Hospital Board Expressed Doubts about Lab Billing

In public meetings, board members questioned the ethics, legality of how hospital billed lab tests

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CEO SUMMARY: Pass-through billing arrangements, particularly those involving clinical laboratory tests, have long been recognized by healthcare attorneys as having great potential to violate certain federal and state laws. Despite this fact, board members of a financially-struggling community hospital went forward with a pass-through billing agreement that news accounts says committed the hospital to pay monthly fees of $175,000 for lab management and $773,000 for lab maintenance.

ANTHEM IS NOT ALONE IN QUESTIONING the legality of the passthrough laboratory test billing arrangement that exists between Sonoma West Medical Center (SWMC) and Durall Capital Holdings and its related business, Reliance Laboratory Testing. Hospital board members and the public are commenting on the potential legal and ethical issues of this business agreement.

After a December meeting of the Palm Street Health Care District board, which owns the financially-troubled 37-bed hospital, the Sonoma West Times wrote that district director Eira Klich-Heartt, “was sharply critical of the toxicology lab program brought to the hospital last April by Durall Capital Holdings of Sunrise, Florida. She called it a ‘convoluted relationship’ that might be supporting ‘questionable’ business practices.”

Sonoma West Times further reported that “the Durall toxicology lab also came under repeated attack by members of the public attending the district meeting this week.” It wrote, “Former district board member Sandra Bodley and others questioned the ‘moral’ and ‘ethical’ basis of running a Florida-based toxicology lab where almost all the test samples are from Florida and testing fees are as much as 10 times higher than prevailing industry standards. ‘You may be sacrificing your integrity here,’ said Bodley.”

Small Hospitals Targeted

In recent years, lab management companies have targeted rural and small community hospitals seeking to get these hospitals to enter into agreements that require the hospitals, as in-network providers, to bill for the toxicology and pain management tests laboratory companies perform.

Often known as hospital outpatient department (HOPD) arrangements, these schemes are designed to enable out-of-network lab companies to bill for the lab tests they perform. The hospital is promised a substantial new source of revenue. However, in practice, the HOPD partner often takes much of the revenue away from the hospital.

Anthem’s case against Sonoma West is an example of a hospital outpatient billing department arrangement. The HOPD scheme is often coupled with healthcare management service organizations (MSOs). (For more details, see “Lab Fraudsters Recruit Hospitals to Bill as InNetwork Providers,” TDR, Oct. 30, 2017.)

This HOPD arrangement appears to be happening at Sonoma West Medical Center. The Anthem letter demanding repayment of $13.5 million from urine drug test payments provides details about the HOPD arrangement between Sonoma West and Durall Capital and Reliance Laboratory.

Additional details about this agreement have been published during the past year by the Sonoma West Times. For pathologists and clinical lab managers who want to understand how these HOPD deals are structured, these news stories provide many useful details.

Begins with Bankruptcy

The story starts when Palm Street Hospital (now renamed Sonoma West Medical Center) filed for bankruptcy protection in 2015. The hospital owners next went through management partnerships with Pipeline, Americore, and KPC Global. Each failed.

In 2017, Aaron Durall entered the picture. Various news accounts described different aspects of this business relationship, which reportedly include four written contracts involving the toxicology testing program.

On June 22, 2017, the hospital and the healthcare district reportedly approved management and laboratory services agreements with Durall. This happened after Durall “donated $2.1 million to stanch hospital losses in May.” It was also stated that the agreements authorized Durall “to manage the hospital and new toxicology laboratory service, which was brought into the hospital under Durall’s plan.”

In another news story, Sonoma West Times said that, as part of the laboratory services agreement, Durall would provide lab specimens, while the hospital was responsible for hiring a marketing company that would provide specimens to SWMC on commission. “It is unknown how much the marketing firm would cost,” noted SWT reporter E. I. Hillin.

