Anthem Seeks $13.5M from California Hospital

Threatens lawsuit over pass-through billing scheme, stops payment for urine drug tests

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CEO SUMMARY: Anthem charged 37-bed Sonoma West Medical Center in Sebastopol, Calif., of engaging in an improper billing scheme to defraud Anthem and its affiliated Blue Cross and Blue Shield plans. In effect, the charge is a notification to SWMC that Anthem intends to sue SWMC and its owner if it does not recover the $13.5 million in a timely fashion. On Feb. 23, the hospital board voted unanimously to reject Anthem’s claims, saying the hospital does “quality legal and morally correct work.”

IN WHAT APPEARS TO BE A NEW CASE of “illegal pass-through billing” of lab claims by a small hospital, 37-bed Sonoma West Medical Center (SWMC) in Sebastopol, Calif., received a letter, dated Jan. 9, from health insurer Anthem demanding repayment of $13.5 million that the insurer had paid the hospital for urine drug test claims.

One of the nation’s largest health insurers, Anthem alleged in the letter that the Sonoma West Medical Center 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.

A DNV-accredited hospital, SWMC opened in October 2015 and has insurance contracts with Medicare,  Medi-Cal, Western Health Advantage, SCAN, and Health Net. It added Blue Shield of California in August 2016.

The effect of the letter is to notify SWMC and its owner, Palm Drive Health Care District, that Anthem intends to file a lawsuit. “Although it is reluctant to do so, Anthem is fully prepared to initiate litigation to recover these funds following the time provided [under California law],” the letter said. In the letter, SWMC had until Feb. 23 to respond to the charges.

But during a special meeting Feb. 23, the five-member district’s Board of Directors voted unanimously to reject Anthem’s $13.5 million claim, according to reporting by E.I. Hillin, a staff writer for the Sonoma West Times. Board President Dennis Colthurst labeled Anthem’s letter a “false claim” and said the hospital does “quality legal and morally correct work.”

Formerly known as Palm Drive Hospital, SWMC is owned and managed by the publicly funded Palm Drive Health Care District. In the Times, staff writer Rollie Atkinson reported that, since the hospital reopened in October 2015, it has never reported a monthly profit and operated on private loans and donations.

In April 2017, cash-starved SWMC was about to close when Durall Capital Holdings promised $1 million and planned to bring expanded laboratory testing to the hospital and provide what SWMC President John Peleuses called “intellectual capital” for vendor negotiations, billings, and collections, Atkinson reported.

In its letter, Anthem said it was aware that SWMC partnered with Durall Capital and also was working with Reliance Laboratory Testing of Sunrise, Fla., and Medivance Billing Service, also of Sunrise.

A Conspiracy Alleged

“Sonoma West appears to have conspired with several third parties to fabricate or misrepresent claims for toxicology testing services that were improperly billed to Anthem,” said the letter from Steven M. Cohen, Anthem’s Senior Associate General Counsel. “This scheme has resulted in more than $13.5 million in payments to Sonoma West. Sonoma West had no right to that reimbursement and obtained it only through material misrepresentations in the claims it submitted.

Public documents show that healthcare providers from around the United States refer patients’ specimens to Reliance Laboratory Testing, and that Reliance Labs distributes those specimens to various labs, including SWMC, for screening, the letter said, constituting the alleged pass-through billing scheme.

Reliance Labs keeps a portion of the specimens and does testing on those specimens “while purportedly passing on a portion of the same to Sonoma West for additional testing,” the letter said.

“Sonoma West bills Anthem for some or all of this testing—representing that it had performed the testing, when, in fact, it had not,” the letter added. “Further, it appears that Anthem’s review of the claims shows that most of the urine samples for which Sonoma West billed Anthem were collected from patients who had no connection whatsoever with Sonoma West.

“That is, the patients were not treated at Sonoma West nor were they treated by a physician connected with Sonoma West who orders laboratory services to be performed at Sonoma West.

Hospital Paid More For Tests

“These misrepresentations are not simply administrative—Sonoma West (as a hospital) receives substantially higher amounts for urine drug testing, often 10 times or more, relative to the lesser amount that Anthem would pay Reliance Labs (as a clinical laboratory),” the letter said.

“Indeed, it is that reimbursement delta that appears to be the only value that Sonoma West brings to its partners in the scheme.”

When Anthem sought to examine medical records for 50 urine drug testing claims that Sonoma West submitted to Anthem, the health insurer learned that the hospital had no records for any of the sample claims, the letter said.

“Anthem was subsequently contacted by Neisha Carter Zaffuto, who represented herself as an employee of Sonoma West, and offered to provide the requested records,” the letter explained. Since then, Anthem learned that Zaffuto is President of Medivance Billing Service.

Contract Specifics Requested

In addition, Cohen requested that Sonoma West and Palm Drive provide the following by Feb. 23:

  1. A response detailing the specifics of the arrangement, and any justification that Sonoma West contends allows it to bill Anthem for testing performed on specimens with no connection to Sonoma West.
  2. All contracts and agreements between Sonoma West and Durall Capital, Reliance Labs, Medivance, Providica Medical Corp., and Aaron Durall.
  3. A list of all laboratory equipment in Sonoma West’s facility, including serial numbers.
  4. All records identifying the source of all urine specimens billed to Anthem by Sonoma West.

Cohen wrote that he was sending SWMC a flash drive with a spreadsheet that detailed all the urine drug test claims that Anthem believes were tainted by the pass-through billing scheme.

The agreements between SWMC and Aaron Durall’s businesses have the characteristics of the hospital outpatient department (HOPD) scheme.

Hospital Board Rejects Anthem’s Charges, Says It Complies with Urine Lab Test Rules

IN RESPONSE TO ANTHEM’S ALLEGATIONS, the Palm Drive Health Care District Board of Directors voted unanimously on Feb. 23 to reject the insurer’s claims that the Sonoma West Medical Center owes Anthem Blue Cross $13.5 million as a result of allegedly conspiring to fabricate or misrepresent claims for toxicology testing services billed to Anthem. The district owns SWMC and operates in part on public funding.

In rejecting Anthem’s charges, board President Dennis Colthurst said SWMC has records to prove that the toxicology testing in question complies with all regulations and requirements and that the medical center can perform laboratory testing legally for non-patients as a reference laboratory under the federal hospital laboratory outreach program, according to reporting by E.I. Hillin, a staff writer for the Sonoma West Times.

In June 2017, the governing board of the district and SWMC approved lab management agreements with Durall Capital Holdings Inc., in exchange for a loan of $2.1 million that was used in part to acquire toxicology testing equipment for SWMC’s lab, Hillin reported.

“According to SWMC staff reports, the hospital performs initial toxicology screening tests sent by Durall from individuals in drug rehabilitation programs from throughout the country,” Hillin added. “When further testing is necessary, those urine samples are sent to Reliance Labs, a Florida laboratory where Aaron Durall also serves as President.”

In the article, Hillin included details from an SWMC toxicology report that showed how, on average, the hospital would net revenue on each drug panel of $4,000. “From July to December 2017, SWMC received more than 24,000 screening panels,” he wrote. Since then, such testing volume has almost doubled to 7,000 to 8,000 tests each month, he added.

Quoting Colthurst, Hillin wrote, “We are very pleased with the new toxicology program. Our financial stability allows us to move ahead with additional plans, meet our obligations, and lets SWMC reduce its accumulated debt.”


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