Under the DOJ’s settlement agreement, HDL may need to pay as much as $100 million, according to a published report

Health Diagnostics Laboratory Inc. (HDL), of Richmond, Virginia, and Singulex Inc., of Alameda, California, agreed to pay $48.5 million to settle charges that they violated the False Claims Act, the Department of Justice (DOJ) announced Thursday.

According to the DOJ, the labs violated the Anti-Kickback Statute by paying physicians in exchange for patient referrals, in addition to billing federal health care programs for medically unnecessary testing. Pathologists, medical laboratory scientists, and clinical laboratory directors have watched this case closely since it became public knowledge last fall.

Other Clinical Laboratories and Lab Executives Face Federal Lawsuits

In separate lawsuits, the DOJ made similar allegations against another laboratory, Berkeley HeartLab Inc., (BHL) of Alameda, California, and also against BlueWave Healthcare Consultants Inc., a sales and marketing company; BlueWave’s owners, Floyd Calhoun Dent III and J. Bradley Johnson; and HDL’s former CEO Tonya Mallory, the DOJ announced.

HDL will pay $47 million and Singulex will pay $1.5 million under the settlements, which stem from three qui tam, or whistleblower, actions filed under the federal False Claims Act. Both medical lab companies deny wrongdoing and each will enter into a multi-year corporate integrity agreement with the federal government.

On Friday, Katie Demeria of Richmond BizSense reported that HDL may need to pay more than $47 million, and possibly as much as $100 million, if the company is sold or if HDL sells any assets. Within five years, if HDL sells its headquarters building on North Fifth Street in Richmond, for example, then HDL would pay 75% of the proceeds to the federal government, Demeria wrote. The city assessed the property at $63 million, and HDL spent $100 million to build the building several years ago, she reported. If there is no sale within four years, HDL would pay 75% of the building’s appraised value, she added.

“The government set a cap under which HDL’s total payout of fixed and contingent payments will be no more than a combined $100 million, the settlement document states,” Demeria reported.

Last month, The Wall Street Journal (WSJ) reported that the DOJ had proposed a settlement with HDL. However, the settlement with Singulex was not expected. Nor were the additional lawsuits against Berkeley HeartLab, BlueWave, Dent, Johnson, or Mallory.

Lawsuit Claims Medical Lab Companies Paid Inducements to Doctors

The government alleged that HDL, Singulex, and Berkeley paid physicians processing and handling fees of $10 to $17 per referral as inducements for the physicians to refer patients to them for blood tests. The clinical laboratory companies also routinely waived the patients’ co-payments and deductibles, the government said.

HDL and Singulex also conspired with BlueWave to offer these inducements on behalf of the two medical laboratories, the DOJ alleged. As a result, physicians allegedly referred patients to HDL, Singulex, and Berkeley for medically unnecessary tests, which were then billed to federal health care programs, including Medicare, the government charged.

Under the Anti-Kickback Statute, medical laboratories or other providers are prohibited from offering, paying, soliciting, or receiving remuneration to induce referrals for services that federal health programs cover.

As part of the settlements announced Thursday, HDL and Singulex agreed to enter into corporate integrity agreements with the U.S. Department of Health & Human Services Office of Inspector General (OIG). The federal announcement did not say how long the corporate integrity agreements would remain in place. The WSJ reported in March that HDL would operate under a corporate integrity agreement for five years.

Whistleblowers Include Physician and Medical Laboratory Employees

Other news in the DOJ announcement included details about the whistleblower suits. Under the qui tam provisions of the False Claims Act, four individuals filed false claims actions and can share in a recovery, the DOJ said. The whistleblowers’ share of the settlements has yet to be determined.

Filing qui tam actions were Scarlett Lutz, Michael Mayes, M.D., Chris Reidel, and Kayla Webster. Reidel is the former CEO of Hunter Laboratories Inc., in Campbell, California, who filed successful qui tam lawsuits against Quest Diagnostics Incorporated, and Laboratory Corporation of America (LabCorp) in 2005. Quest Diagnostics paid $241 million and LabCorp paid $49.5 million to settle those charges in 2011.

