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.

Background

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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BlueWave Healthcare Consultants sues Health Diagnostic Laboratory for $205 million

HDL logo

BlueWave Healthcare Consultants, a sales contractor for embattled clinical laboratory Health Diagnostic Laboratory (HDL), is suing HDL for $205 million for breach of contract.  Mr. John Galese, founding shareholder of Galese and Ingram and one of the attorneys representing BlueWave, was kind enough to provide a lengthy comment about this matter which is included at the end of the article.

Contents of BlueWave’s Complaint

BlueWave and HDL entered into a contractual agreement around January 4, 2010 which made BlueWave an independent contractor for HDL for the purposes of performing “certain sales services” in Alabama, the Carolinas, Mississippi, Tennessee, Georgia, Florida, Louisiana, and Texas for a period of ten years.

In exchange for these services, HDL would pay BlueWave 13.8% of the revenue collected from sales within BlueWave’s territory during the first 18 months, 19.8% for the next 18 months, and 16.8% after that.  In addition, BlueWave was also paid a flat monthly fee for the first five years: $53,750/month in year one, $43,000/month in year two, $32,250/month in year three, $21,500/month in year four, and $10,750/month in year five.

BlueWave claims it was eligible to receive a $3,103,512.35 commission payment on December 15, 2014, and a $2,703,126.42 commission payment on January 15, 2015, but HDL “failed and refused” to pay the amount due in December, and has “informed BlueWave it has no intention of making [the January] payment as and when called for”.

BlueWave also claims HDL owes in excess of $19,000,000 in additional commission payments, but has failed to provide an accounting and again informed BlueWave it has no intention of making payment.

Using $3 million/month as a rough gauge of future commissions, BlueWave argues HDL’s breach of contract will cost BlueWave $180,000,000 in commission payments over the remaining 60 months in the contract.

The complaint also notes HDL terminated its contract with BlueWave effective January 4, 2015, and argues that represents a “clear and direct violation of the Termination provisions” in the contract.

In addition to demanding HDL provide a “full, accurate accounting of all revenue received or collected by HDL for sales made in BlueWave’s territory”, BlueWave is also asking for at least $204,806,638.77 as well as interest, fees and costs.

Commentary

Readers will recall HDL first became widely introduced to the public back in September 2014, when John Carreyrou and Tom McGinty at the Wall Street Journal (WSJ) published an article that stated, among other things, HDL was being investigated by the Office of the Inspector General (OIG) for Health and Human Services for potentially paying illegal kickbacks to referring physicians in the form of a $20 “process and handling” payment for each specimen referred to HDL.

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46 month prison sentence given to Polaris Allergy Labs owner for faking test results

gavel

Mr. Rahsaan Garth, owner of Polaris Allergy Labs in East Point Georgia, has been sentenced to 3 years 10 months in prison followed by 3 years of supervised release, and has been ordered to pay approximately $246,000 in restitution for faking the results of allergy tests.

According to the Criminal Information filed by federal prosecutors, Mr. Garth opened Polaris, which provided skin “scratch” and blood allergy testing for food and environmental allergens in both children and adults, in March 2011. Polaris employed an unspecified number of phlebotomists, who were placed in referring physician offices to perform the scratch tests as well as draw blood.

Ordinarily, the phlebotomists would send a requisition form which contained the specific allergens the physician wanted to be tested along with the blood back to Polaris, where a laboratory technician would test the patient’s serum on an Immulite 2000 analyzer.

But, starting in September 2012 and continuing until February 2014, Mr. Garth instructed his lab technician to forego the requested testing if the patient was older than 12 years of age or was an adult who did not have a “reported highly allergic” scratch test so as to save money on testing reagents.

The lab tech was instructed in these cases to simply throw the patient’s blood away and send a blank test report form to Mr. Garth, who would fabricate the test results and send them to the requesting physician.  Mr. Garth would sometimes generate reports that indicated the patient did not have a reaction to any of the allergens requested, but, in an effort to keep physicians from growing suspicious, would also occasionally report positive results as well.

