$26 Million Recoupment from Medicare Audit Hammers Pharmacogenomic Lab

Lab hit with $26 million overpayment demand after ZPIC auditor denies 100% of sampled claims

CEO SUMMARY: After Pharmacogenetics Diagnostic Laboratory LLC was audited by a Medicare Zone Program Integrity Contractor (ZPIC), it faced a $26 million repayment demand. The lab company appealed and asked for a redetermination, then filed for Chapter 11 bankruptcy protection. These developments should be a concern to all labs offering pharmacogenomic testing to Medicare patients. This audit may be an early sign that ZPIC audits will be more aggressive.

FOR YEARS, CLINICAL LABS and pathology groups have feared the power that private auditors have under the Medicare Zone Program Integrity Contractor (ZPIC) program. Now a lab company in Louisville, Ky.—hit with a $26 million bill from a ZPIC—is in bankruptcy and fighting for its life.

The only details available about this case are contained in the documents filed on Nov. 8 by Pharmacogenetics Diagnostic Laboratory LLC (PGXL) to initiate a Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the Western District of Kentucky. Officials at PGXL declined to discuss any aspect of this case.

The $26 million repayment demand by the Medicare program is only part of the story. The claims in question were for pharmacogenomic testing and the auditor ruled that 100% of the claims it inspected post-payment should be denied. THE DARK REPORT believes this is a significant development.

This audit fight might be an early sign that federal health programs consider pharmacogenomic tests—essential to the practice of precision medicine—to be a clinical service that would bust their budgets if tens of millions of Americans were candidates for this testing in coming years. Thus, could this audit be an early signal from federal health officials that they are not prepared to cover pharmacogenomic tests? (See related article.)

Independent of that conjecture, every laboratory in the United States has reason to be concerned if the private contractors Medicare retains to audit clinical labs have the power to make such sweeping assumptions during a random sample audit of lab test claims. This is true whether the audit is conducted under the Recovery Audit Contractor (RAC) program or the Zone Program Integrity Contractor (ZPIC) program.

Documents in the PGXL bankruptcy case explain in chilling detail how PGXL learned of the audit findings:By letter dated October 4, 2016, CGS Administrators, LLC (“CGS”), the Medicare contractor for region J15 (Medicare Part B) issued an overpayment demand to PGXL. The overpayment demand is the result of an audit conducted by AdvanceMed, the Zone Program Integrity Contractor (“ZPIC”) for Medicare Part B in Kentucky. AdvanceMed conducted a post-payment audit of thirty (30) patient records for claims with dates of service from January 1, 2012, through September 23, 2015. As a result of its review, AdvanceMed imposed a 100% denial rate for these claims, which it then extrapolated to the universe of claims submitted by PGXL during this same period. The extrapolation resulted in the $26,333,173.00 overpayment demand issued by CGS.

auditor’s Methods Disputed

After examining records from 30 patients, the auditor declared all 30 to be falsely billed and then extrapolated to include all claims over almost three years to arrive at a staggering demand for overpayment of $26.3 million, the documents show.

PGXL officials disagreed with AdvanceMed’s findings, its sampling methods, and extrapolation to reach the amount to be repaid. The lab company also began the administrative appeal process by filing a redetermination request with CGS on Nov. 3. CGS had until about Jan. 3 to issue a decision.

“Debtor believes that the ultimate liability, if any, will be significantly less than $26 million,” the filing said. In the documents, PGXL described itself as a commercial and research laboratory that is working to bring pharmacogenetic drug sensitivity testing into the mainstream. The lab offers molecular diagnostic testing and interpretive services to physicians, clinics, and hospitals; has 21 employees; and expected gross revenue in 2016 of about $8.8 million.

overpayment Demand

This ZPIC audit and outcome is significant. It means that the $26 million overpayment demand is an amount that equals a full three years of revenue for PGXL, a lab company that has been in business only 12 years! THE DARK REPORT is unaware of any precedent in the lab industry where a Medicare auditor has essentially declared such a high proportion of the lab’s Medicare claims to be overpayments and subject to recoupment by the Medicare Program.