In September, the WSJ broke the story that federal investigators were looking into the practices of HDL and other clinical laboratories. HDL and the other laboratory companies were believed to be paying physicians “to process” blood specimens collected in their offices, the newspaper’s John Carreyrou and Tom McGinty reported in a page one article September 8, 2014.

Reports Say Medical Laboratories Paid Physicians a “Processing Fee” for Blood Draws

The fee these medical laboratories paid to these physicians was described as a “processing fee,” including $3 for venipuncture, the WSJ reported. HDL conducts blood tests for biomarkers that physicians use to identify cardiovascular risks. The fees could provide an incentive to physicians to order more tests and some of those tests could be unnecessary, critics say.

Health Diagnostic Laboratory (HDL) in Richmond, Virginia

Health Diagnostic Laboratory in Richmond, Virginia, reached a settlement agreement with federal investigators over charges that HDL had paid physicians “to process” blood specimens collected in their offices. This “processing fee” included a $3 portion for venipuncture, The Wall Street Journal reported. (Photo copyright The Richmond Times-Dispatch.)

 

HDL Says it Has Consistently Sought to Comply with All Regulations

The Richmond Times-Dispatch reported in March that HDL issued a prepared statement about the proposed settlement. “We wish to make it clear that HDL Inc. has worked cooperatively with the Department of Justice since the inception of its investigation of various diagnostic laboratory industry practices, many of them common within the industry,” HDL said. “We look forward to concluding a settlement with The Department in the very near future that will enable our company to avoid potentially expensive and protracted litigation and allow us to move ahead with our important work of helping improve the health of millions of Americans.”

In addition, HDL told the WSJ, “We have consistently sought to comply with all applicable legal and regulatory requirements, and are committed to continuing to do so.”

Berkeley HeartLab (a division of Quest Diagnostics Inc.) did not respond to a request for comment from Dark Daily.

Laboratory Will Continue to Participate in Federal Health Programs

In a statement on Friday, HDL said, “The payment of processing and handling fees was a longstanding practice in the diagnostic laboratory industry. In June 2014, when the government for the first time issued new guidance stating that the payments presented risk, HDL, Inc., immediately stopped paying processing and handling fees to referring providers. We emphasize that reaching this agreement does not mean that HDL, Inc., engaged in any wrongdoing. The settlement is not an indication that any conduct was improper or unlawful. As DOJ noted in its news release announcing the settlement, ‘The claims settled by these agreements and asserted against these companies and individuals are allegations only, and there has been no determination of liability.’ We have consistently sought to comply with all applicable legal and regulatory requirements, and are committed to continuing to do so.” HDL will continue to contract with federal agencies, it said.

Singulex also issued a statement, saying, “The investigation primarily related to the payment of process and handling fees, which was an industry-wide practice,” that it denied any wrongdoing, and that it entered into the agreement with the DOJ to resolve the investigation fully and to avoid protracted and expensive litigation. “The company is confident in its business practices and the value that its products and services add to customers,” Singulex said.

OIG Advised Laboratories on the Risk of Fraud

In June 2014, OIG issued a special fraud alert that said paying processing and handling fees represents, “a substantial risk of fraud and abuse under the anti-kickback statute.” The Special Fraud Alert: Laboratory Payments to Referring Physicians is available from the OIG’s site.

Representatives for the OIG and the Justice Department declined to comment for the WSJ article and did not respond to a request for comment from Dark Daily.

In March, the WSJ reported that Medicare payment data show HDL received $139 million from the federal health program for the elderly and disabled in 2012, and $157 million from these programs in 2013. After adding payments from commercial insurers, the company’s total revenue in those years was $800 million, the WSJ reported.

HDL paid some of that money to BlueWave Healthcare Consultants Inc. and to HDL’s shareholders, Carreyrou wrote. From 2011 to 2013, about $119 million went to 16 HDL shareholders, and of that amount, $50 million went to HDL’s three co-founders: Tonya Mallory, Joseph P. McConnell, Ph.D., and Russell Warnick, the WSJ added.