In other instances, if Polaris did not have certain allergen reagents in stock, Mr. Garth would instruct the lab tech to perform tests with the reagents Polaris did have, and Mr. Garth would simply falsify the results for the allergens not in stock.

Mr. Garth also apparently sometimes falsified results in patients younger than 12 and in patients who had reactive skin tests.

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CFO of pain management clinics pleads guilty to receiving laboratory kickbacks

Gavel

Vic Wadhwa, former Chief Financial Officer (CFO) of Advanced Pain Management Services in central Maryland, has pled guilty to soliciting and accepting kickbacks from an unnamed laboratory in northern New Jersey totaling almost $1.4 million from July 2011 to July 2012.

Those who read the plea agreement will notice Advanced Pain’s name, as well as the name of Advanced Pain’s CEO, Muhammad Khan, do not appear in the text.  Those names, however, are disclosed in a separate civil lawsuit filed by Advanced Pain against Misters Wadhwa and Khan in 2012. Unfortunately, neither document contains the name of the New Jersey laboratory in question.

Kickback Scheme Details in Plea Agreement

Mr. Wadhwa was the CFO of Advanced Pain, which generated “hundreds” of urine drug toxicology specimens every month, from December 2009 until August 2012.  In February or March 2011, Mr. Khan told Mr. Wadhwa there was a urine drug toxicology laboratory in northern New Jersey that was willing to “pay a kickback for every urine toxicology specimen”.

Mr. Wadhwa conducted the negotiations with the laboratory owner, who agreed to kick back half of the lab’s after-expense profit for every urine toxicology sample referred.  In March 2011, Advanced Pain stopped sending specimens to the laboratory that to that point had provided “satisfactory” service and switched to the New Jersey lab.  The kickback payments did not begin until July 2011.

The kickback arrangement lasted 16 months, and during that time, the laboratory received a total of $4,033,846.70 in reimbursement from private insurers (~$3.5 million), Medicare ($530,191.13), and the Federal Employees Health Benefit Program ($7,562.83).  It cost the laboratory $690,602.69 to perform the tests referred to it by Advanced Pain.

The laboratory paid a total of $1,376,540.85 in kickback payments between July 2011-July 2012.  Of this, Mr. Wadhwa received $459,245.92, Mr. Khan received “more than $400,000″, and the rest was distributed to “other persons associated with [Advanced Pain].”

After all expenses and kickback payments, the laboratory still netted “substantially in excess of $1 million” in profit during the 16 month scheme.

Mr. Wadhwa faces a maximum of 5 years in prison and a $250,000 fine when he is sentenced on April 2, 2015.

Laboratory-Related Allegations in Advanced Pain Management Services, LLC v. Vic Wadhwa, et al.

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Bio-Reference Laboratories countersues HunterHeart; HunterHeart responds

Bio-Reference LaboratoriesThis is the third installment in a series of posts that describe the legal wranglings between HunterHeart (HH) and Bio-Reference Laboratories (BRLI).  Part one discussed HH’s lawsuit against BRLI.  Part two detailed BRLI’s answer to HH’s suit.  Now I will address BRLI’s counterclaims against HH and HH’s response to those counterclaims.

BRLI advances three counterclaims:  Declaratory Judgment against HH, Breach of Contract against HH and Chris Riedel, and Breach of Contract against HH, Chris Riedel, and Marcia Riedel (President of HH).

Declaratory Judgment against HH

As I mentioned in Monday’s post, BRLI admitted it has not released funds held in an escrow account to HH.  In its counterclaims, BRLI explains why that is, and asks the court to rule HH is not entitled to the funds.

BRLI claims that, during due diligence prior to purchasing Hunter Laboratories, it discovered HH (which was then known as Hunter Labs) failed to both file payroll tax returns in 2009 and 2010, and also failed to pay quarterly payroll taxes “for these and other years”.