Pharmacogenetics Diagnostic Laboratory LLC, has been a pioneer in the fields of exome sequencing and pharmacogenomic testing. It was founded in 2004 by Roland Valdes Jr., PhD, along with Mark W. Linder, PhD. Both are professors of pathology at the University of Louisville.

Valdes serves as president of PGXL and is a tenured professor of Pathology and Laboratory Medicine and of Biochemistry and Molecular Biology at the University of Louisville’s School of Medicine. Linder is PGXL’s executive vice president of operations and a professor in the Department of Pathology and Laboratory Medicine at the University of Louisville and assistant director of Clinical Chemistry and Toxicology at the University of Louisville Hospital.

Diagnostic Informatics Tools

In an interview with THE DARK REPORT in 2012, Valdes explained PGXL’s work to develop what he called “companion informatics” to estimate warfarin dosing to stabilize a patient. “Pharmacogenetics Diagnostic Laboratories is seeking to develop similar diagnostic informatics tools for use with different drugs and in the treatment of different medical syndromes,” Valdes said said at that time. “Cardiovascular medicine is an area of interest, along with likely applications in oncology and psychiatry.”

In response to a request by THE DARK REPORT, Valdes said he could not comment for this article.

Medicare’s Zone Program Integrity Contractors Are “Most Serious” Audits Faced by Providers

IN AN ARTICLE DESCRIBING MEDICARE’S Zone Program Integrity Contractor (ZPIC) initiative, the American Health Care Association (AHCA) says: “The most serious audit or investigation that you can be involved with is with a ZPIC.” The association represents long-term and post-acute care providers.

“The primary goal of the ZPIC is to identify cases in the Medicare program of suspected fraud, develop them thoroughly and in a timely manner, and take immediate action to ensure that Medicare Trust Fund monies are not inappropriately paid out and that any mistaken payments are recouped,” said AHCA.

These contractors have no specified look-back periods and can make unlimited requests for documents, AHCA said. “ZPICs have the authority to suspend payments, recoup overpayments through extrapolation, refer the provider to the federal Office of Inspector General (OIG), and determine if the provider violated its participation agreement (with the federal Centers for Medicare and Medicaid Services),” it added.

CGS, the Medicare Administrative Contractor serving Kentucky, said that under the ZPIC program, fraud is defined as billing for services not furnished; billing that appears to deliberately seek duplicate payment; altering claims or medical records to obtain a higher payment; soliciting, offering, or receiving a kickback or rebate for patient referrals; and billing non-covered or non-chargeable services as covered.

Investment By Foundation

In March 2011, University of Louisville Foundation Inc. (ULF) contributed $1 million in capital to PGXL and became a part owner. “Debtor’s membership interests are owned as follows: Dr. Valdes, 59.68%, Dr. Linder, 8.15%, and ULF, 32.17%,” the filing showed. ULF has a potential maximum exposure of $4 million, according to reporting by Joe Sonka in Insider Louisville.

PGXL has assets of less than $1 million, liabilities of $10 million to $50 million, and between 200 and 999 debtors, the filing showed.

PGXL’s largest creditor is Stock Yards Bank & Trust Company, which has a claim against PGXL for $3.5 million from a revolving promissory note issued Feb. 6, 2015. The note matured Feb. 6, 2016. “SYB granted certain extensions which amended the maturity date to Sept. 5, 2016,” the filing said.

In September, SYB sent PGXL a default notice. The three owners of PGXL (Valdez, Linder, and ULF) have guaranteed payment of the note. “At the time of the bankruptcy filing, the amount of the SYB’s claim under the note was approximately $2.975 million,” the filing said.

Only a limited amount of public information is available about the bankruptcy case and PGXL’s redetermination request with the Medicare program. Thus, it is too early to understand whether this ZPIC audit is an outlier event or the first example of more aggressive ZPIC audits that will happen as private auditing companies show up at clinical labs in other regions of the United States.

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