CEO SUMMARY: This was the first criminal case involving anti-kickback violations brought against executives of a public laboratory company. Federal prosecutors charged the defendants with offering inducements to referring physicians in several ways. Defense counsel rebutted the prosecution’s case, using several arguments that many laboratory compliance experts would consider both novel and unlikely. This story expands upon the information presented on pages 2-5 of this issue.
FOR MANY YEARS TO COME, the criminal indictments, trial arguments, and jury decision in the case of three ex-UroCor, Inc. executives will surely cause consternation and compliance headaches for lawyers, pathologists, and laboratory managers.
That’s because there are no winners in this unusual laboratory compliance case. For the three defendants, their victory in court may be a satisfying vindication, but it comes only after several years of legal fees, emotional stress, and loss of professional reputation. Those years and the expenses incurred can never be reclaimed.
For the U.S. Attorney who investigated the case and decided to indict, the jury’s acquittal of the three defendants represents a setback in the efforts of the Department of Justice to enforce Medicare anti-kickback laws. Had a conviction resulted, it would have sent a message about what can happen to those who operate their businesses in violation of the law.
For pathologists and laboratory managers, this trial’s outcome only makes anti-kickback compliance more difficult. They must consider the experience of this jury trial, which is not binding anywhere, but demonstrates that federal healthcare prosecutors may file charges in similar situations.
At the same time, the trial’s outcome can be psychologically reassuring to referring physicians. After all, they have a jury verdict in a court case that says deeply-discounted pricing in client- billing arrangements doesn’t trigger inducement that would violate anti-kickback law. This layman’s view, if not informed by other compliance issues and opinions, has the potential to encourage physicians to play one laboratory competitor against the other in order to get the lowest discounted test prices.
And what about lawyers who provide guidance to clinical laboratories and pathology group practices on Medicare and Medicaid compliance? The trial’s outcome leaves them with neither a clear conclusion nor useful guidance as to how federal prosecutors might file future actions that claim labs or pathology groups have violated anti-kickback laws in their arrangements with referring physicians.
Into this situation, THE DARK REPORT can provide some exclusive intelligence. In the following pages, attorneys for the defendants share their insights and the arguments they used to convince the jury to acquit the three defendants on all counts.
THE DARK REPORT has organized this information to provide a discussion of each relevant point. However, because of the variety of issues, and the complexity of the arguments provided by prosecution and defense during the case, the comments on the following pages can only summarize a few of the more interesting points argued during the trial.
Setback For the Feds
What will surprise those who have studied laboratory compliance in great detail is how the defendants’ attorneys developed a defense that flaunts the popular wisdom. One simplistic way to explain this is to say that the defense argued: 1) that everything done by the defendants while working at UroCor was legal; 2) that what UroCor did in the marketplace was comparable with identical practices at competing laboratories; and, 3) that, among all the documents, statements, and pronouncements in the public record during the time of the alleged crimes, the government itself had acknowledged these activities as widespread and not in violation of then- current laws.
It should also be noted that the attorneys in this case are active litigators. Their job is to defend their client and gain acquittal. Therefore, they will analyze the law in a different way from attorneys who practice general corporate law, for they need to present their client’s position in a way that refutes the prosecution’s accusations. Thus, the strategies and tactics used in this trial will be unorthodox for those who are experts in laboratory compliance and seldom litigate in court.
Proving “Specific Intent”
Reid Robison was the attorney who represented former UroCor Chairman, President and CEO William Hagstrom. “To convict someone of a violation of Medicare anti-kickback law, the prosecution must prove ‘specific intent’ by the defendant,” stated Robison, who practices at McAfee & Taft in Oklahoma City, Oklahoma. “This means that the government must prove, beyond reasonable doubt, that the defendant knew what he was doing was a crime, and, with this knowledge, then acted with intent to induce referrals because of remuneration—the kickback—he paid to the referring provider.
“Under the anti-kickback statute, these two defendants could not be convicted unless they knew that what they were doing was a crime and they then acted with this knowledge,” continued Robison. “For the prosecution to win a conviction, it would have to convince the jury of two things. First, that the actions taken by UroCor in the marketplace caused the payment of illegal inducements to referring physicians—inducements that were illegal under the Medicare anti-kickback statute. Second, that the two defendants acted with the knowledge that these practices were illegal.”
What Defendants Believed
“At the end of the day, our defense was essentially based upon the mental state of the defendants—that they believed their actions were legal,” noted Michael J. Barta of Baker Botts in Washington, D.C. He was the defense attorney for Mark G. Dimitroff, former Vice President of Sales and Marketing at UroCor.
