CEO SUMMARY: In this second phase of the whistleblower case against three cardiology testing labs and a sales consulting company, federal prosecutors are requesting a jury trial against the individuals named in the court documents filed August 7. Federal investigators alleged that executives at one lab began a fraud scheme in 1999 and then expanded that scheme to other labs over 15 years. The suit claims that the labs made improper payments to referring physicians.
FEDERAL PROSECUTORS HAVE PROVIDED A DETAILED LOOK at how three lab companies managed to defraud two federal healthcare programs out of $500 million in just a few years.
A half-billion-dollar lab scam is huge, but that amount is just half the story! These same three companies were paid $500 million to $700 million more by private health insurance companies during these same years. Add the Medicare and private insurer payments together, and that’s a fraud totaling $1 billion to $1.2 billion!
$80 Million Paid To Doctors
Federal prosecutors allege that the three defendant lab companies paid $80 million in various forms, such as handling and processing fees, to physicians to generate the $500 million in payments from Medicare and Tricare payments.
But there’s something more startling to this story. In addition to those payments to physicians, court documents say that the labs paid an amazing $223 million to their sales consultants, BlueWave Healthcare Consulting!
THE DARK REPORT is first to report the additional aspects of this federal investigation into the activities of Health Diagnostic Laboratories, Singulex, and Berkeley HeartLab (no longer in operation). In settlements to date, HDL and Singulex have both denied guilt and signed agreements that include some repayment to the federal government.
The huge dollars involved in these schemes is unprecedented for the clinical lab industry. Pathologists and lab administrators should understand what these three lab companies did for an important reason. Lab fraud on this scale is what causes payers to react with restrictive coverage guidelines.
As this happens, honest labs are handcuffed and find it impossible to provide a wide range of medical laboratory tests that improve patient care and are clinically useful. As a consequence, the lab industry’s handful of scoundrels not only cheat the government and private health insurers, but they also negatively affect patient’s access to many useful clinical laboratory tests.
To help lab executives understand the key details of the inducements, kickbacks, and other schemes alleged in the court documents filed by federal prosecutors, THE DARK REPORT is providing the following analysis of the case.
Overview Of The Case
This information comes from the lawsuit filed on August 7, 2015, in the United States District Court of South Carolina-Beaufort Division. Federal prosecutors are asking for a jury trial to recover funds, including treble damages, from these defendants: Berkeley HeartLab, Inc., BlueWave Healthcare Consultants, Inc., Floyd Calhoun Dent, III, Robert Bradford Johnson, and Tonya Mallory. BlueWave is the sales consulting firm, and Dent and Johnson are the owners of BlueWave.
Mallory is the former president of Health Diagnostic Laboratories. The Medicare and Tricare programs paid the $500 million to Berkeley, HDL, and Singulex. Berkeley is no longer in business. (It was acquired by Quest Diagnostics and was closed.) HDL and Singulex have settled with the DOJ.
Payments To Physicians
Federal court records show that by offering or paying $80 million in improper processing and handling fees, the defendants in lab-billing schemes from 1999 through last year netted false claims totaling $500 million that the Medicare and Tricare programs paid. The federal Department of Justice explained in detail the extensive case it built against two blood-testing labs, two sales consultants, and a lab executive.
In the 48-page complaint, the DOJ explained how the sales consultants and the lab executive worked with the two labs to offer kickbacks to referring physicians in violation of the Anti-Kickback Statute and to generate false claims to the Medicare and Tricare programs in violation of the False Claims Act.
What follows are details taken word for word from the federal complaint. These have been lightly edited only for style and clarity.
Sham Processing Fees
Processing and handling fees were part of the scheme, described as follows:
From January 2010 through July 2014, Defendants BlueWave, Johnson, Dent, and Mallory conspired to offer, arrange for, and provide remuneration to physicians to induce referrals of blood testing to HDL and Singulex, including testing that was reimbursed by Medicare and Tricare. As with Berkeley, the remuneration was in the form of sham processing and handling fees and the waiver of Tricare copays and deductibles.
