Recent prosecutions of clinical labs for fraud: Practices to avoid
Sound management of a clinical laboratory requires an effective compliance program. An effective compliance program, in turn, requires a thorough and nuanced understanding of regulatory requirements affecting labs, particularly where violations can give rise to fraud prosecutions. In part because of rampant COVID testing fraudulent schemes,1 the Department of Justice (DOJ) and the Office of Inspector General of the Department of Health & Human Services (HHS-OIG) are now laser-focused on prosecuting clinical laboratory fraud. With these prosecutions, the panoply of fraudulent lab scams is coming into focus. In recent years, the DOJ has obtained dozens of guilty pleas and convictions, as well as numerous eight-figure settlements, in cases alleging clinical lab fraud.
Many of these cases arise from whistleblower cases filed under the “qui tam” provisions of the federal False Claims Act (FCA), the Government’s primary civil remedy for addressing health care fraud. In “qui tam” cases, a whistleblower files on behalf of the taxpayers, and the United State may either join the case or permit the whistleblower to litigate on its behalf. The whistleblower may receive an award based on the Government’s recovery. The FCA imposes liability on those who “knowingly” submit false claims for government funds, with the term “knowingly” broadly defined to include not only “actual knowledge,” but also acting with “reckless disregard” or “deliberate ignorance” of the truth or falsity of claims.
This article discusses the types of clinical lab schemes that the Government has pursued in recent years using both criminal tools and the FCA.
Background
While DOJ has pursued criminal fraud and FCA cases against clinical labs and their owners for all types of fraudulent schemes, the majority of successful cases in recent years have focused on the following types of misconduct:
i) “Bread and butter fraud,” i.e., schemes that straightforwardly overcharge government payers, such as billing for tests not performed and double billing, including billing for tests in violation of Medicare’s 14 Day Rule;
ii) "Payola,” i.e., bribe, kickback and self-referral schemes;
iii) “Overtreatment,” i.e., knowingly billing for services in the face of medical consensus or authoritative clinical guidelines indicating the services are not medically necessary and reasonable for the patient; and,
iv) “Express exclusions” i.e., billing for services expressly excluded from coverage by law, program instructions, or a national or local coverage determination.
“Bread and butter fraud”: Billing for services not provided and duplicate billing
Services not Provided. Clinical labs have seen their share of prosecutions for “bread and butter” fraud in which the service being billed was either not provided or was already paid for. With regard to services not provided, in June 2023, the owner-operator of a clinical lab in Arkansas was sentenced to 15 years in prison and required to pay almost $30 million in restitution for a scheme in which he and his coconspirators obtained Medicare beneficiaries’ private information and then submitted more than $134 million in false and fraudulent claims for urine drug testing and tests for respiratory illnesses that were not ordered by medical providers, were medically unnecessary, and/or were not provided as represented.”2
Duplicate billing. A whistleblower successfully pursued an FCA case against LabCorp for double billing the federal government for genetic tests.3 In another FCA action, the Fifth Circuit affirmed a $30 million damage award in a case in which a laboratory billed Medicare for “miles purportedly driven by technicians to collect specimens from patients—when the samples were actually shipped one-way via airplane without any technician onboard.”4
Law enforcement’s focus on double billing is also evident in cases that involve violations of 42 C.F.R. § 414.510, Medicare’s “14-day rule,” which, with certain exceptions, prohibits laboratories from billing Medicare for a test of a specimen collected during a hospital stay if the test was ordered during the patient’s hospital stay or within 14 days of the patient’s discharge. Medicare’s reasoning is that such tests are already paid for under the lump-sum DRG payment the hospital received from Medicare for the patient’s care, and, accordingly, the lab should bill the hospital, not Medicare. For example, in 2023, Genomic Health, a subsidiary of Exact Sciences, agreed to pay $32.5 million to resolve allegations that it conspired with and encouraged hospitals and physicians to cancel and reorder Oncotype DX® tests that were originally ordered within 14 days of the patients’ hospital discharge to illegally circumvent the 14-day rule and bill Medicare. When it could not do so, Genomic Health declined to bill the hospital, thereby paying a kickback.7
“Payola”: Kickback and self-referral schemes
FCA cases based on the Anti-Kickback Statute (“AKS”) and the physician self-referral law, known as the Stark Law, “have been at or near the top of the list of cases most frequently pursued by the DOJ over the last several years.”8
The AKS9 and the Stark Law10 regulate the relationship between the physicians who order lab tests for their patients and the clinical laboratories that perform those tests. The Anti-Kickback Statute prohibits the exchange of anything of value when at least one purpose of the payment is the referral of federal health care program business, and the Stark Law prohibits physicians from referring patients for clinical laboratory and certain other “designated health services” to entities with which the physician or their family members have financial relationships. These laws aim to ensure that physicians make laboratory referrals with their patients’ best interests in mind.