“On this point, we emphasized the rulings in two prior court cases involving the Medicare anti-kickback law,” added Barta. “One was the 1985 case of United States v. Greber. The other was the Hanlester ruling by the 9th Circuit Court of Appeals in 1995. These two cases teach that you must have intent and you must conspire to break the law.”
“The second basic defense we offered was that the business practices at UroCor not only did not violate the law, but were recognized in public government statements as widespread and within legal bounds,” said Robison. “Our contention was that, in the years 1993 to 1998, the government’s theory on discounted lab test pricing as an inducement had never been announced and that its appearance in this indictment was a novel theory.”
Facts And Evidence
Hagstrom and Dimitroff’s attorneys did not contest the facts and the evidence presented by the prosecution that UroCor offered discounted prices that were below the laboratory’s cost. They also did not contest the fact that UroCor evaluated the referring physician’s specimen volumes and payer mix to determine if the volume of Medicare business could financially offset the highly-discounted pricing extended to the physician.
“Our argument was ‘so what,’ because the U.S. government, in a series of pronouncements, had made clear that essentially all labs were discounting and they were discounting below cost, and that it was profitable only because of the Medicare business,” observed Barta.
“Given that the government knew that, what had it said?” asked Barta. “Pronouncements of the U.S. government said that discounting is a problem if, and only if, the lab discounts below fair market value.
“Once we made this point, the argument in court shifted to the definition of market value,” he continued. “The language that was relevant and guiding for our case was the government’s use of the term ‘fair market value’ in public statements. These government statements said nothing about pricing ‘below cost.’
Digging Deep Into Documents Bolsters Defense
IN LOOKING TO COUNTER PROSECUTION ARGUMENTS, the attorneys for the three ex-UroCor defendants did extensive research in to all the public statements, papers and opinions made by government healthcare officials.
In count one of the indictment, paragraph 23 states “UroCor consistently billed Medicare the Company’s standard list price for a laboratory test, even when the referring doctor received a “special price” for that particular test for his non-Medicare patients. The effect of the “special pricing” was that no discounts were given to Medicare patients, and UroCor did not inform Medicare of the discounts provided to non-Medicare patients.” (Italics added by THE DARK REPORT.)
“Much of the government’s case was organized around this point that UroCor gave discounts to physicians and didn’t lower its prices to Medicare,” stated Michael Barta, attorney for the defense. “To rebut this claim, we entered two government documents into the case.”
First was a letter from the Department of Health and Human Services (HHS)to the American Association of Bioanalysts, written in January 1985 and labeled FQA-422. Its key statement is, “There is no prohibition against a laboratory charging a physician less for non-Medicare patients than the amount it would be paid under the fee schedule provisionsoftheDeficitReductionActof1984.”
The second document is Exhibit B of the Plea Bargain between the United States and Robert E. Draper, defendant. It was a part of the case against National Health Lab- oratories, Inc. and this document was filed in court on December 18, 1992. In the “Stipulated Statement of Facts,” the government writes: Laboratories have adopted a practice of discounting the prices they offer physicians. Because laboratory prices to physicians are unregulated, it is not illegal for a laboratory to charge a physician a price that is less than the price charged to patients or to third party insurers. Laboratories engage in harsh price competition and often offer extremely low prices to physicians in order to obtain their accounts.” (Italics added by THE DARK REPORT.)
Definition Of Market Value
“Having made that point during the trial, we next addressed the definition of market value,” he continued. “Our response was simple. Market value is set by the competition. If the price UroCor charged was essentially the same as competing laboratories, then on what other basis might the physician choose one (equally-priced) laboratory over another? Our answer was quality! Moreover, government statements in the public domain make it clear that much of the Medicare regulations and statutes have the intent to encourage providers to base their buying decisions on quality.”
Robison echoed Barta’s comments. “We thought it was absolutely crystal clear, in the government’s own pronouncements, that pricing to meet competition, and pricing to meet market value, was understood by the government to be the ‘then current’ practice in the lab industry and was accepted by the government,” he said.
Under the anti-kickback statute, it is not an inducement if the price is at the market rate and the doctor can get the same price from other labs,” added Robison. “That makes price a tie between competing labs. There is no inducement there! Now the doctor must pick the laboratory on the basis of quality—and that’s the position the government said it wanted to maintain. And that’s exactly what these managers at UroCor did. They made it possible for a doctor to choose a lab on the basis of quality.
“There’s no inducement in this situation,” declared Robison. “The doc- tor is not getting anything from UroCor that is not available to him from other laboratories. And that’s the point we emphasized in court. UroCor’s decision to discount was in response to competition.”