Berkeley, HDL, and Singulex are clinical laboratories that specialize in cardiovascular health and advanced lipid testing. Advanced lipid tests are generally more expensive than basic cholesterol and blood tests and often result in significantly higher profit margins for the laboratories that provide such tests. For instance, Medicare pays HDL well over $1,000 when physicians refer a patient for HDL’s Initial Comprehensive CVD Baseline Assessment panel. Further, Medicare pays HDL over $600 for every CVD/Metabolic Follow-Up Profile that is referred-a panel that many HDL customers [physicians] ordered four times a year for each of their patients who received such testing.
Lipid Test Panel Profits
The following statements from the court documents describe how the profit margins on lipid panels played a role in the lab’s marketing schemes:
Partly because the profit margins on advanced lipid testing are so substantial and also because these specialized tests have such limited clinical utility and would normally only be ordered for a small percentage of the population, competing laboratories like Berkeley, HDL, and Singulex resorted to illegal kickback schemes to poach customers from their rivals and to induce referrals from a substantially larger portion of the population than medically necessary.
No later than 1999, Berkeley implemented a nationwide scheme to pay physicians and physician groups a kickback disguised as a draw fee for every sample referred to Berkeley’s laboratories. Between 1999 and 2005, Berkeley induced referrals by paying physicians and physician groups a “draw fee” of up to $20 for every sample referred to Berkeley-a sum that far exceeded the $3 draw fee permitted by CMS.
Between 2005 and January 2012, Berkeley continued offering and paying processing and handling fees, albeit at the reduced rate of $7.50, with a few accounts receiving as much $11.50. The payment of processing and handling fees had the intended effect.
Physicians who received P&H fees from Berkeley made substantial referrals to Berkeley. For instance, in 2010, Berkeley paid Dr. Bodo Brauer tens of thousands of dollars in processing and handling fees in exchange for approximately $570,843 worth of referrals. Also in 2010, Berkeley paid Dr. Jeffrey Gladden tens of thousands of dollars in processing and handling fees in exchange for approximately $556,825 worth of referrals.
In 2009, Berkeley paid Dr. Rex Butler tens of thousands of dollars in processing and handling fees in exchange for approximately $384,366 worth of referrals.
Between 2005 and 2011, Berkeley paid approximately $6 million in processing and handling fees to physicians and physician groups nationwide in exchange for referrals yielding roughly $96 million in Medicare and Tricare reimbursement.
Federal Prosecutors Summarize the Case
IN THE WHISTLEBLOWER LAWSUIT FILED ON AUGUST 7, 2015, FEDERAL PROSECUTORS succinctly presented a broad summary of the case against the defendants:
Between 2008 and 2010, Defendants Mallory, Johnson, and Dent-all of whom had worked for Berkeley-left that company and initiated their own kickback scheme. Mallory founded HDL, a specialty laboratory that offered the same or similar testing services as Berkeley. Johnson and Dent created BlueWave, which provided an outside sales force dedicated to marketing and selling HDL’s tests and test panels. Later, BlueWave also became the outside sales force for another specialty lab, Singulex, which offered tests that were similar to those offered by Berkeley and HDL.
From 1999 through January 2012, Berkeley provided remuneration to physicians and physician groups to induce the referral of federal beneficiaries to Berkeley. Such remuneration was in the form of sham processing and handling fees and the waiver of Tricare copays and deductibles.
Berkeley provided this remuneration with the intent to induce physician referrals of blood testing for which Berkeley sought reimbursement through two federal health care programs, Medicare and Tricare, in violation of the AKS. Berkeley knew it was not entitled to reimbursement for claims arising out of this illegal scheme, and therefore submitted or caused to be submitted claims in violation of the FCA as well.
By paying kickbacks to physicians, Berkeley also induced physicians to order large panels of tests that included a significant number of medically unnecessary tests.
