or same day surgery” patients.

The Agendia sales rep went to Ms. Flick and told her Lourdes had unpaid bills and that he was “having trouble” with the laboratory director.  He provided Ms. Flick with the proposed contract clause for discounted pricing the lab director created.  Ms. Flick met with the lab director and told him she feared the deal he was trying to cut with Agendia potentially violated the Anti-Kickback Statute; the lab director allegedly told her it was none of her business.

At some point, Ms. Flick also learned Agendia had written off almost $14,000 in testing charges for two patients, and that Lourdes billed Medicare for molecular services for one of those patients.  Ms. Flick met with Lourdes’ VP of Operations in August 2013 and supplied him with documentation that the lab director had solicited and accepted free services from Agendia.  The VP told her a few weeks later in an email that he did not have time to deal with the matter and supported the lab director’s decisions.

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Uropathology laboratory LabMD sues Tiversa for racketeering and conspiracy

Scales of Justice

LabMD, the Atlanta-based uropathology laboratory currently embroiled in a years-long administrative and legal fight with the Federal Trade Commission (FTC), has sued data security company Tiversa, its CEO Dr. Robert Boback, and Dr. M. Eric Johnson, alleging they engaged in a “multi-year, nationwide, continuing racketeering scheme and conspiracy” against LabMD.


I have written about the ongoing administrative and legal battle between LabMD and the FTC numerous times, the most recent being just a week ago, when an appellate court upheld the dismissal by a lower court of a suit LabMD filed that sought to terminate the FTC action against it.  Both the lower court and the appellate court determined the FTC must finalize its action against LabMD before any legal challenges to the action can be brought.

In that article, I very briefly summarized Tiversa’s involvement in the case, which LabMD expands upon in its instant complaint:

According to LabMD, a company called Tiversa obtained a LabMD computer file with the protected health information (PHI) of more than 9,000 LabMD patients from a peer-to-peer file sharing program in 2008.  Tiversa told LabMD it had the PHI in its possession but refused to provide any further information “unless LabMD entered into a contract for Internet security services” with Tiversa.  LabMD refused.

Tiversa then allegedly turned LabMD’s PHI over to the FTC, which, after a full-scale investigation into LabMD’s data security practices, pronounced the breach was due to inadequate data security practices.

In addition, the House Oversight Committee is conducting an ongoing investigation into the LabMD/Tiversa/FTC affair.  This is important, as a couple of letters from the Oversight Committee appear as exhibits in LabMD’s complaint, and LabMD uses the content of those letters to support its case.

Allegations in LabMD v. Tiversa complaint

Tiversa and its CEO, Dr. Robert Boback, contacted LabMD multiple times between May and July 2008 and stated Tiversa had obtained a 1,718 page document (“1718 file”) containing “sensitive and confidential patient data” from a peer-to-peer (P2P) network.  Tiversa also told LabMD it continued to see people downloading copies of the file.

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Class action suit accuses Quest Diagnostics of being a monopoly

QuestA new lawsuit filed in the Northern District of California alleges Quest Diagnostics paid kickbacks to physicians, colluded with Aetna and Blue Shield of California (BSC) to suppress competition, and acquired laboratory competitors in order to achieve and maintain a monopoly on clinical diagnostic testing in northern California.

Physician kickback allegations

There are two relevant insurance markets at play here: the “physician billing” market in which Quest bills the referring physician for laboratory services, and the “plan/outpatient market”, in which Quest bills the patient or the patient’s health insurance plan directly.

Physician billing, where physicians pay Quest a set fee per patient per month for all laboratory testing they refer (capitation), is very common in California, where Health Maintenance Organizations (HMOs) are widespread.

The suit alleges Quest provides kickbacks to physicians who have these capitated contracts by charging the physicians well (often 50% or more) below what it costs Quest to perform the tests.  By having their laboratory costs substantially lowered, these physicians realize increased profits, and as a result, the lawsuit claims Quest now has at least 70% of the market share for these physician-billed capitated contracts.

The kickbacks, in addition to physicians’ desire to keep things administratively simple by using only one laboratory provider, provide an incentive for the physicians to also send their plan/outpatient testing to Quest (so-called “pull-through” testing).  These plan/outpatients are then charged above market “monopoly” rates, not the deeply discounted rates Quest charges HMO physicians.

The reduced testing fees Quest charges therefore:

…functionally are no different than if Quest were to give cash to medical providers in exchange for their agreement to steer such business to Quest.

