Health Diagnostic Laboratory to pay $47 million to settle kickback allegations

HDL logo

Mr. John Carreyrou at the Wall Street Journal is reporting Health Diagnostic Laboratory (HDL) has reached a tentative deal with the government to pay $47 million to settle allegations it paid kickbacks to physicians in exchange for test referrals.


In September 2014, the WSJ published an article that stated the Office of the Inspector General for the Department of Health and Human Services was investigating the $20 per specimen payment HDL remitted to referring physicians as a possible illegal kickback.  According to an internal memo written by then-CEO Tonya Mallory, $17 of the fee was for “process and handling” and the remaining $3 was a CMS-allowable blood draw fee.

Two physicians the WSJ identified as prolific referrers to HDL were potentially paid close to $50,000 per year in P&H fees, and some practices were apparently paid more than $4,000 per week.  In total, HDL reportedly paid $17 million in P&H fees to physicians in 2013 alone.  While that sounds like a lot, it represents only 4.4% of HDL’s 2013 revenue.

HDL stopped the P&H payments after the OIG released a Special Fraud Alert in June 2014 that stated the agency was scrutinizing these P&H fees. Ms. Mallory resigned as HDL’s CEO soon after the WSJ article appeared.

P&H fees not the only legal iron in the fire for HDL


Cigna filed a lawsuit against HDL in October 2014 that alleges HDL engaged in “fee-forgiveness fraud” that cost the insurer $84 million.  Cigna claims HDL, which is not in its network of lab providers, foregoes charging Cigna members any co-payment, co-insurance or deductible, and then jacks up the rates it charges Cigna for its services.  Because Cigna members do not have to share any of the costs, they have “no incentive to moderate their demand for HDL’s services or to consider the higher costs of any particular out-of-network service”, according to the suit.

In addition, Cigna also accuses HDL of encouraging physicians to order “a litany of medical tests, regardless of whether the provider believes such tests are needed to diagnose or treat the patient”, and also of paying kickbacks to physicians in exchange for referrals.

HDL filed a motion to dismiss Cigna’s suit in December 2014, but to my knowledge, the case is still ongoing.

Boston Heart Diagnostics

Also in December 2014, HDL filed a lawsuit against Boston Heart Diagnostics that alleges Boston Heart is infringing on patent #8,119,358, “Diabetes-Related Biomarkers and Methods of Use Thereof” that is currently assigned to HDL.


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American Clinical Solutions accuses Pinnacle Laboratory Services of paying kickbacks to docs

ACS logo

American Clinical Solutions (ACS), a urine drug testing laboratory in Florida, has filed a lawsuit against one of its competitors, Pinnacle Laboratory Services, that alleges Pinnacle engages in an illegal kickback scheme that “promises to provide physicians with hundreds of thousands of dollars annually.”

I only recently learned of the existence of the suit, which was filed in July 2014 and is still in the discovery phase, but it is interesting nonetheless because the alleged scheme is very similar to one utilized by Veritas Laboratories, another urine drug toxicology lab I wrote about in November 2013.

ACS’ Allegations

Pinnacle arranges a contract between co-defendant third-party billing company Florida Medical Reimbursement Services (FMRS) and referring physicians in which FMRS bills non-governmental payors for the urine drug testing the physicians send to Pinnacle.  Once FMRS receives payment, it sends $100 to Pinnacle and remits the remainder to the referring physician. Pinnacle markets the arrangement with FMRS as a benefit to the physician.

Pinnacle designed the scheme so as to induce referring physicians to refer all government-reimbursed urine drug testing to Pinnacle.  Pinnacle has a “clear expectation” it will receive the “full price reimbursement” for all referrals involving patients with government insurance, which ACS refers to as the “quid pro quo part of [the] kickback scheme”.

Pinnacle logoBased on the amount of damages Pinnacle is seeking in another unrelated suit, ACS has determined Pinnacle makes about $300 profit per test on average.  ACS says it is “illogical and not commercially reasonable” for Pinnacle to lose out on $200 per test, unless that money is used for illegal payments to physicians in exchange for referrals.

ACS argues the “swapping” scheme, where discounts are offered for commercial insurance patients to secure referrals of government-insured patients, violates the federal Anti-Kickback Statute, Stark Law, and Criminal Health Care Fraud Statute, as well as multiple Florida statutes.

ACS also cites the Special Alert the Office of the Inspector General for Health and Human Services released on June 25, 2014, that said in part:

Arrangements in which laboratories provide free or below-market goods or services to physicians or make payments to physicians that are not commercially reasonable in the absence of Federal health care program referrals potentially raise four major concerns typically associated with kickbacks—corruption of medical judgment, overutilization, increased costs to the Federal health care programs and beneficiaries, and unfair competition.

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Judge quashes pathology researcher’s subpoena to unmask anonymous PubPeer commenters

Fazlul Sarkar, PhD (Cancer Therapy)

Fazlul Sarkar, PhD (Cancer Therapy)

A Wayne County Michigan Circuit judge has determined, with one possible exception to potentially be decided today, the website will not be compelled to turn over the identities of anonymous commenters that pathology researcher Fazlul Sarkar, PhD alleges defamed him and led to the loss of a job offer at the University of Mississippi and loss of tenure at Wayne State University.