AKS and Stark Law violations often serve as the basis for FCA liability because compliance with these laws is a condition of payment for federal health care programs.
Notwithstanding HHS-OIG’s guidance on the AKS since 1994,11 clinical lab kickback schemes remain pervasive and one of law enforcement’s top priorities. A number of labs and lab owners in recent years have found themselves on the wrong side of the “v” in an FCA lawsuit or a criminal prosecution after they paid referring physicians to collect, process, and package patient specimens; waived patient deductibles and co-pays; paid physicians and other referral sources above fair market value to lease office space; and/or rewarded marketing companies or independent sales representatives for generating referrals.
Kickback schemes continue to evolve. In May 2022, a lab CEO was prosecuted criminally for soliciting payments from other labs in exchange for referring government urine testing business to those labs, disguising the kickbacks as “marketing services.” The CEO was sentenced to 24 months in prison and required to pay $7.6 million in restitution.12 In September 2023, the owner of a lab was sentenced to 27 years in prison and ordered to pay $187 million for a scheme in which telemarketers recruited patients for genetic testing and the lab then paid bribes and kickbacks to “patient brokers” who arranged for telemedicine doctors to order the tests.13
With regard to civil settlements, in 2019, a pathology lab agreed to pay $63.5 million for paying referring vendors for phlebotomy services in violation of the Stark Law;14 in 2022, a clinical lab paid $24.5 million for violating the Stark Law by paying its physician employees 40% of profits on presumptive urine drug testing ordered by the physicians, i.e., urine drug testing that had not been determined to be medically necessary;15 and, in 2023, a lab and its owner paid $585,540 to resolve allegations that they received kickbacks from numerous other labs in the form of free clinical staff and payments for office space rentals, phlebotomy, and consulting services.16
Overtreatment: Medically unnecessary tests
Medicare and other federal health care programs will pay for items and services only when they are “reasonable and necessary for the diagnosis or treatment of illness or injury,”17 and accordingly, federal health programs require clinical labs to certify on their claims that billed-for services were “medically necessary.” HHS-OIG made clear in its 1998 Clinical Laboratory Compliance Program Guidance that a laboratory billing a federal government health program has a “legal duty to ensure that it is not submitting false or incorrect claims” and, accordingly, should “take all reasonable steps to ensure that it is not submitting claims for services that are not covered, reasonable, and necessary.”18
In recent years, DOJ successfully has pursued numerous FCA cases against laboratories for performing medically unnecessary tests, such as tests performed pursuant to standing orders,19 respiratory pathogen and other tests “added on” to medically necessary COVID tests,20 tests included within panels despite the fact that the test was not medically necessary for the panel’s marketed purpose,21 and tests performed without a licensed healthcare provider ordering the test.22
DOJ has also pursued labs that bill for medically unnecessary genetic tests. In 2018, a San Diego lab paid $2 million to resolve claims that it had billed for Breast Cancer Index (BCI) tests for patients who had not been in remission for five years and taking tamoxifen, criteria for medical necessity found in published clinical trial data and clinical practice guidelines.23
Express exclusions under the law or coverage determinations
Medicare and other government health programs expressly exclude from or limit the coverage of some tests pursuant to statutes, regulations, policy instructions and national and local coverage determinations. Knowingly billing the government plan for these tests can lead to FCA liability. For example, in 2019, a San Diego lab paid $1.99 million to settle claims that it had billed Medicare for genetic tests for prostate cancer patients who did not have the six clinical prerequisites required by local coverage determinations.24 In addition, in March 2023, DOJ settled an FCA case against a lab accused of encouraging other laboratories to submit claims for its GlycoMark hyperglycemia test, despite the fact that the test was excluded from the relevant local coverage determination and no longer eligible for Medicare reimbursement.25
Conclusion
As Ben Franklin once observed, “[t]here is no kind of dishonesty into which otherwise good people more easily and frequently fall than that of defrauding the government.” To achieve a fully compliant business, lab managers are well advised to stay up to speed on law enforcement activity and to create a culture that encourages employees to promptly raise their concerns about potential illegal activity. Such a culture is one in which managers reward rather than penalize whistleblowers and respond swiftly when concerns are raised.
