Whistleblower allegations against Family Dermatology/Nelson Dermatopathology

Dr. Paula Nelson being confronted by a reporter (CBS46.com)

Dr. Paula Nelson being confronted by a reporter (CBS46.com)

A couple of weeks ago I wrote about the Department of Justice press release that announced Family Dermatology, which also operates a dermatopathology laboratory called Nelson Dermatopathology, had agreed to pay a little more than $3.2 million to settle allegations it violated the False Claims Act.

At the time, the whistleblower suits that contained the allegations were not yet on PACER, so I could not get into any more detail than was provided by the DOJ.  But now I have the three suits in hand and can discuss the allegations that were brought against Family Dermatology/Nelson Dermatopathology that led to the settlement.

The whistleblower suits were filed by three different dermatologists (Scott Ross, Harold Milstein and Mark Baucom); Dr. Ross’ is the longest and most detailed and will be discussed first.

Dr. Scott Ross’ Facts/Allegations

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Aetna sues Health Diagnostic Laboratory and Bluewave Healthcare Consultants


In a lawsuit filed earlier this month, health insurer Aetna seeks to recover “tens of millions” of dollars from Health Diagnostic Laboratory (HDL) and its sales contractor Bluewave Healthcare Consultants, claiming they paid illegal kickbacks to physicians and encouraged them to order unnecessary tests, and provided unlawful inducements to patients.

This lawsuit follows closely on the heels of the announcement from the Department of Justice that HDL will pay at least $47 million and could pay as much as $100 million to settle similar allegations in three separate qui tam lawsuits.

Factual Allegations

Aetna begins with a brief discussion of its network and how Aetna members have to pay substantially more copayment or coinsurance if they use an out-of-network provider.  This obviously serves as an incentive to stay in-network, which then leads to lower health care costs for the company, since the providers within the network have already agreed to a set fee for their services.

If an out-of-network provider is used, Aetna will have to pay far more for services since the providers do not have a contract.

HDL is not in Aetna’s network.  In order to secure referrals from Aetna physicians (who are contractually obligated to refer patients/services to in-network providers, including laboratories, whenever possible) to go outside Aetna’s network, HDL and Bluewave paid physicians $20 per specimen.  Aetna points out this is more than 6 times what Medicare allows.

HDL logoReaders may recall one of the qui tam suits I covered on April 13th (United States ex rel. Riedel v. Health Diagnostic LaboratoryInc., et al.) alleged physicians could increase the payments they received from HDL, Bluewave and Singulex depending on how they packaged the samples and ordered the tests:

A physician can draw four vials of blood, order four tests, ship them in four packages to defendants, and receive an $80 packaging fee.

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


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


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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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.


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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Cigna sues Health Diagnostic Laboratory for fee-forgiving fraud

HDL logo

Health insurance provider Cigna has filed suit against Health Diagnostic Laboratory (HDL), alleging HDL unlawfully obtained at least $84 million from it through a “fraudulent fee-forgiving scheme”.

Readers will recall HDL is one of the laboratories being investigated by the Office of the Inspector General (OIG) for the Department of Health and Human Services for possibly paying kickbacks to physicians in exchange for referrals. Not soon after that fact came to light, the HDL CEO, Tonya Mallory, resigned.


Cigna states one of its responsibilities is to control health care costs for its benefit plans.  It accomplishes this in part by offering incentives to its members to use providers that are in Cigna’s network, who generally charge lower rates than out-of-network providers.

If a member chooses to utilize an out-of-network provider, Cigna requires that member to pay a higher portion of the costs than it would if an in-network provider were used.

HDL, which is not in Cigna’s network, allegedly:

…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.

Cigna explains that because no member is paying anything for HDL’s services, its members have “no incentive to moderate their demand for HDL’s services or to consider the higher costs of any particular out-of-network service” and this leads to higher costs for the entire plan.

CignaNot only that, but Cigna states fee-forgiveness undermines the insurance industry as a whole, as members will preferentially use out-of-network providers, for whose services they are charged nothing, rather than in-network providers, whose services require the member to pay something.  This would lead fewer providers to join insurance networks, which would make health care more expensive overall.

Cigna argues the American Medical Association, the federal government and the courts have long recognized fee forgiveness as a form of medical billing fraud.

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 (the OIG investigation).

The complaint states HDL did not disclose its fee forgiveness program to Cigna, and that it only became aware of the existence of the program when it came across patient flyers and brochures that explain the program.  Cigna then began investigating HDL by sending questionnaires to Cigna members who utilized HDL.

The 27 responses it received confirmed Cigna members were not paying anything for HDL’s services.  In addition, Cigna claims the members relayed false information provided to them by their physicians and HDL about HDL’s billing practices and Cigna’s policy.

When Cigna confronted HDL about its billing practices, then-CEO Tonya Mallory assured Cigna that HDL will not engage in fee forgiveness as “a general practice” and that all claims forms submitted to Cigna will reflect “the actual charge for the services(s) provided.”

Causes of Action

  • Claim for Overpayments Under ERISA
  • Unjust Enrichment
  • Fraud
  • Negligent Misrepresentation
  • Tortious Interference with Contract
  • Claim for Unfair and Deceptive Business Practices Under Connecticut’s Unfair Trade Practices Act and Unfair Insurance Practices Act
  • Declaratory Relief

Jury Demand

Cigna is asking for a jury trial for all non-ERISA claims.