Insurer collusion allegations

The lawsuit claims Quest has colluded with BSC and Aetna, the third and fourth largest private health insurers, respectively, in northern California, to reduce laboratory competition using “cash and other large financial incentives”.


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Appellate court upholds dismissal of challenge to FTC action filed by LabMD

FTC building

The Eleventh Circuit Court of Appeals has upheld the dismissal by a lower court of a challenge filed by uropathology laboratory LabMD which sought to bring an end to an administrative action filed against it by the Federal Trade Commission (FTC).


I have written about the LabMD/FTC saga quite a bit already, and readers can refer to these posts for more info, but what follows is a brief synopsis of how we got to where we are.

According to LabMD, a company called Tiversa obtained a LabMD computer file with the protected health information (PHI) of more than 9,000 LabMD patients from a peer-to-peer file sharing program in 2008.  Tiversa told LabMD it had the PHI in its possession but refused to provide any further information “unless LabMD entered into a contract for Internet security services” with Tiversa.  LabMD refused.

Tiversa then allegedly turned LabMD’s PHI over to the FTC, which, after a full-scale investigation into LabMD’s data security practices, pronounced the breach was due to inadequate data security practices.  These supposed inadequate data security practices, according to the FTC, represented an “unfair” trade practice under Section 5 of the FTC Act. The FTC filed its complaint against LabMD on August 29, 2013.

LabMD president Mike Daugherty

LabMD president Mike Daugherty

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Myriad Genetics working to end all BRCA patent infringement disputes


Myriad Genetics has settled the BRCA patent infringement lawsuits it filed against LabCorp, Invitae and Pathway Genomics, and is reportedly working to settle other pending BRCA lawsuits involving Quest DiagnosticsAmbry Genetics, GeneDx and Counsyl.  This brings to an end nearly six years of essentially continuous litigation over Myriad’s BRCA patents.


On June 13, 2013, the US Supreme Court unanimously invalidated the patents Myriad held on BRCA1 and BRCA2 on the grounds that “[a] naturally occurring DNA segment is a product of nature and not patent eligible…” (Association for Molecular Pathology et al. v. Myriad Genetics et al).

Despite that ruling, over the course of the next six months, Myriad sued Ambry Genetics, Gene by Gene, LabCorp, GeneDx (a subsidiary of Bio-Reference Laboratories), Quest Diagnostics, and Invitae.  Myriad argued the companies were infringing on conventional laboratory techniques contained within the BRCA patents, not the gene sequence part of the patents that were invalidated.

Within the same time frame, Quest, Invitae and Counsyl sued Myriad and asked the courts to issue a declaratory judgment that they were not infringing on Myriad’s patents by offering their own BRCA tests.  In February 2014, Myriad was successful in consolidating three of the actions it filed (Ambry Genetics, GeneDx, Quest Diagnostics) and two actions brought against it (Quest and Counsyl) into one big case in Myriad’s District of Utah home court.

Myriad settled the suit against Gene by Gene in February 2014 and did not sue Pathway Genomics until June 2014, so those cases were not included in the consolidation effort.

Settlement Details

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United States files brief against Millennium Health appeal in urine drug testing cup suit

Millennium Health logo

The United States has filed an amicus curiae (friend of the court) brief that urges the Eleventh Circuit Court of Appeals to reject the appeal filed by Millennium Health (MH) in a case in which a jury found MH violated both the Stark Law and the federal Anti-Kickback Statute (AKS) by providing free point-of-care urine drug testing (POCT) cups to physicians.

I am writing about this brief because it is my understanding (although I could be wrong) this is very unusual and may be the first instance in which the US has filed an amicus brief in a civil case involving Stark and AKS issues in which it was not a party.


This suit was originally filed by MH’s main competitor, Ameritox, in April 2011. Ameritox claimed MH (Millennium Laboratories at that time) violated the Lanham Act (false advertising), the Stark Law and the AKS, and engaged in unfair competition and tortious interference in multiple states by providing physicians with free POCT cups (urine cups which contain immunoassay strips for qualitative drug testing) in exchange for referrals.

A judge ruled in May 2014 that MH violated the Stark Law and AKS when it provided free POCT cups to physicians who then billed for chemical analysis, but allowed a jury to decide whether MH violated the Stark Law and the AKS by providing free POCT cups to physicians who could have billed for POCT but agreed not to do so.

AmeritoxIn June 2014, the jury determined MH did indeed violate the Stark Law and AKS and ordered MH to pay Ameritox $14.8 million. That amount was later reduced to $11.26 million in September 2014.  At some point (I do not know precisely when), MH appealed the decision, arguing, among other things, the provision of POCT cups to physicians did not violate Stark and the AKS.