References
1. In 2022, the Government flagged for scrutiny 378 clinical labs that billed Medicare for tests added on to COVID testing at “questionably high levels—in volume, payment amount or both.”
2. Lavaca man sentenced in $134 million COVID-19 health care fraud and money laundering scheme. Justice.gov. Published June 8, 2023. Accessed April 11, 2024. https://www.justice.gov/usao-wdar/pr/lavaca-man-sentenced-134-million-covid-19-health-care-fraud-and-money-laundering-scheme.
3. Laboratory Corporation of America agrees to pay $2,100,000 to settle False Claims Act allegations related to overbillings on Department of Defense contracts. Justice.gov. Published March 27, 2023. Accessed April 11, 2024. https://www.justice.gov/usao-md/pr/laboratory-corporation-america-agrees-pay-2100000-settle-false-claims-act-allegations.
4. United States ex rel. Drummond v. BestCare Lab’y Servs., L.L.C., 950 F.3d 277, 279 (5th Cir. 2020).
5. See 42 C.F.R. § 414.510. Gove.info. Accessed April 12, 2024. https://www.govinfo.gov/app/details/CFR-2023-title42-vol3/CFR-2023-title42-vol3-sec414-510.
6. There are exceptions to the 14-Day rule for: i) chemotherapy sensitivity tests on live tissue specimens collected during surgical procedures; and, ii) molecular pathology tests, advanced diagnostic laboratory tests, and cancer-related protein-based Multianalyte Assays with Algorithmic Analyses performed on specimens collected during outpatient hospital stays.
7. Genomic Health Inc. Agrees to Pay $32.5 Million to Resolve Allegations Relating to the Submission of False Claims for Genomic Diagnostic Tests, Justice.gov, October 2, 2023, https://www.justice.gov/opa/pr/genomic-health-inc-agrees-pay-325-million-resolve-allegations-relating-submission-false. See also Caris Life Sciences Pays over $2.8 Million to Settle False Claims Act Allegations from Delay in Submission of Genetic Cancer Screening Tests, Justice.gov, June 1, 2022, https://www.justice.gov/usao-edny/pr/caris-life-sciences-pays-over-28-million-settle-false-claims-act-allegations-delay; California Genetic Testing Company Agrees To Pay $8.25 Million To Resolve False Claims Allegations; Paducah, Ky, Area Hospital Also Settles, Justice.gov, July 1, 2020, https://www.justice.gov/usao-wdky/pr/california-genetic-testing-company-agrees-pay-825-million-resolve-false-claims.
8. Remarks of deputy assistant attorney general Michael D. granston at the ABA civil false claims act and Qui tam enforcement institute. Justice.gov. Published December 16, 2020. Accessed April 11, 2024. https://www.justice.gov/opa/speech/remarks-deputy-assistant-attorney-general-michael-d-granston-aba-civil-false-claims-act.