I wrote about this case back in November 2014, and I will rely heavily on that post to provide background here.


Dr. Sarkar has been involved in pathology research for 35 years and was a tenured professor at Wayne State University.  According to his complaint, he has over 430 peer-reviewed journal articles, over 100 review articles and book chapters, has edited several books, sits on the editorial board of several journals, and had over $12.8 million in National Institutes of Health (NIH) funding.

In the fall of 2013, he pursued a position at the University of Mississippi, and was offered an employment contract which he signed on April 18, 2014. Tenure was conferred upon him on May 15, 2014.  He resigned from Wayne State on May 19th, put his house on the market and made an offer on a house in Mississippi.

On June 19th, Dr. Sarkar received word from an official at the University of Mississippi that, after reviewing “a series of emails forwarded anonymously from (sic?), containing several posts regarding papers from your lab”, his job offer had been rescinded.  Dr. Sarkar was successful in retaining employment at Wayne State, but his tenure was not reinstated.

The complaint highlights a number of comments posted anonymously on PubPeer between March and July 2014 that Dr. Sarkar claims violate PubPeer’s terms of services.  Some of these comments accuse Dr. Sarkar of research misconduct, an allegation he flatly denied.

On July 7th, Dr. Sarkar’s attorney contacted the anonymous owners of and asked them to retract the defamatory comments from the site, retain records, and disclose the identities of the anonymous commenters.  PubPeer removed some of the comments from its site, but never responded to the letter.

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Contributor to Palmetto GBA ancillary stain local coverage determination speaks out


I received this comment from a (frustrated) member of the College of American Pathologists (CAP) House of Delegates who helped write the ancillary stain local coverage determination (LCD) policy for Medicare Administrative Contractor Palmetto GBA.

With the member’s permission, I am posting the comment in its entirety. Hopefully there will be a good discussion on this topic at the House of Delegates meeting that begins March 21st, because it is a very important issue.

When I was in college I brought a 1961 Ford Falcon. I truly think it was one of the worst cars ever built. But it was all I could afford.

Not long after buying the car it developed an emission problem. Large amounts of smoke came out the tail pipe. Since I grew up in rural Montana and we had to fix a lot of our cars ourselves, I knew the car was doomed. There was probably a split in the manifold or some other very costly area of the innards. I checked with a mechanic who told me it would cost me more than the car was worth to fix it.

Since the car only smoked visibly when idling, I made it a practice of driving only at night and only on less heavily travelled streets.

One Saturday morning I absolutely had to drive to the pharmacy in daylight. So I took a potato from the kitchen commons and stuffed it in the tail pipe. Voila! No smoke from the tail pipe. I drove to the pharmacy but had to stop at a red light. Idling, black smoke started to come out from under the hood and the car coughed, sputtered, and died.

The Falcon was towed to the car mortuary where it was pronounced dead.

I am reminded of that story as I watch the CAP fail by trying to stuff really important issues into the tailpipe of our collective professional car.

I am one of many actively practicing community and academic pathologists (CAP members) who contributed to the Palmetto GBA LCD on special stains and immunohistochemistry (IHC).  Instead of working with the LCD, the College rejected the LCD outright and asked for it to be withdrawn.  By doing so, the College has squandered a wonderful opportunity to address serious issues facing our profession.  In essence, the College made a potato out of it and stuffed it in the tailpipe.

Across the country every day there are pathologists and other physicians who are abusing the system in a systematic fashion. They are ordering tests (special stains and IHCs) that are not medically needed, and are doing so for financial gain. Patients financially suffer, Medicare gets pillaged.  And the College turns a blind eye.

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Patient claims contamination of pathology slides led to removal of his eye


A Texas appellate court has upheld the dismissal on procedural grounds of a medical malpractice lawsuit filed by Mr. Leonardo Quintero, who claimed contamination of his pathology slides led to a misdiagnosis of cancer and the unnecessary enucleation of his right eye.

In May 2011, tissue around Mr. Quintero’s right eye was biopsied at Houston Methodist Hospital (HMH).  Pathologists Dr. Patricia Chevez-Barrios and Dr. Mary Schwartz reviewed the slides and stated one of the slides showed atypical cells consistent with metastatic carcinoma.

Mr. Quintero’s slides were subsequently reviewed by pathologists at MD Anderson, who diagnosed Mr. Quintero with a poorly differentiated carcinoma.  Ophthalmologist Dr. Bita Esmaeli removed Mr. Quintero’s right eye and surrounding tissues; pathologic examination revealed no evidence of malignancy.

Mr. Quintero sued Drs. Chevez-Barrios and Schwartz for negligently diagnosing him with carcinoma, HMH for vicarious liability and for failing to maintain procedures to prevent slide contamination, and TMH Physician Organization, which Mr. Quintero claimed was liable for the acts of Drs. Chevez-Barrios and Schwartz.

Mr. Quintero enlisted Dr. William Manion to write an expert witness report in order to satisfy Section 74.351 of the Texas Civil Practice and Remedies Code.  Section 74.351 says:

In a health care liability claim, a claimant shall, not later than the 120th day after the date each defendant’s original answer is filed, serve on that party or the party’s attorney one or more expert reports, with a curriculum vitae of each expert listed in the report for each physician or health care provider against whom a liability claim is asserted.

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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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