Anthem Alleges $16M in Calif. Hospital Lab Fraud

In lawsuit, Anthem and nine BCBS plans describe elaborate clinical lab-testing scheme

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CEO SUMMARY: In a lawsuit filed in the U.S. District Court for the Central District of California, Anthem and affiliated Blue Cross Blue Shield plans alleged that 37-bed Sonoma West Medical Center, a Florida lab testing company, a medical billing company, and others used a pass-through lab test billing scheme to defraud Anthem and its BCBS plans to produce more than $16 million in net proceeds. That income came by deceiving Anthem and its affiliated plans, the lawsuit said.

PASS-THROUGH BILLING INVOLVING MILLIONS OF DOLLARS of toxicology laboratory tests by a small, financially-troubled hospital is the central issue of a lawsuit filed in June. Anthem Inc. sued Sonoma West Medical Center (SWMC), four companies, and two individuals who had previously managed the medical center lab’s toxicology-testing program.

The 37-bed hospital in Sebastopol, Calif., has struggled financially since it reopened in Nov. 4, 2015 after being closed for 18 months. It closed on April 28, 2014, when debt far exceeded its income. On Aug. 17, the Palm Drive Health Care District (PDHCD), which runs the hospital, voted to replace the administrative staff and convert the facility to serve patients needing long-term and urgent care.

Last year, SWMC was seeking to shore up its finances and contracted with a lab management company, a deal that led to the Anthem lawsuit. In the lawsuit, Anthem alleges in detail how the medical center used toxicology testing and a pass-through billing scheme to defraud Anthem and the other BCBS plans. (See TDR, March 5 and May 7, 2018.)

In the lawsuit filed June 1 in the U.S. District Court for the Central District of California, Anthem and nine of its affiliated Blue Cross Blue Shield plans alleged that SWMC, a Florida lab testing company, a medical billing company, and others used a pass-through billing scheme to defraud Anthem and its BCBS plans to produce more than $16 million in net proceeds by deceiving Anthem and its affiliated plans, the lawsuit said. Earlier his year, Anthem said it was seeking recoupment $13.5 million from SWMC for what it says was fraudulent lab testing.

‘We’re Not Scheming…’

In response to the lawsuit, the medical center’s CEO John Peleuses rejected the claim that the hospital was being used as a front to bill for testing it had not performed. “We’re not scheming with anyone to do anything other than to provide patient care,” he added.

After emerging from bankruptcy protection early in 2017, SWMC was cited in September of that year in a 62-page statement of deficiencies report from the federal Centers for Medicare and Medicaid Services for “inability to ensure the provision of quality health care and services in a safe environment.”

In addition to SWMC, the other defendants in the Anthem lawsuit are four companies and two individuals:

  • DL Investment Holdings LLC (formerly known as Durall Capital Holdings LLC;
  • Reliance Laboratory Testing Inc.;
  • Medivance Billing Service Inc.;
  • Aaron Durall who owns DL Investment Holdings; and,
  • Keisha Carter Zaffuto who is the president of Medivance Billing, court documents show.

In May, THE DARK REPORT reported that SWMC dropped its controversial drugs-of-abuse testing program. (See TDR, May 7, 2018.)

Court documents explained that SWMC stopped its toxicology testing program earlier this year after Anthem sent the medical center a letter on Jan. 9 demanding repayment of $13.5 million that the insurer paid the hospital for urine drug test claims. In the letter, Anthem alleged that SWMC and the Palm Drive Health Care District engaged in an improper billing scheme to defraud Anthem and its affiliated Blue Cross and Blue Shield entities beginning in April 2017.

Lawsuit: Hospital Got Toxicology Test Specimens from Patients Who Were Thousands of Miles Away

IN A LAWSUIT FILED JUNE 1, lawyers for Anthem Inc. and nine affiliated Blue Cross Blue Shield plans explained an alleged scheme to defraud the insurers of $16 million. The following is taken from the court documents:

“The distance this urine had to travel as part of this scheme was remarkable. Approximately 90% of [lab] specimens originated in Orange County, California– nearly 500 miles from Sonoma West. The remaining 10% originated in states other than California.