9. 42 U.S.C. § 1320a-7b. GovInfo. Govinfo.gov. Accessed April 12, 2024. https://www.govinfo.gov/app/details/USCODE-2021-title42/USCODE-2021-title42-chap7-subchapXI-partA-sec1320a-7b.
10. 42 U.S.C. § 1395nn. GovInfo. Govinfo.gov. Accessed April 12, 2024. https://www.govinfo.gov/app/details/USCODE-2022-title42/USCODE-2022-title42-chap7-subchapXVIII-partE-sec1395nn.
11. See HHS-OIG, Special Fraud Alert: Arrangements for the Provision of Clinical Lab Services, , October 1994, https://oig.hhs.gov/documents/physicians-resources/980/121994.pdf; HHS-OIG, Special Fraud Alert: Laboratory Payments to Referring Physicians, pp. 3-5, June 25, 2014, https://oig.hhs.gov/documents/special-fraud-alerts/866/OIG_SFA_Laboratory_Payments_06252014.pdf; HHS-OIG, Advisory Opinion 05-08, June 13, 2015, https://oig.hhs.gov/documents/advisory-opinions/499/AO-05-08.pdf.
12. Former CEO of defunct medical testing laboratory sentenced to prison for medical kickback scheme. Justice.gov. Published May 27, 2022. Accessed April 11, 2024. https://www.justice.gov/usao-wdwa/pr/former-ceo-defunct-medical-testing-laboratory-sentenced-prison-medical-kickback-scheme.
13. Convicted lab owner ordered to forfeit over $187 million in health care fraud proceeds. Justice.gov. Published October 3, 2023. Accessed April 11, 2024. https://www.justice.gov/usao-sdfl/pr/convicted-lab-owner-ordered-forfeit-over-187-million-health-care-fraud-proceeds.
14. Pathology laboratory agrees to pay $63.5 million for providing illegal inducements to referring physicians. Justice.gov. Published January 30, 2019. Accessed April 11, 2024. https://www.justice.gov/usao-mdfl/pr/pathology-laboratory-agrees-pay-635-million-providing-illegal-inducements-referring.
15. Physician Partners of America to pay $24.5 million to settle allegations of unnecessary testing, improper remuneration to physicians and a false statement in connection with COVID-19 relief funds. Justice.gov. Published April 12, 2022. Accessed April 10, 2024. https://www.justice.gov/usao-mdfl/pr/physician-partners-america-pay-245-million-settle-allegations-unnecessary-testing.
16. South Carolina physician and nephrology practice agree to pay over $585,000 to settle laboratory kickback allegations. Justice.gov. Published September 29, 2023. Accessed April 10, 2024. https://www.justice.gov/opa/pr/south-carolina-physician-and-nephrology-practice-agree-pay-over-585000-settle-laboratory.
17. 42 U.S.C. § 1395y(a)(1)(A). Gov.info. Accessed April 12, 2024. https://www.govinfo.gov/app/details/USCODE-2022-title42/USCODE-2022-title42-chap7-subchapXVIII-partE-sec1395y.
18. Clinical Laboratory Compliance Program Guidance, 63 FR 45076-03. Clinical Laboratory Compliance Program Guidance. Published online 1998:63-45076.