Sonoma West Times also reported that, “through the lab service, SWMC is responsible for billing and will receive all reimbursement, which could be lucrative, depending on the number of tests the hospital performs each month.” The paper said that Durell was projecting reimbursement to be $35 for each drug analyte. Estimates were that the hospital would perform as many as 15,000 drug panels each month, with a panel comprised of 10 analytes. This was the basis for Durall projecting that SWMC would gross $2.8 million per month, if reimbursement averaged 80% of the billed amount.

Durall Capital Invested in Sonoma West Hospital

IN 2015, FOLLOWING THE BANKRUPTCY of Palm Drive Hospital (the previous name of Sonoma West Medical Center), the Palm Drive Health Care District entered into three failed management partnerships with “non-local medical industry entities.”

Then, in 2017, as the Sonoma West Times reported, “SWMC entered an agreement last June with Aaron Durall and his companies, Durall Capital Holdings and Reliance Laboratory Testing. Durall forwarded the cash-strapped hospital as much as $2.1 million over the summer and promised enough drug lab testing to pump an average of $2.8 million per month into SWMC’s coffers, an estimate later revised to $350,000 per month.” Durall and Reliance are located in Sunrise, Fla.

It is unclear how much of this monthly revenue for urine drug test payments the hospital retains. On Aug. 2, 2017, Sonoma West Times wrote that, “In October, the hospital billed a net of $5.1 million for just over 5,000 toxicology test panels, according to monthly financial reports and hospital CEO John Peleuses. The windfall was offset by $4.8 million owed to Durall in management fees.”

The newspaper described Durall Capital Holdings as a “Florida-based Limited Liability Corporation set up in August 2016. It is led by attorney Aaron Duvall and it owns two hospitals in Georgia and Alabama. Durall also has various management agreements at other southeastern U.S. health institutions. One of its specialties is providing laboratory services to acute care hospitals.”

Drug Screens at Hospital Lab

A news article in July stated that, under one agreement, “Durall Capital Holdings will purchase a new blood and urine testing machine for the hospital to conduct preliminary toxicology analysis. SWMC personnel will perform an initial panel of testing on specimens of non-patients—likely individuals in rehabilitation or addiction treatment centers—from around the country. Tests will determine whether one or more broad categories of drugs or chemicals are present. Upon a positive test, SWMC will send the specimen to Reliance Laboratory Testing, a third-party vendor also owned by Aaron Durall, for confirmation testing.”

In August 2017, Sonoma West Times reported exactly how much money was going to Durall each month. This story included comments from Stewart Goldberg, the financial officer for SWMC’s governing board.

Reporter Hillin wrote, “If the trend continues, the new laboratory service could actually cost the hospital money, adding to its negative cash run. According to Goldberg’s summary, the hospital has to pay Durall $150,000 a month for managing the toxicology laboratory and an estimated $773,000 a month for lab maintenance. With those numbers, SWMC would need to perform 2,600 panels a month to become profitable on the lab service.”

Payment for Lab Oversight

If these numbers are accurate, this is a staggeringly high sum of money for the oversight and the maintenance of a clinical laboratory in a 37-bed community hospital. It calls into question the decisions of the hospital board and administrators when they reviewed and signed these contracts.

Also notable is Durall’s representation that payer reimbursement would average $4,000 for a drugs of abuse test panel with 10 analytes. Why did the board and administration’s due diligence fail to question these revenue projections?

It is a rare opportunity to have public access to so many details about an HOPD pass-through billing arrangement for lab tests such as the one between Sonoma West Medical Center and Durall Capital Holdings. In combination, the Anthem demand letter of Jan. 22 and the various news stories reported by the Sonoma West Times and other media outlets document facts that often remain hidden until cases like this are litigated in court.

Small Hospitals Targeted

There is a key element that connects all these events at Sonoma West Medical Center. It is the ongoing financial losses the hospital has incurred since it filed a bankruptcy action in 2015. As a small and struggling hospital, administrators and hospital board members are motivated to keep the institution open and maintain clinical services to the community it serves. That need to fill the revenue shortfall is what motivates them to consider HOPD arrangements like the one offered them by Durall.

Pathologists and lab managers should consider sharing this information with their hospital CEOs and administrators. It is knowledge that could help them identify and avoid similar HOPD schemes involving lab tests.


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