“But that was just the beginning of their journey. After they were collected from patients, the urine samples did not go directly to Sonoma West, but instead travelled 2,300 miles east to Reliance Labs, in Sunrise, Florida. There the specimens were divided into two portions, with one remaining at Reliance Labs and the other boarding a plane to fly 2,600 miles back to Sebastopol where, purportedly, a basic screening test would be performed—one that Reliance Labs was more than capable of conducting and, indeed, Reliance Labs was the entity who most physicians had ordered to perform the testing.

“These nearly 5,000 miles were a trip not just around the country, but the end-run on Anthem’s professional fee schedule.

“The conspiracy was remarkably successful—delivering on Durall Capital’s promise of swift wealth. In the 18 months prior to the conspiracy, Sonoma West submitted just 50 claims for urine toxicology testing to Anthem in total. In the first nine months of the scheme, that number ballooned to more than 15,000 claims; more than 50 claims per day,” said the lawsuit.

Defendants’ Conspiracy

In the most recent court filing, Anthem said Aaron Durall was primarily responsible for the defendants’ conspiracy to commit the alleged fraudulent scheme by entering into an agreement between SWMC and Durall Capital, engaging Reliance Labs to do some of the testing, and by having Medivance do some of the billing for the scheme, Anthem charged. Also, Durall enrolled Zaffuto to participate, court records showed.

Under the scheme, court documents showed, Durall, “has personally received a substantial portion of the amount paid by Anthem and the BCBS plans as a result of this fraudulent scheme…”

In the 107-page lawsuit, Anthem’s lawyers, the law firm of Robins Kaplan LLP of Los Angeles and Minneapolis, explain the pass-through billing scheme in great detail.

‘Deceptive Scheme’

“In 2017, a personal injury lawyer from Florida approached a failing, 37-bed hospital in northern California with an idea he claimed could enrich them both virtually overnight,” the lawsuit said. “The lawyer, Aaron Durall, under the guise of a corporate shell, would acquire urine [specimens] through a network of marketers and physicians from around the country; he would consolidate that urine through a toxicology lab in Florida that he owned; and the hospital would bill insurers for the [toxicology lab] testing even though other labs had been ordered to perform it. With that simple but deceptive scheme, the hospital could increase the insurance payments for those services up to 100 fold.”

As a result, the lawsuit said, the hospital could generate reimbursement from insurers, “that would be orders of magnitude greater than Aaron Durall’s laboratory, Reliance Laboratory Testing, Inc., could.”

$32 Claim Goes to $3,500

Anthem’s fee schedule showed that Anthem paid about $32 for each claim for urine toxicology test. “But, if the co-conspirators could make it appear to Anthem that an out-of-network hospital was providing the services for the hospital’s patients, they could bypass the $32-reimbursement cap. With that simple deception, they could transform a $32 claim into a $3,500 claim, because hospitals were paid as a function of their billed charges,” the lawsuit explained.

In 18 months before Durall and SWMC worked together, the medical center billed urine testing claims at an average of $118 per test. After the scheme was in place, the same testing was billed at $3,500, the lawsuit said.

Also, before the scheme, SWMC had submitted only 50 claims for urine toxicology testing over 18 months. In the first nine months of the scheme, billing for urine testing rose to more than 50 claims each day for a total of 15,000 claims, the lawsuit said.

Given the lawsuit and other pressures, the directors of SWMC voted Aug. 17 to convert the hospital into a long-term, acute-care facility and urgent-care center. It will no longer operate as a hospital, the Sonoma West Times and News reported.

During a special meeting the PDHCD also voted to accept an offer from American Advanced Management Group of Modesto, Calif., to replace the administrative staff of the hospital. Earlier this month, the PDHCD announced that SWMC would run out of money by Aug. 31.

By no means is the example of Sonoma West Medical Center’s involvement in a pass-through billing scheme involving toxicology lab testing an isolated example of this type of alleged fraud. Over the past several years, THE DARKREPORT has published stories of other similar arrangements, typically involving small rural hospitals and community hospitals that are at the point of financial collapse and desperate for more revenue.

These stories are intended to help lab administrators and pathologists—particularly those working in hospital and health network laboratories—to understand the scale of lab test fraud that is widespread in this sector of the hospital industry.

Contact Robins Kaplan attorneys Roman Silberfeld at; David Martinez at or 310-229-5800.


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