When a clinical laboratory or pathology company uses sales schemes or business practices that violate federal law, employees unhappy about this situation often file whistleblower lawsuits

Whistleblower activity across the medical laboratory industry seems to be increasing. This can be both a positive and a negative trend for pathologists and clinical laboratory managers.

On the positive side, a whistleblower lawsuit that is joined by the U.S. Department of Justice (DOJ) and state attorney generals is one way to curb the illegal marketing and business practices of those medical lab companies willing to gain a competitive market advantage by pushing their interpretation of federal and state laws beyond legal limits.

Clinical Laboratory Companies Can Be Sued By Whistleblowers

On the negative side, a clinical lab company that is not run in full compliance with federal and state laws can find itself being sued by a whistleblower. The whistleblower is often a current or former employee of the lab company and thus has access to the types of documents and witnesses that a U.S. Attorney finds useful to build a case against the offending lab company.

A whistleblower is probably involved in the federal investigation of Health Diagnostic Laboratories (HDL) of Richmond, Virginia. This investigation was the subject of a front-page story in the The Wall Street Journal‎ in September. Many veteran lab industry executives commented that a whistleblower was probably the original source of the information that caused federal officials to launch their investigation of HDL.

According to The Wall Street Journal, HDL finished 2013 with annual revenue of $383 million. That large number shows that a possible settlement with HDL could generate a substantial recovery for the federal government, along with a hefty payday for any whistleblower(s) connected with the case, who are awarded part of the settlement by the federal judge.

Sometimes More than One Whistleblower Will File a Qui Tam Suit

The plural of whistleblowers is appropriate, because frequently more than one individual will observe the illegal behavior, gather relevant documents, and file a whistleblower lawsuit. Because these lawsuits are sealed until the DOJ has determined whether or not to join the case, no one knows if one or more whistleblower lawsuits have been filed.

The settlements of whistleblower lawsuits are interesting to read. Among other things, they describe the sales and marketing schemes and business practices in detail that were alleged to have violated federal and state laws.

Bostwick Laboratories Settles Whistleblower Allegations

One recent whistleblower lawsuit that was settled involved Bostwick Laboratories of Uniondale, New York. One part of the case was settled in August 2013, when Bostwick agreed to pay $503,668 to resolve allegations of illegally paying physicians for test referrals, noted a DOJ press release dated August 30, 2014.

The second part of the case was settled last month when it was announced that Bostwick Labs would pay the federal government $6.048 million to resolve allegations that it violated the False Claims Act, noted a news story published by the National Law Review.

The whistleblower in this case was Michael Daugherty, former President/CEO of LabMD, a company based in Atlanta, Georgia, that had provided anatomic pathology services to the urology market until it closed in January 2014.

The case began in 2008 when Daughtery filed a whistleblower, or qui tam lawsuit, against Bostwick Laboratories. LabMD, however, closed after Daugherty and the Federal Trade Commission (FTC) failed to settle charges the FTC filed in an administrative suit alleging LabMD failed to reasonably protect the security of sensitive patient information.  Daugherty claimed the FTC had unfairly targeted LabMD.

Whistleblower to Be Awarded Money Under the False Claims Act

In the Bostwick case, Daugherty is due to receive an award for reporting Medicare fraud and bringing the case under the False Claims Act, according to news stories.

Pictured above is Michael Daugherty, former President/CEO of LabMD. A whistleblower lawsuit filed against Bostwick Laboratories by Daugherty was settled last month. To settle the allegations of the qui tam suit, Bostwick Laboratories agreed to pay $6.048 million. LabMD was an anatomic pathology company located in Atlanta, which had served urologists nationwide and competed against Bostwick Laboratories. It closed in January 2014 following allegations by the Federal Trade Commission that the lab had failed to protect sensitive patient information. (Photo copyright LabMD).

Pictured above is Michael Daugherty, former President/CEO of LabMD. A whistleblower lawsuit filed against Bostwick Laboratories by Daugherty was settled last month. To settle the allegations of the qui tam suit, Bostwick Laboratories agreed to pay $6.048 million. LabMD was an anatomic pathology company located in Atlanta, which had served urologists nationwide and competed against Bostwick Laboratories. It closed in January 2014 following allegations by the Federal Trade Commission that the lab had failed to protect sensitive patient information. (Photo copyright LabMD).

When he filed the lawsuit on behalf of the U.S. government, Daughtery alleged that Bostwick billed the Centers for Medicare & Medicaid (CMS) for tests and services in violation of the Anti-Kickback Statue.

In addition, Daughtery claimed in the lawsuit that Bostwick violated the False Claims Act by paying physicians illegally to enroll their patients in a study called “Determination of the Accuracy of PCA3Plus Urine Assay for the Detection of Prostate Cancer,” a test that Bostwick was sponsoring, explained Tycko & Zavareei LLP, the law firm that represented the whistleblower.

Daugherty also alleged that Bostwick had violated the Physician Self-Referral Statue (known as the Stark Laws) and the Anti-Kickback Statue, which prohibit providers from receiving payments or gifts in exchange for referring Medicare patients, Tycko and Zavareei reported.

The physicians participating in the scheme needed to send urine samples of patients enrolled in the prostate cancer study to Bostwick in order to receive the monetary incentive, the law firm wrote. Other competent laboratories could have processed those samples, the firm added. Although this claim was not proven in this case, such a practice is illegal because it violates the Anti-Kickback Statute and the False Claims Act, Tycko and Zavareei concluded.

C. Jack Dowden’s Qui Tam Case against National Health Labs

The granddaddy of all clinical laboratory whistleblowers is C. Jack Dowden of San Diego, California. He was a lab sales rep who filed one of the medical lab industry’s first qui tam actions, naming National Health Laboratories as the defendant. In its story published on December 21, 1992, about the settlement of this case, The New York Times wrote that the result was “a guilty plea by National Health to two charges of submitting false claims to government health insurance programs. The company agreed to refund $111 million to Medicaid, Medicare and the Civilian Health and Medical Program.”

Now 22 years later there is ample public evidence that lab whistleblowers have ongoing qui tam suits against clinical lab companies. What is more of a mystery is how many more whistleblower suits have been filed and are moving forward under seal. For that reason alone, in coming years, everyone in the medical laboratory profession may be surprised as some of these lawsuits are unsealed and the defendant laboratory companies are identified and allegations of their illegal business practices are made public.

Related Information:

Bostwick Laboratories Agrees to Pay U.S. Government $6.05 Million for Allegedly Violating the Anti-Kickback Statue; Whistleblower to Receive Reward

Bostwick Laboratories, Inc. Pays $503,668 to resolve civil fraud allegations that its sales representatives used a clinical study to induce physicians to utilize its services

A Fast-Growing Medical Lab Tests Anti-Kickback Law

Firm Paid Doctors Who Sent Blood for Tests; ‘One Word Makes It Legal’

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

California Whistleblower Lawsuit Ensnares Major Lab Companies

How a Whistle-Blower Found Blood-Test Fraud