This, according to BRLI, left HH vulnerable to “potential tax liabilities to the IRS and other tax authorities totaling millions of dollars, including substantial interest and penalties.”  BRLI then claims the purchase agreement includes stipulations that HH was to settle up its tax liabilities prior to or during closing, and that BRLI would in no way be liable if HH failed to do so.

To ensure that last part, BRLI placed $4 million of the purchase price in an escrow account, which would be used to pay off any of HH’s tax liabilities if HH failed to do so on its own prior to or during closing.  BRLI asserts the use of the escrow funds meant BRLI would be kept “fully apprised” of HH’s tax situation.

BRLI then goes on to explain four conditions in the purchase agreement that, if any one were met, would cause the balance of the escrow funds to be released to HH.  One of these is if HH provided “clearance letters from the IRS for relevant periods” that proves it has no outstanding tax liabilities.

BRLI admits HH produced a letter from the IRS dated February 28, 2014 that stated HH had no outstanding balances, but argues that letter does not satisfy the aforementioned condition.  This is because HH’s fiscal year runs from April 1 to March 31, and historically does not file its returns until December.

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Bio-Reference Laboratories answers lawsuit filed by HunterHeart

Bio-Reference LaboratoriesLast week I wrote about the lawsuit HunterHeart (HH) filed against Bio-Reference Laboratories (BRLI) that alleges, among other things, breach of contract and fraud.  At the time, I mentioned BRLI had filed an answer to HH’s suit and advanced its own counterclaims against HH, but I could not go into detail because it would have made the post far too long.

What follows is BRLI’s answer to HH’s allegations in the order I discussed them in the original post.  Again, because of length considerations, I will have to discuss BRLI’s counterclaims in Wednesday’s post.

BRLI’s answer

HH claimed BRLI agreed to perform and report certain tests on HH’s behalf for the six month period after BRLI acquired Hunter Laboratories.  HH further claimed BRLI agreed to pay HH 40% of the cash collections for those tests but failed to do so.  BRLI argues HH did not provide an “accurate and comprehensive description” of what the purchase agreement actually required of BRLI and denies this allegation.

BRLI readily admits it did not release the $4 million held in escrow, but claims it did so because HH failed to honor the terms of the purchase agreement that would have led to the release of the funds.  BRLI goes into more detail on this point in its counterclaims, which will be discussed in Wednesday’s post.

Unlawful activities related to northern California

BRLI admits it removed HH’s name and logo from test reports, but did so in accordance with provisions in the purchase agreement as well as federal and state laws and regulations, and denies there were any report formatting issues, or that it neglected to “competently service” HH’s accounts.  BRLI also denies it showed a “gross lack of responsiveness to client concerns”.

With respect to HH’s claim that BRLI sent a mass communication to HH’s client base stating it (BRLI) had a “better way to assess heart health” than HH has, BRLI does not deny it sent the communication.  Rather, it claims the purchase agreement allowed for the communication, and disputes HH’s characterization of its contents.

HunterHeartHH alleged BRLI salespeople told HH clients that HH’s testing panel would no longer be available “from any source”, and that HH had refused to “sell or license” its testing panel to BRLI and also refused to allow BRLI to continue to perform HH tests.  HH claimed BRLI personnel made these statements despite the fact HH had “offered and encouraged” BRLI to continue to offer HH’s testing panel in Northern California.

BRLI admits HH made that offer, and that BRLI rejected it, but argues it merely informed HH clients that HH tests would no longer be available through BRLI after the six month testing period ended.  BRLI denies it reported HH’s test results on its own test reports and that a BRLI sales manager removed HH’s test panel from requisition forms.

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HunterHeart sues Bio-Reference Laboratories for breach of contract, fraud

HunterHeart

HunterHeart (HH), a clinical laboratory in northern California owned by Chris Riedel that specializes in cardiovascular testing, has filed a lawsuit against Bio-Reference Laboratories (BRLI) which alleges, among other things, breach of contract and fraud.  BRLI has filed an answer to the suit, and is also pursuing its own counterclaims against HH, but due to space considerations, I will only discuss HH’s allegations at this time.