Illegal Sales Agreement
The design of the sales agreements was described in the court documents:
Furthermore, BlueWave, Johnson, and Dent knowingly and willfully solicited and received remuneration, totaling more than $223 million, that was meant to induce them to arrange for or to recommend the purchasing or ordering of HDL’s tests that might be paid for in full or in part by federal health care programs.
On June 1, 2010, two months after entering into the HDL Sales Agreement, BlueWave, Johnson, and Dent executed a very similar sales agreement with Singulex. This agreement named BlueWave as Singulex’s outside
sales force. Mallory approved of the terms in the Singulex Sales Agreement. Pursuant to the Singulex Sales Agreement, BlueWave was paid a monthly commission of 24% of Singulex’s revenue collected from sales generated by BlueWave as BlueWave’s fee for arranging for or recommending to doctors that they refer patients’ blood testing to Singulex.
The Kickback Scheme
How Singulex paid BlueWave Healthcare Consultants is described this way:
In return for the samples being referred, Singulex paid BlueWave approximately $153,883 in commissions in 2010. In return for the samples being referred, Singulex paid BlueWave approximately $3.1 million in commissions in 2011. In return for the samples being referred, Singulex paid BlueWave approximately $7 million in commissions in 2012. In return for the samples being referred, Singulex paid BlueWave approximately $8.2 million in commissions in 2013.
Touting Processing Fees
The court filing explained the arrangement for these labs to pay physicians for their lab test referrals:
In their sales pitches, BlueWave sales representatives touted how much more HDL paid in processing and handling fees than competitor laboratories were paying. For example, Leonard Blasko, an independent contractor working with BlueWave, met with a physician on January 27, 2012. During that meeting, Blasko not only went into great detail about the benefits of the $20 processing and handling fees, he also called up another BlueWave sales representative, Charles Maimone, who mentioned to the physician that he could get an additional $13 if he ordered a Singulex panel in addition to an HDL panel. The processing and handling fees took into account the volume and value of the business generated by the physician.
More Test Volume, More Pay
The labs were aggressive in using sales reps to build specimen referrals, described in the court documents in this way:
The more specimens the physician sent to HDL, the more money HDL paid the physician. Similarly, the more specimens the physician sent to Singulex, the more money Singulex paid the physician. BlueWave, Johnson, Dent, and Mallory promoted processing and handling fees to referring physicians as a revenue generator.
For instance, on June 16, 2010, a BlueWave sales representative emailed a potential client and explained: your “practice has the potential to draw close to 100 panels a week if we were to include all other insurances we were not able to include previously.
“Therefore, 100 panels a week would result in a revenue stream for the office of 2,000 (100 x 20 panels) per week. He added, “this would far outweigh any rent money an outside laboratory could legitimately compensate the office to assist in collecting blood specimens.” For some physician practices, processing and handling payments totaled over $100,000 a year. For instance, from 2011 through 2012, HDL paid $234,740 to the Colorado Springs Family Practice in exchange for $1.7 million in Medicare referrals. In 2012, HDL paid $107,660 to Dr. Lawrence A. May in exchange for $1.1 million in Medicare referrals. From 2011 through 2012, HDL paid $185,840 to the Family Physicians of the Spartanburg practice in South Carolina in exchange for $4.7 million in Medicare referrals. From 2011 through 2012, HDL paid $189,237 to the Keowee Primary Care & Internal Medicine practice in South Carolina in exchange for $3.5 million in Medicare referrals.