19. See Reference Laboratory, Pain Clinic, And Two Individuals Agree To Pay $41 Million To Resolve Allegations Of Unnecessary Urine Drug Testing, Justice.gov, April 15, 2020, https://www.justice.gov/usao-mdfl/pr/reference-laboratory-pain-clinic-and-two-individuals-agree-pay-41-million-resolve (urine drug testing); University of Miami to Pay $22 Million to Settle Claims Involving Medically Unnecessary Laboratory Tests and Fraudulent Billing Practices, Justice.gov, May 10, 2021, https://www.justice.gov/opa/pr/university-miami-pay-22-million-settle-claims-involving-medically-unnecessary-laboratory (pre-set protocol of tests for all kidney transplant patients); Physician Partners of America to Pay $24.5 Million to Settle Allegations of Unnecessary Testing, Improper Remuneration to Physicians and a False Statement in Connection with COVID-19 Relief Funds, Justice.gov, April 12, 2022, https://www.justice.gov/usao-mdfl/pr/physician-partners-america-pay-245-million-settle-allegations-unnecessary-testing (urine drug testing); Healthcare Company and Lab Pay $845K to Resolve Federal and State False Claims Act Allegations, Justice.gov, February 5, 2021, https://www.justice.gov/usao-ct/pr/healthcare-company-and-lab-pay-845k-resolve-federal-and-state-false-claims-act (standing orders for urine drug testing).
20. See Lab Owner Pleads Guilty to $6.9 Million Genetic Testing & COVID-19 Testing Fraud Scheme, Justice.gov, January 13 2022, https://www.justice.gov/opa/pr/lab-owner-pleads-guilty-69-million-genetic-testing-covid-19-testing-fraud-scheme; Ann Maxwell, Labs With Questionably High Billing for Additional Tests Alongside COVID-19 Tests Warrant Further Scrutiny (OEI-09-20-00510), oig.hhs.gov, December 2022, https://oig.hhs.gov/oei/reports/OEI-09-20-00510.pdf.
21. Missouri laboratory owners agree to pay 1.9 million and relinquish 7 million in escrow in settlement of civil fraud claims. Justice.gov. Published July 31, 2023. Accessed April 10, 2024. https://www.justice.gov/usao-edmo/pr/missouri-laboratory-owners-agree-pay-19-million-and-relinquish-7-million-escrow.
22. See, e.g., United States Obtains More Than $370 Million In Judgments Against Kentucky Businessman And His Companies For Laboratory Testing Scheme That Targeted Medicare, Justice.gov, September 26, 2023, https://www.justice.gov/usao-mdfl/pr/united-states-obtains-more-370-million-judgments-against-kentucky-businessman-and-his; Justice Department Files False Claims Act Complaint Against Laboratory Companies and Their Owner, Justice.gov, July 18, 2023, https://www.justice.gov/opa/pr/justice-department-files-false-claims-act-complaint-against-laboratory-companies-and-their; Inform Diagnostics Agrees to Pay $16 Million to Resolve False Claims Act Allegations of Medically Unnecessary Tests, Justice.gov, July 20, 2022, https://www.justice.gov/usao-ma/pr/inform-diagnostics-agrees-pay-16-million-resolve-false-claims-act-allegations-medically; Radeas LLC Agrees to Pay $11.6 Million to Resolve Allegations of Fraudulent Billing, Justice.gov, March 31, 2022, https://www.justice.gov/usao-ma/pr/radeas-llc-agrees-pay-116-million-resolve-allegations-fraudulent-billing; MD Labs and its Co-Founders Agree to Pay Up to $16 Million to Resolve Allegations of Fraudulent Billing, Justice.gov, October 20, 2021, https://www.justice.gov/usao-ma/pr/md-labs-and-its-co-founders-agree-pay-16-million-resolve-allegations-fraudulent-billing.
23. San Diego Laboratory Agrees to Pay $2 Million to Settle False Claims Act Allegations Related to Unnecessary Breast Cancer Testing, Justice.gov, April 19, 2018, https://www.justice.gov/opa/pr/san-diego-laboratory-agrees-pay-2-million-settle-false-claims-act-allegations-related.
24. San Diego Genetic Testing Company Agrees to Pay $1.99 Million to Resolve Allegations of False Claims to Medicare for Medically Unnecessary Tests (link, 2/11/19).
25. Diabetes Blood Test Distributor GlycoMark Agrees to Pay $195,000 to Settle False Claims Act Allegations, Justice.gov, March 30, 2023, https://www.justice.gov/usao-edpa/pr/diabetes-blood-test-distributor-glycomark-agrees-pay-195000-settle-false-claims-act.