Prayer for Relief

  • A declaration that the products and services provided by HDL do not constitute covered services under the employee health and welfare benefit plans administered or insured by Cigna and that HDL is not entitled to receive any payments on the claims for reimbursement that it has submitted or may submit in the future as part of the fee-forgiving practices
  • Return of any all monies paid to HDL on claims for reimbursement submitted by HDL
  • Monetary, exemplary and punitive damages
  • Pre- and post-judgement interest
  • Court costs and attorney fees

The full complaint is here.

Bostwick Laboratories settles whistleblower suit for $6.05 million


Bostwick Laboratories (BL) has settled the federal qui tam (whistleblower) lawsuit filed by Michael Daugherty of LabMD that alleged False Claims Act violations for $6.048 million.  This settlement does not resolve allegations against Dr. David Bostwick, who is a separate defendant in the case.

I first wrote about this case in January 2013, when Senior District Judge Arthur Spiegel denied BL’s motion to dismiss, and again in May 2014 to simply provide a quick update on where the case stood.

Briefly, Mr. Daugherty alleged BL and Dr. Bostwick (from my previous post):

  1. Routinely (not on a case by case basis) perform fluorescent in-situ hybridization (FISH) testing on atypical urine cytology cases regardless of whether the referring clinician requested FISH testing and then bills the government for the tests; and
  2. Perform other tests of dubious necessity without a physician order and also bills those to government payors; and
  3. Perform both the professional and technical components of FISH testing, but allow the referring physicians to bill for the professional component; and
  4. Charge referring physicians a reduced amount for the FISH technical component, which allows the referring physicians to mark up and bill Medicare for the full amount, and pocket the difference.

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Quest Diagnostics, LabCorp accused of duplicative testing, billing in recently unsealed suit


A former phlebotomist for Quest Diagnostics filed a qui tam (whistleblower) suit on July 27, 2012, alleging her former employer and LabCorp knowingly submitted “false and fraudulent claims to the United States and the State of California…for the same tests, performed on the same day, on the same patient” since at least 2002.  The suit was unsealed on October 6th, 2014 after a US District judge denied the federal government’s motion for a fifth extension of time to consider whether it would intervene in the suit.


According to the complaint, Elisa Martinez was hired by Quest to work as a phlebotomist at its patient service center (PSC) in Red Bluff California.  She was placed on leave under the Family and Medical Leave Act for undisclosed reasons in February 2011 and was terminated in June 2011.

Just before she advances her allegations, Ms. Martinez highlights the fact Quest paid $302 million in 2009 and Quest and LabCorp paid $241 million and $49.5 million, respectively, in 2011 to settle fraud allegations.

She then provides four examples in which Quest received orders from different physicians to perform the same tests on the same patient and instead of merely sending the results of one set of tests to the ordering physicians, allegedly performed duplicate blood and urine testing and billed Medicare twice.

In one case, Ms. Martinez says a phlebotomist poured urine from one specimen cup into a second cup so as to facilitate the duplicate testing.

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Owner of Bristol Laboratories indicted for healthcare fraud and kickbacks

Scales of Justice

Beth Palin, a non-practicing attorney and owner of Bristol Laboratories (BL) and Mountain Empire Medical Care (MEMC), has been indicted by a federal grand jury on charges of healthcare fraud, conspiracy to commit healthcare fraud and offering or paying a kickback.  Palin’s husband, Joseph Webb, was indicted on the same charges, and otolaryngologist Dr. Mary Curtiss was indicted on charges of healthcare fraud, conspiracy to commit healthcare fraud and receiving a kickback.


Dr. Curtiss, who has an ENT practice in a nearby town, was an employee of MEMC and “purported” to run a substance abuse treatment program there for which she was paid $1400 per day “regardless of the number of patients she saw or the amount of work she did.”

Although Dr. Curtiss was an employee of MEMC, she or her husband would pick up her paychecks at Bristol Laboratories.

Dr. Curtiss ran a cash-only enterprise at MEMC and charged patients up to $250 for an initial visit and up to $110 for each subsequent weekly visit.  In addition, MEMC and Dr. Curtiss performed a dip stick urine test on every patient every week, but whether any further testing was performed depended on the patient’s insurance status.

If the patient was insured, BL (which did accept private and government insurance) would also perform in-house qualitative testing and then send the sample to an unnamed lab in Denver for quantitative testing.  If the patient was uninsured, they would be asked to pay $10-25 for the dip stick urine drug test and no additional testing would be performed.

This algorithm was followed regardless of the treatment needs of individual patients.

BL would be reimbursed the following for each in-house drug screen:

  • Medicare-up to $321.76
  • Virginia Medicaid-up to $118.53
  • TennCare-up to $256.72
  • Private insurance-up to $1218.75

The Denver lab would be reimbursed the following for each quantitative test:

  • Medicare-up to $321.76
  • Virginia Medicaid-up to $112.59
  • TennCare-up to $209.74
  • Private insurance-up to $582.35

A BL employee was always present at MEMC, and would perform the functions of receptionist, office manager and urine collector.  This employee would actually order the “appropriate” drug testing based on the patient’s insurance status; Dr. Curtiss would merely pre-sign blank order forms.

The government alleges Palin and Webb required Dr. Curtiss to order “…excessive, medically unnecessary quantitative and qualitative urine drug screens from Bristol Labs”, the results of which were not used to “guide treatment of MEMC’s patients.”

The indictment also discusses the actions of a now-deceased anesthesiologist whose practice was set up in a similar fashion to Dr. Curtiss’ and also sent urine drug tests to BL.  In fact, Dr. Curtiss briefly worked for this anesthesiologist before becoming employed by MEMC.

Possible sentences

According to the Department of Justice, each defendant faces up to 25 years in prison and $750,000 in fines if convicted.

The full indictment is here.