In Sales Agreement, BlueWave Sales Consultants Got Monthly Fee Plus Up to 19.8% of Revenue
BLUEWAVE HEALTHCARE CONSULTANTS HAD AN EXTREMELY LUCRATIVE SALES AGREEMENT with the two defendant lab companies. The lawsuit provided details of how this agreement benefited BlueWave and its owners, Floyd Dent and Robert Johnson, as follows:
In April 2010, Mallory, on behalf of HDL, and Johnson and Dent, on behalf of BlueWave, executed a sales agreement, which was dated January 4, 2010, wherein BlueWave would serve as HDL’s exclusive outside sales force in certain enumerated states: Alabama, South Carolina, Mississippi, Tennessee, Georgia, Florida, North Carolina, Louisiana, and Texas.
Also pursuant to the HDL Sales Agreement, HDL paid BlueWave a monthly base fee, plus a “commission equal to…13.8% of the revenue collected by HDL from sales” in BlueWave’s territory. For the 18 months beginning after September 30, 2011, BlueWave was to be paid an “Increased Commission” that was “equal to… 19.8% of the revenue collected by [HDL] from sales” in the same territory. For the remaining time, HDL paid BlueWave “a commission equal to 16.8% of the revenue collected by [HDL].” The Agreement also conveyed shares in HDL to Dent and Johnson as individuals.
Between January 2010 and January 2015, BlueWave and HDL performed under the HDL Sales Agreement, and, by January 2015, BlueWave served as a large, independent sales and marketing force for HDL in 47 states and the District of Columbia.
Indeed, BlueWave arranged for physicians to order 753,062 samples in 2012 and 868,381 samples from HDL in 2013. In return for the samples being referred, HDL paid BlueWave approximately $6.9 million in commissions in 2010. In return for the samples being referred, HDL paid BlueWave approximately $21.1 million in commissions in 2011.
In return for the samples being referred, HDL paid BlueWave approximately $74.4 million in commissions in 2012. In return for the samples being referred, HDL paid BlueWave approximately $67.1 million in commissions in 2013. In return for the samples being referred, HDL paid BlueWave approximately $54.1 million in commissions in 2014.
In other words, the more HDL tests that BlueWave, Johnson, and Dent’s customers referred, the more money BlueWave, Johnson, and Dent would make. Between October 2009 and July 2014, Medicare and Tricare paid HDL approximately $333 million for tests referred by physicians who received processing and handling fees.
Between 2010 and 2014, BlueWave, on behalf of Mallory and HDL, paid physicians and physician groups roughly $68 million in processing and handling fees. BlueWave, Johnson, Dent, and Mallory could afford to offer such high processing and handling fees because the defendants promoted the ordering of large panels of tests, many of which were medically unnecessary, [and] which generated substantially more revenue than ordering only those tests that were medically necessary for each patient. HDL promoted baseline and follow-up panels as well as panels customized for a specific doctor.
BlueWave, Johnson, Dent, and Mallory promoted HDL’s “baseline” and “follow up” panels. In South Carolina the baseline panel included as many as 20 or more individual blood tests, including a number of one-time genetic tests. The “follow up” panel was smaller and omitted the genetic tests, but still included as many as 15 or more tests. Depending on the patient, many of the tests ordered in the baseline panel and the follow-up panel were medically unnecessary.
Large Panels Encouraged
Physicians were encouraged to order panels costing several thousand dollars, which the federal prosecutors described as:
In South Carolina, HDL billed federal health care providers as much as $3,000 to $4,000 per panel. Mallory, Johnson, Dent, and BlueWave encouraged physicians to order a follow-up baseline panel every three months. For the customized panels, BlueWave sales representatives met directly with the ordering physician and presented the physicians with “recommended custom panels” consisting of dozens of tests that would be ordered on every sample submitted to HDL.
BlueWave, Johnson, and Dent sent out periodic reminders to BlueWave sales representatives with instructions to “make a concerted effort” to add additional tests “to each of your customers panels,” or with directives to push newer and more expensive tests such as the CYP2C19 test. Physicians were required to order multiple tests in order to get the processing and handling fees.