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Former CEO of Renaissance RX sues founder for breach of contract

Renaissance RX logo

Mr. David Guzan, the former CEO of pharmacogenetics laboratory Renaissance RX, has filed a lawsuit against Renaissance’s founder, Dr. Tarun Jolly, alleging Dr. Jolly failed to transfer a 1% ownership stake in Renaissance potentially worth $2.5 million to Mr. Guzan as promised.

Altogether there are a total of four claims in the suit, three of which do not involve Renaissance, but are nonetheless interesting in that they all involve money owed to Mr. Guzan by entities affiliated with Dr. Jolly.

Louisiana Pain Specialists

Mr. Guzan used to be the CEO of Louisiana Pain Specialists (LPS), a pain medicine practice in New Orleans founded by Dr. Jolly, who is board-certified in pain medicine and anesthesiology.  On September 30, 2014, Mr. Guzan gave LPS 90 days notice that he planned to stop working for LPS.  LPS allegedly asked Mr. Guzan to resign from LPS effective November 13, which he did.

Mr. Guzan’s contract with LPS said if he gives 90 day notice but is asked to resign sooner than the 90 day period, he is supposed to receive all compensation and benefits as if he had stayed the full 90 days.  Mr. Guzan claims he is owed $382,615.36 in salary, benefits and bonus, but has thus far not been paid, despite written demands (Claim #1).

Crescent View Surgical Center

Mr. Guzan is also the Principal of Surgical Continuum (SC) , which according to Mr. Guzan’s LinkedIn page, is a “Consulting, Development and Management Company for Office Base (sic) Surgery Practices, Surgery Centers, Surgical Hospitals and Hospital Joint Ventures with Physicians”.

SC entered into an agreement with LPS in July 2012 to build an outpatient surgical center that would be managed by a company half owned by LPS and half owned by SC.  Management fees were to equal 6% of monthly gross revenue “on a cash basis”.

In addition to the management fees, the agreement also stated SC would receive a 3.33% ownership stake in CVSC that would increase to a total of 10% after the end of the third year of operations.

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Health Diagnostic Laboratory requests injunctive relief from BlueWave Healthcare Consultants

HDL logo

Health Diagnostic Laboratory (HDL) has filed a lawsuit in US District court in Virginia and asked the court to grant an injunction against the owners of BlueWave Healthcare Consultants to prevent them from competing with HDL. Mr. Jeff Ingram, a partner at Galese and Ingram and one of the attorneys representing BlueWave, states HDL’s suit is “without any merit” and is merely an attempt to intimidate BlueWave.

Contents of HDL’s complaint

HDL alleges Robert Johnson and F. Calhoun (Cal) Dent, each of whom owns 50% of BlueWave and 1.5% of HDL,:

…threatened to compete with HDL, to direct other sales representatives not to work with HDL and to appropriate for themselves and other laboratories the physicians and medical practices that were serviced by HDL…

HDL explains Johnson and Dent told an unspecified number of people, including some HDL shareholders, they intended to take all of the business BlueWave generated for HDL to another laboratory.  HDL also alleges Johnson and Dent told their sub-contractor salespeople they are not allowed to talk with HDL about their clients, nor can they enter into conversations regarding potentially becoming employed by HDL.

HDL claims these actions violate the confidentiality, non-competition and non-solicitation provisions in the Shareholders Agreement Johnson and Dent signed when they acquired stock in HDL.  In addition, the two:

…have caused and will cause HDL irreparable harm in lost customer relations, lost business good will, lost reputation in the market, disruption of the market, and irreparable harm through the misappropriation of confidential information.

For these reasons, HDL asks the court to grant preliminary and permanent injunctive relief.

The most interesting part in the complaint, though, is where HDL says Johnson and Dent undertook these actions after HDL notified BlueWave on December 22, 2014 that it wished to renegotiate the terms of the Sales Agreement.  HDL says it wanted to renegotiate because it determined, after a “review and analysis of its operations”, that “certain compensation components…posed a risk of violating federal and state law”.

HDL never specifies to which “compensation components” it is referring.  But I believe it is pretty clear it is talking about the $18-21 “processing and handling” fee HDL used to pay physicians for each sample they referred to HDL that appears on page 2 of the Sales Agreement between HDL and BlueWave.  Readers will recall this is the payment that is being scrutinized by the Office of the Inspector General (OIG) for the Department of Health and Human Services as a possible illegal kickback.

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