HH originally filed this lawsuit in Santa Clara County California on August 12, 2014, but the case was removed to the US District Court for the Northern District of California on September 9, 2014.  Admittedly, I did not know about the suit until about a week ago, when I ran across an analyst report about BRLI from short seller GeoInvesting that briefly mentioned it.  In its report, GeoInvesting notes BRLI failed to disclose the suit to its investors in its latest 10-Q filing.

Hunter’s allegations against BRLI

HH used to be part of Hunter Laboratories, which was sold to BRLI in August 2013.  At that time, BRLI had no interest in Hunter Labs’ cardiovascular testing services, and so that portion was excluded from the purchase agreement and remained an independent lab under the control of Mr. Riedel.

But, BRLI agreed to provide HH with “testing, related services, and reports on [HH’s] behalf” for up to six months after the purchase of Hunter Labs, and also pay HH 40% of the cash collections for those testing services.  HH alleges BRLI failed to meet the terms of the purchase agreement, and failed to pay HH for its share of the testing performed.

In addition, HH claims BRLI has refused to release approximately $4 million of the purchase price that has been held in escrow to HH.

HH then splits its complaint up and discusses BRLI’s alleged unlawful activities related to and outside of northern California.

Unlawful activities related to northern California

HH claims BRLI, on the very first day BRLI started running tests for HH, removed HH’s name and logo from test reports and inserted its own name instead.  After multiple requests and several weeks, BRLI finally re-inserted HH’s name and logo on some of the test reports.  This, however, apparently resulted in formatting issues that caused the omission of important test results, including entire categories of tests, as well as Patient Risk Category classification and Treatment Goals, from the reports.

Bio-Reference LaboratoriesHH alleges no one at BRLI even noticed these reporting issues and, despite numerous requests to fix them, did not make any attempt to rectify the matter until five months into the six month servicing period. HH argues these reporting issues “adversely affected client relationships and caused irreparable damage”.

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Health Diagnostic Laboratory asks court to dismiss $84 million fraud suit filed by Cigna

HDL logo

Health Diagnostic Laboratory (HDL) has filed a motion to dismiss the $84 million fee-forgiving fraud suit filed by Cigna, arguing the insurer’s use of the amended Employment Retirement Security Act of 1974 (ERISA) is fatally flawed.

Allegations

Very briefly, Cigna, in its suit filed in October 2014claims HDL:

…lures patients from health plans that are administered or insured by Cigna by misrepresenting those patients’ responsibilities under the plans, by promising not to collect any co-payment, co-insurance or deductible obligation, and by further promising not to seek reimbursement for any other portion of its bill that the plan does not cover. HDL then misleadingly bills the plans themselves at exorbitant and unjustified “phantom” rates—rates that misrepresent what HDL actually intended to collect.

HDL’s memo of law in support of its motion to dismiss

The bulk of HDL’s argument centers around Cigna’s use of ERISA as the basis for its claims and offers six reasons why the suit should be dismissed:

  1. Cigna lacks standing as a fiduciary under ERISA
  2. Cigna failed to comply with ERISA’s administrative process for adverse benefit determinations
  3. Cigna failed to identify any ERISA provisions that were violated and resulted in harm
  4. Cigna failed to allege damages that can be compensated under ERISA
  5. Cigna’s state law claims are preempted by ERISA
  6. Cigna failed to “allege fraud with particularity”

What follows is a summary of HDL’s arguments in its Memorandum of Law in Support of Motion to Dismiss.

Cigna lacks standing under ERISA

Under ERISA, only “participants, beneficiaries, and fiduciaries” may seek relief.  ERISA further states a fiduciary may only recover funds for the plan(s) it administers, and not for the fiduciary itself.

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