Counter To Popular Wisdom
The subtlety of these arguments runs contrary to the popular wisdom about compliance during the 1990s. Popular wisdom said that discounted pricing and client bill arrangements had the potential to create illegal inducements. The physician could make money by marking up the discount-priced lab tests and billing private payers and patients. Meanwhile, the laboratory billed Medicare for full reimbursement (and used those funds to offset losses incurred from the discounted pricing). Under certain circumstances, these types of arrangements might trigger inducements considered illegal by the Medicare anti-kickback law.
The defendants made an argument that goes in an entirely different direction. “How can a deeply-discounted price be an inducement, if competing laboratories are offering the same physician comparable pricing?” goes the argument. “Since the physician can get the same price from several labs, there is no inducement. Instead, the physician must base his decision on other factors, like better quality and service. And, that is precisely what Medicare statutes want to encourage.”
Barta did acknowledge that some government positions on these points have changed in recent years. “OIG Advisory Opinion 99-13, posted on December 7, 1999, does describe price discounting arrangements that could trigger anti-kickback violations,” he commented. “This fraud alert represented a new federal perspective on this issue. However, my client had left UroCor in the months prior to its issuance and so the shifting stance expressed in Advisory Opinion 99-13 did not play a role in this trial.”
Federal prosecutors argued that remuneration existed when UroCor gave a doctor a discounted price and that doctor turned around and marked up that same test when she billed private payers. “To support these arguments, prosecutors presented some nicely-designed charts in court,” recalled Barta. “They showed how UroCor would sell a test to the doctor at, say $3. The doctor would then submit a claim to Blue Cross, for example, for $59 and pocket the $56 difference.
Two Distinct Price Markets
“We argued that those types of transactions were irrelevant to the anti-kick- back accusations,” he noted. “We pointed out that there were two distinctive pricing markets. One pricing market was ‘retail,’ the price that payers, whether private or Medicare/Medicaid, would reimburse claims,” explained Barta. “The other was ‘wholesale,’ the price that competing laboratories would sell lab tests to the physician.
“We countered the government’s argument by saying that doctors were free to do what they wanted with the discounted tests,” he said. “Many times, doctors might not bill either the payer or the patient for the lab test. In that case, they wrote off the $3 dollar cost.
“Alternatively, some physicians would mark up the test, submit the claim, and make money,” noted Barta. “Whether the doctor did or did not mark up the test was irrelevant to UroCor. It could only gain a doctor’s business by offering prices comparable with the competition, and that’s what set market value in this wholesale market. The jury apparently accepted this position.
“Whether the doctor did or did not mark up the test was irrelevant to UroCor. It could only gain a doctor’s business by offering prices comparable with the competition, and that’s what set market value in this wholesale market. The jury apparently accepted this position.”
“From a broader perspective, the government tried to sell its case as one based on ‘discrimination’—that it was wrongful for the defendants to offer discounts to doctors without offering these same discounts to Medicare,” noted Barta. “The judge expressly rejected this position and prohibited the government from making this argument to the jury.”
Doctors As Consultants
In the count involving anti-kickback violations, it was claimed that UroCor violated the law because it entered into consulting service contracts with physicians, in some cases paying individual doctors as much as $76,000 per year. But it had no reports filed by these doctors to indicate they performed work in return for this compensation.
“In court, we demonstrated that these doctors had done this work,” recalled Barta. “The documentation existed. But it was not found in the sales or marketing records because these consulting service contracts originated in the research arm of UroCor.
“UroCor was devoting extensive resources—money and people—into investigating new disease markers, potential therapies, and doing basic science,” he continued. “UroCor researchers were contracting with client physicians who could provide specific types of specimens needed for this research. They were also transmitting outcomes and follow-up information on the patient over time.
“In court, these facts prevailed and it became clear that the consulting services agreements UroCor signed with physicians did represent payment for valuable services rendered,” summarized Barta.
Waiving HMO Charges
There was a significant part of the government’s anti-kickback case which never made it to the court case. In the indictment, under count one dealing with violations of the anti-kickback law, the government had described UroCor’s use of insurance reimbursement assessments (IRAs).
Between 1992 and 1999, UroCor used IRA arrangements in situations where it did not hold managed care contracts. These IRA agreements spelled out how, for a 90- to 180-day period while UroCor was negotiating a contract with the managed care company, it would accept whatever out-of-network reimbursement it might be paid and would not pursue payment directly from patients or physicians.
In the indictment, prosecutors described this arrangement as creating illegal inducement between UroCor because it created remuneration. That remuneration was the time saved by the physician and his office staff because they could send all their specimens to one laboratory.
“We argued that this was not remuneration as defined in the statute,” recalled Barta. “The statute defines remuneration as cash or value in kind. Saving time does not meet this definition and the judge accepted our argument.
