Defunct, Oft-Troubled Calloway Labs Hit with $1.4M Federal Judgement

Whistleblower case results in civil judgement, has common elements with ongoing Boston Heart case

HOW OFTEN IS A DEFUNCT LAB COMPANY IN THE NEWS? That was the odd development last week when it was announced that a U.S. District Court had entered a $1.4 million civil judgement against Calloway Laboratories, Inc., a toxicology lab company formerly based in Woburn, Mass., for business practices during the period May 2014 through November 2014.

An interesting fact gives this development additional significance. After facing state and federal charges prior to 2012 that resulted in jail sentences, fines, and penalties, Calloway Labs was acquired by a private equity company that year and an experienced lab industry executive became its CEO. So this civil settlement involves claims that Calloway violated federal law under its new owners and new executive leadership.

False Claim Allegations

In a press release, the U.S. Attorney’s Office for the Eastern District of Kentucky said that the $1,374,058 judgement was “part of a settlement agreement resolving False Claims Act allegations that, during the period May 2014 to November 2014, Calloway submitted false claims for payment for urine drug testing referred by physicians to whom Calloway provided free testing supplies. As part of the settlement agreement, Calloway acknowledged that it provided free testing supplies to physicians for the purpose of inducing or rewarding referrals of urine drug testing to Calloway. Calloway then submitted claims to Medicare and TRICARE seeking payment for the testing referred by these physicians.”

The judgement is the result of a whistleblower lawsuit filed by a former Calloway employee. The whistleblower will be awarded a portion of whatever the federal government collects from the civil judgement.

This would be the second major government enforcement action against Calloway during the last four years that it was in business. The first came in 2010, when then-Attorney General of Massachusetts, Martha Coakley, filed 42 indictments against Calloway labs, two of its officers, and two employees of a sober house.

Coakley, in a press release, said the defendants “engaged in a pervasive kickback scheme involving two straw companies which funneled kickbacks to sober houses, as well as paid middlemen and a medical office to illegally obtain urine drug screening business paid by MassHealth, the Commonwealth’s Medicaid program.”

Those charges resulted in Calloway Labs agreeing to pay $20 million to settle criminal charges (without admitting guilt) in March, 2012. Later that year, in October, ex-Calloway executives Arthur Levitan and Patrick Cavanaugh pled guilty and were sentenced to four years of probation. Kelli Ann Cavanaugh pled guilty in Jan. 2013 and received a similar sentence.

Ampersand Capital Partners entered the picture at this time. It acquired Calloway Laboratories before the end of 2012 and installed Gail Marcus as President and Chief Executive Officer. At that time, Calloway Labs still had about 250 to 300 employees.

Lab Company Closed in 2015

Less than 33 months later, Ampersand and Marcus made the decision to close Calloway Laboratories, effective October 16, 2015. This is also the same period identified in the Department of Justice press release as when Calloway Laboratories was “submitting false claims to federal healthcare programs… by providing physicians with free testing supplies in violation of the federal Anti-Kickback Statute and the Stark Law.”

This raises the interesting question about the level of oversight and due diligence exercised by Ampersand, the new owner of Calloway Laboratories during that time, and its executive team. For example, the CEO, Marcus, had two decades of experience at such major health insurers as Cigna and UnitedHealthcare, followed by two years as CEO of Caris Diagnostics in Irving, Texas. It would be expected that such experienced ownership and management would recognize which of their lab’s business practices might be non-compliant with federal healthcare laws.

Oversight and Due Diligence

That same question about oversight and due diligence by executives with years of experience managing lab companies is an element in another whistleblower case involving a clinical laboratory company.

This qui tam case is unfolding in the U.S. District Court for the District of Columbia. It is United States of America ex rel. Chris Riedel versus Boston Heart Diagnostics Incorporated. The original lawsuit was filed under seal in 2012, but the second amended complaint is public. The claims that the plaintiff asserted against the defendant contained detailed descriptions of Boston Heart’s business practices that are alleged to be violations of federal healthcare laws.

Attorneys tell The Dark Report that this ruling sets a new bar for lab compliance, as it relates to specific ways that labs induce physicians in exchange for lab test referrals.

What connects this story to the Calloway Laboratory compliance issues is that Boston Heart also had owners, a board, and executives who were experienced professionals and who would be expected to be familiar with proper due diligence and how to comply with federal healthcare laws. Boston Heart provided a statement about this whistleblower case.

Boston Heart’s Directors

In the court documents, Riedel says he served on Boston Heart’s board as a director from 2007 until fourth quarter 2010. The lawsuit identifies other board members at this time as Susan Herzberg, President and CEO; Peter Parker, Chairman; Alice Limkaking, Chief Business Officer; Frank Yunes, Secretary and General Counsel; and Jeff Crison. Of this group, Herzberg had the most relevant and applicable experience with how labs comply with federal healthcare laws, having previously worked at Oxford Health Plans, Quest Diagnostics, and Abbott Laboratories.

Given the similarities of noncompliance in the court allegations against Calloway Laboratories and Boston Heart Diagnostics, the unanswered question is how experienced investors and lab executives failed to keep their companies compliant with federal healthcare laws.

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