HDL announced on Sept. 23 that Mallory resigned as President and CEO and that McConnell, who was Chief Laboratory Officer at the time, would hold both titles. Warnick is HDL’s Chief Scientific Officer.

“Because HDL is organized as an S corporation that passes on its tax liabilities to its shareholders, $71 million of the $119 million went to taxes, the company said,” Carreyrou reported.

Laboratory Paid Millions to Shareholders and Sales Firm, WSJ Reported

In addition, HDL paid sales commissions from 2010 to 2014 of $220 million to BlueWave, the WSJ reported, adding that, from that amount, BlueWave’s owners Dent and Johnson got $173 million. HDL estimated that the remainder went to BlueWave’s sales staff, the WSJ reported.

Carreyrou wrote that a lawyer for BlueWave, John Galese, of Galese & Ingram, said that HDL’s estimates were overstated by “tens of millions of dollars.” Galese told Dark Daily he had “no comment.”

In January, HDL discontinued its relationship with BlueWave, Carreyrou wrote. That same month, BlueWave filed a $205 million suit against HDL, according to Richmond BizSense.

Forbes reported last month that federal negotiators will reach similar agreements with other lab companies named in the WSJ article in September. Those labs are Atherotech Diagnostics Inc. in Birmingham, Alabama, and Boston Heart Diagnostics Corp. in Framingham, Massachusetts, the WSJ reported. Each of these labs denied the allegations, and each said it was cooperating with investigators, the WSJ reported.

Since the federal announcement Thursday, CEOs of several clinical laboratory organizations expressed disappointment at the meager amount of the settlement federal prosecutors negotiated. One of the clinical lab companies is alleged to have paid hefty inducements to physicians and it then received $396 million in Medicare payments for just two years, they said. Yet, under the terms of this settlement, the lab company will pay $47 million to $100 million back to the federal government.

When weighed against the $395 million in Medicare payments (plus the additional Medicare revenues paid in other years), the settlement means the owners and executives of this lab company still “came out millions of dollars ahead” as a result of their willingness to create schemes that induced physicians to order tests that federal prosecutors consider to be medically unnecessary under existing law, the CEOs said.

There might, however, be a bigger story. The DOJ noted that the government also intervened in the whistleblower lawsuits as to similar allegations against Berkeley HeartLab Inc., and against BlueWave Healthcare Consultants Inc., and its owners, Dent and Johnson, and against Mallory.

Might it be reasonable to speculate that the U.S. attorneys handling these cases are pursuing these companies and individuals for larger settlements and possible criminal charges? If this speculation proves true, then such a resolution to these whistleblower cases may set a precedent and act as a deterrent. In addition, U.S. attorneys could pursue charges against the physicians who accepted the labs’ inducement payments and ordered large numbers of medically unnecessary tests. After all, it takes two parties for an inducement to succeed: the provider paying the inducement and the physician who accepts the inducement and refers Medicare patients to that provider.

—Joseph Burns

Related Information:

Wall Street Journal Writes about Federal Investigation of Health Diagnostic Laboratory and Certain Specialty Medical Lab Test Companies

Two Cardiovascular Disease Testing Laboratories to Pay $48.5 Million to Settle Claims of Paying Kickbacks and Conducting Unnecessary Testing

HDL Settlement Bill: $47M and Likely to Go Up

HDL, Inc. Reaches Settlement Agreement with DOJ

Justice Department Widens Inquiry into Labs’ Payments to Physicians

Health Diagnostics Laboratory to Pay $47 million in False Claims Settlement 

Lab Reaches Tentative Deal with Government over Doctor Payments

Lab Under Federal Investigation Cuts Ties with Sales Contractor 

A Fast-Growing Medical Lab Tests Anti-Kickback Law

HDL Nears Settlement of Federal Investigation, May Face Large Fine 

Health Diagnostic nears Settlement on Doc Payments

Embattled Lab nears Settlement with Government over Kickbacks

HDL Cuts a Deal with the Justice Department 

Tonya Mallory Steps Down as HDL, Inc. President and CEO, Is Succeeded by Dr. Joe McConnell

Special Fraud Alert: Laboratory Payments to Referring Physicians