Using OIG Fraud Alerts
“Further, we offered into evidence that the basic practice of waiving charges to managed care patients, as UroCor was accused of doing, was recognized by the government as allowable,” he explained. “The evidence was the fraud alert published on December 19, 1994 by the Office of Inspector General (OIG). It discusses “Waiver of Charges to Managed Care Patients and says it is acceptable to waive lab testing charges if no remuneration, including managed care contract utilization incentives, is paid to the doctor.” (See TDR, August 26, 2002.)
“These points were all argued during pre-trial motions and hearings,” added Barta. “The judge threw out the section of the indictment that involved the IRAs and that issue was never part of the actual trial.”
Issue About Test Prices
On the claim by prosecutors that UroCor offered prices to physicians that it did not give to Medicare, the defense offered some interesting points. “The government postured its case on the fact that UroCor was offering discounted prices for lab tests to referring physicians, but UroCor did not give these same lab test prices to Medicare,” noted Barta.
“Our contention was that, not only was this not illegal, but the practice was widespread in the laboratory industry and pronouncements by the United States government acknowledged these and other practices,” he continued. “We offered several documents that demonstrated government statements on this point. For example, in the 1992 case between National Health Laboratories, Inc. (NHL) and the federal government, NHL’s President and CEO, Robert E. Draper, pleaded guilty to two counts of submitting false claims. In the stipulated statement of facts, the government stated that it is not illegal to offer clients a discount price that is less than Medicare.”
“Another document that we used was a 1985 letter from the Department of Health and Human Services
(HHS) that was responding to a request for guidance,” said Barta. “It stated that there was no prohibition against a laboratory charging a physician less for non-Medicare patients than the Medicare fee schedule.” (See sidebar on page 12.)
The comments on these pages cover some of the more interesting and relevant points in the UroCor case, but only from the perspective of the defense. Since the jury voted to acquit all three defendants on all counts, the arguments used by the defense are worthy of study.
That is one reason why the practical lessons to be learned from this case are limited. In one sense, this might be considered a “time capsule” case. Today’s compliance environment has important differences from that of the 1990s.
Because of the complexity of this subject, and the volumes of information presented before and during the trial, it is impossible for THE DARK REPORT to present a more comprehensive and detailed review of the UroCor anti-kickback and securities fraud case. That is a job more properly left to experts in compliance and law—individuals with the training and experience to comment on the full range of implications in each argument offered by prosecution and defense. However, it is unlikely that such a review will ever be conducted, or if it is, that its findings would be made available to pathologists, lab managers, and their legal counsel.
For that reason, THE DARK REPORT considered this to be an important opportunity to publicize certain aspects of this case. By allowing the defense attorneys to comment on their legal strategies and how they responded to various government claims of illegal business practices, it gives the laboratory industry valuable perspectives about this unique case.
An Important Caveat
Readers are urged to also keep an important point in mind when reviewing the information presented on these pages. The UroCor anti-kickback case involved sales and marketing programs conducted from about 1990 through 1999. Both prosecution and defense were arguing their positions based on industry practices and government statutes and guidance that were relevant to that time period.
That is one reason why the practical lessons to be learned from this case are limited. In one sense, this might be considered a “time capsule” case. Today’s compliance environment has important differences from that of the 1990s.
Finally, the defense attorneys also had advice to share with laboratories and pathology group practices about how to structure their compliance programs and how to use legal counsel to best effect. Coming issues of THE DARK REPORT will present their recommendations.
Securities Issues Linked to UroCor’s Fast Growth
COUNT TWO IN THE TRIAL of the ex-UroCor executives involved “conspiracy to commit securities fraud in violation of Title 18, United States Code, Section 371.”
“There was some complex interplay across both counts during the trial,” said Kevin Krahl, attorney for Michael N. McDonald, former CFO for UroCor. “Essentially, federal prosecutors were claiming that UroCor’s business was growing through illegal means and that affected the accounting.
“However, we had a good rebuttal for the prosecution’s arguments,” continued Krahl, who is a partner at Hornbeek Krahl Vitali & Braun in Oklahoma City, Oklahoma. “For example, with the IRA agreements, the bad debt reserve was always higher than the total balance generated by the IRA accounts. And, in fact, collections averaged about one-third of the balance, so this was conservative accounting.
“Another weakness in the prosecution’s case was their lack of understanding accepted accounting standards,” recalled Krahl.“We demonstrated that our accounting standards were strict and consistent with professional standards.
“Further, allegations of securities fraud did not stand up to scrutiny, since no shareholders were on record as having lost money,” added Krahl. “In fact, during the years involved in this case, Urocor shares performed acceptably well.”