Patient Copayments Waived
An essential part of the scheme was that the labs never charged patient copays, which is described as follows in the court documents:
For instance, in the aforementioned January 27, 2012, meeting between Blasko and a potential customer physician, the physician was specifically told that he could get the processing and handling fees only if he ordered the full panel. As another inducement, Mallory, Johnson, Dent, and BlueWave advertised HDL’s waiver of copayments and deductibles for all patients, including Tricare patients. Defendants waived Tricare copayments and deductibles to induce Tricare patients to agree to testing by HDL and Singulex. The combined effects of the processing and handling kickbacks and the waiver of copays and deductibles kickbacks worked to generate millions of referrals and HDL’s profits soared.
For example, HDL starting testing in the fall of 2009 and by April 2011 it was receiving approximately 7,000 blood samples a week. By November 2012, HDL was receiving over 28,000 samples a week. By 2013, hundreds of thousands of blood samples from physicians’ offices across the country were arriving on a weekly basis.
There were so many blood samples coming in that HDL got its own Federal Express mailing code. See Richmond Times-Dispatch article, 2/6/12. In February 2012, Mallory told the Richmond Times-Dispatch, “[w]e run about 60,000 tests a day. We have been growing at a rate of about 5% a week for the last 23 months.” The scheme was so effective that HDL was able to poach at least 75 high-referring physicians from Berkeley within 12 months of implementing the scheme. Those 75 physicians referred $28 million in Medicare reimbursements to HDL in 2011 and 2012 alone. Mallory, Johnson, and Dent directly profited from the kickback scheme they instituted.
From 2009 through July 2014, HDL collected approximately $333 million from Medicare and Tricare related to claims that were tainted by the processing and handling fees. Mallory’s salary and bonuses were directly tied to HDL’s profits, and she personally collected at least $26 million in salaries, bonuses, and stock distributions between 2009 and 2014. Between 2010 and 2014, BlueWave received commission payments from HDL totaling more than $223 million. Between 2010 and 2013, BlueWave received commission payments from Singulex totaling more than $18.8 million.
HDL, BlueWave Encouraged Physicians to Order Large Numbers of Medically-Unnecessary Tests
IN THE COURT DOCUMENTS, defendants are alleged to have no reservations or concerns about inducing physicians to order medically-unnecessary tests. These actions were described as follows:
BlueWave, Johnson, Dent, and Mallory promoted that physicians run unnecessary genetic testing on all patient blood samples held by HDL in storage, which Mallory said “alone could result in almost a million extra for us.” In one instance, Mallory wanted the CYP2C19 genetic test to be run on all of the stored blood from patients for a South Carolina physician “by the end of July so that the reimbursement will hit us in September when we will need it to pay our next settlement fees to [Berkeley].” BlueWave, Johnson, Dent, and Mallory also successfully encouraged physicians to include the CYP2C19 genetic test on the standard and custom panels that doctors submitted to HDL.
As a result, the CYP2C19 test was unnecessarily performed on thousands of patients despite the fact that its sole utility is detecting whether a patient has an extremely rare gene that makes the drug Plavix ineffective. The CYP2C19 test was performed on thousands of patients who were not and would not be taking Plavix.
Berkeley, BlueWave, Johnson, Dent, and Mallory knew of the remuneration, and at times directly and personally authorized the payment of remuneration in exchange for referrals of tests. Mallory approved, on a case-by-case basis, HDL’s payment of a higher processing and handling fee for certain physicians in order to get them to switch to HDL from competitors. For example, Mallory approved a request from an HDL Account Manager to pay an increased processing and handling fee to a physician who requested to be paid more after speaking with a colleague who was also paid more than the established rate. According to the HDL Account Manager, the physician’s colleague “was a prime example of a doctor who cranked it out when offered the higher [processing and handling fees].” Defendants knowingly attempted to disguise the illegal remuneration by calling it a “processing and handling” or “P&H” fee and encouraging the use of these phrases.
Johnson at one point told Mallory and Dent, “I want to refocus that this is an [sic] ph [processing and handling] fee not a draw fee. One word makes it legal the other illegal.” Defendants received emails from physician practices and their attorneys asserting that the processing and handling fees were kickbacks. Even though Defendants claimed that the processing and handling payments were just meant to reimburse the practice for the time spent processing and handling the blood samples, Mallory authorized and HDL paid some physicians directly rather than the physicians’ practices. HDL also mailed checks directly to a physician’s house rather than to his practice.
Physicians Paid On Volume
The result of encouraging doctors to order panels that included medically unnecessary tests is described as follows:
As joint owners of BlueWave, Johnson and Dent each received 50% of all net profits generated from BlueWave’s improper contracts with HDL and Singulex. Upon information and belief, the government estimates that Johnson and Dent each received at least $58 million from BlueWave distributions.
Defendants’ kickback scheme induced physicians to order more tests than were medically necessary because the amount of the physician’s remuneration was tied to the volume or value of business generated by the physician. For example, Berkeley encouraged Dr. Mayes to order tests in pre-packaged “panels” rather than specifically choosing individual tests to run on each patient. These panels included genetic tests like the CYP2C19 “Plavix” test, ApoE, and KIF6, and the hormone test NTproBNP, that are not appropriate for most patients.
Processing Fee Incentives
An interesting element in the processing fee scheme is that multiple tests needed to be ordered for the physician to get the maximum “processing and handling” payment, explained in the lawsuit as:
BlueWave sales representatives, trained by Johnson and Dent, marketed processing and handling fees to physicians as an additional revenue stream. For example, a BlueWave sales representative in Maryland told a practice that it would receive “$20 per patient per draw” called a “process and handling agreement,” which was “significantly higher than the typical $2.76 reimbursement.” The sales representative explained further that “[a]s long as two or more tests are ordered” HDL would pay the practice $20 and so “[w]ith two offices and 10 providers you can see how much revenue this could create” for the practice. The BlueWave representative later forwarded this email to Mallory. BlueWave sales representatives in Nevada and Washington encouraged physicians to order more tests by putting together charts calculating how much “P&H Missed Potential” revenue a practice had. For one practice the missed projected revenue was $145,000 per year.
BlueWave sales representatives also promoted the additional revenue physicians could generate for follow-up office visits. They recommended follow up visits to review the test results for which the physician could “bill one level to two levels higher for the office visit… generating an additional $60 to $85 per patient…$546,000 per year.” At the instruction of Johnson, Dent, and Mallory, BlueWave sales representatives sold potential clients by hyping the additional revenue stream those clients would reap from the processing and handling fees. BlueWave sales representatives even went so far as to provide mathematical equations showing how much extra a doctor would make each month by ordering certain numbers of tests. Berkeley, BlueWave, and Johnson encouraged sales representatives to target physicians that were “money hungry doctors.” If a physician was not satisfied with just the processing and handling fee from HDL, BlueWave, Johnson, and Dent encouraged sales representatives to offer to send blood to multiple labs in order for the physician to get paid multiple processing and handling fees. For example, when one physician asked if HDL would pay him more fees per test, the BlueWave representative told the doctor that the doctor could get an additional $13 if he also ordered tests from Singulex, without even explaining the Singulex testing to him. Mallory, Johnson, and Dent were personally aware of this practice and encouraged the sales representatives to do it.
Lawsuit Provides Insights
The contents of the federal whistleblower lawsuit filed on August 7 provide a rare opportunity for those pathologists and clinical lab managers who find themselves competing against labs like HDL, Singulex, and Berkeley HeartLab. The excerpts from the lawsuit reproduced in this story allow pathologists and lab administrators to better understand how such lab companies develop and use different forms of inducements and kickbacks to persuade physicians to refer lab specimens.
In addition, the information provided by these court documents demonstrates how much money can change hands when a lab company decides to offer inducements that it probably recognizes may cross the compliance line into dangerous territory. The lab considers that the reward outweighs the risk of federal enforcement action.