Drug Testing Labs in Texas, California Deal With Fraud Charges

Allegations include fraud, illegal kickbacks, and medically unnecessary tests at two labs

CEO SUMMARY: Two toxicology lab companies accused of fraud are fighting to stay in business. In the case of Medicus Laboratories of Dallas, it is asking a federal judge to issue a temporary restraining order to prevent state and federal lab regulators from pulling its CLIA license. At Proove Biosciences of Irvine, Calif., following a series of news reports about ex-employees and others accusing Proove of illegal actions, the company went to bankruptcy court and put itself in receivership.

TWO LABORATORY COMPANIES WERE responding in different ways as a result of fraud charges in recent weeks. In one case, the charges came in a series of news articles that appear to have led to a bankruptcy filing. In the other case, the fraud charges stemmed from lawsuits by the government and from one of the nation’s largest health insurers.

One laboratory company was Proove Biosciences, a genetic testing firm in Irvine, Calif., that was ordered into receivership for restructuring and asset sale, according to Stat News.

The other company was Medicus Laboratories of Dallas. On Aug. 18, Medicus and its majority owner, Next Health, sought a temporary restraining order in County Court of Law No. 3 in Dallas. The companies sought an injunction to stop the federal Department of Health and Human Services from suspending or revoking their federal laboratory licenses. Also named as defendants were Thomas Price, the DHHS Secretary, and Seema Verma, administrator of the federal Centers for Medicare and Medicaid Services.

The Dallas Morning News reported earlier this month that, in 2014, Medicus paid $5 million to settle a federal civil complaint that it defrauded Medicare over urine testing services. In its request for a restraining order, Next Health and Medicus charged that state and federal officials intend to shut down the lab.

In addition, the newspaper reported, “A team of state and federal inspectors arrived at Medicus’ laboratory in April for a five-day inspection, reportedly in response to an anonymous complaint, the lawsuit said. The team also inspected five other labs owned in part by Next Health, the lawsuit said.”

Lab’s ‘Pervasive Problems’

In a letter from CMS dated May 10 to officials at Next Health and Medicus, CMS said of Medicus, “Your laboratory demonstrated systemic and pervasive problems throughout the laboratory which has led to the findings of immediate jeopardy,” the newspaper reported. Such a finding means that CMS can suspend, limit, or revoke a laboratory’s license to operate and do so without a hearing or a chance to challenge the allegations, the article added.

The Dallas newspaper also reported on the alleged, so-called “Whataburger scheme,” saying, a former marketing contractor for Next Health was named in an unrelated criminal case involving alleged kickbacks for lab tests. In that case, prosecutors reported that a company called the ADAR Group gave out $50 gift cards to people in exchange for having them urinate in cups in restrooms at Whataburger restaurants, the newspaper reported, saying the tests were part of a wellness study.

In addition to the problems Next Health and Medicus face with CMS, Becker’s Hospital Review reported Sept. 6 that two executives of Next Health, Andrew Hillman and Semyo Narosov, were facing federal kickback charges in connection with their relationship to Forest Park Medical Center in Dallas. Hillman, Narosov, and 19 others allegedly paid or received $40 million in bribes and kickbacks to physicians and other providers for overpriced and unnecessary drug and genetic tests, the website reported.

On Dec. 1, U.S. Attorney John Parker of the Northern District of Texas announced that FPMC’s founders, investors, physicians, surgeons, and other executives were charged with various felony offenses stemming from their payment or receipt of approximately $40 million in bribes and kickbacks for referring certain patients to FPMC.

Next Health faces more legal trouble as a result of a lawsuit from one of the nation’s largest health insurers, UnitedHealthcare. In January, UHC named Next Health and other affiliated labs in a lawsuit filed in U.S. District Court for the Northern District of Texas. In addition to Next Health, UHC named United Toxicology, Medicus Laboratories, US Toxicology, American Laboratories Group, Erik Bugen, and Kirk Zajac as defendants. The labs perform drug and genetic laboratory tests and Next Health describes itself as a leading ancillary service company, the lawsuit says.

‘Unlawful Conduct’ Cited

In the lawsuit, UHC says, “Next Health’s rapid growth has been primarily, if not exclusively, driven by its unlawful conduct and inappropriate business practices. Specifically, Next Health and its subsidiary labs paid bribes and kickbacks to referral sources (physicians, sober homes, sales consultants, etc.) in exchange for test orders; they inappropriately utilized standing test protocols regardless of patients’ medical histories, clinical conditions, or needs; they performed and billed for testing services that were not ordered by physicians; they improperly billed for services that they did not perform; and they routinely ignored patients’ payment responsibilities to avoid drawing attention to the scheme.”

UHC’s lawsuit references the DOJ’s actions in December, saying the DOJ indicted several executives, surgeons, physicians and others in connection with a similar illegal kickback conspiracy at Forest Park Medical Center.

“For years, Next Health and its subsidiaries succeeded in illegally billing commercial insurers for improper and unnecessary laboratory services,” the UHC lawsuit states. “Between 2011 and mid-2016, Next Health and its subsidiaries submitted thousands of claims to United, charging more than $400 million for out-of-network drug and pharmacogenetic laboratory testing services. United paid Next Health and its subsidiaries more than $100 million for these claims. Unbeknownst to United, all of the claims arose from the illegal and improper practices set forth herein.”

Kickbacks and/or Bribes

Last year, UnitedHealth discovered the illegal operation, then launched an investigation into Next Health and its subsidiary labs. “The investigation revealed, among other things, that Next Health funneled kickbacks and/or bribes to providers in multiple geographic areas for drug and pharmaco-genetic test orders,” said the court papers.

“One of these illicit arrangements involved Next Health’s sales consultants paying people $50 to urinate in a cup in a Whataburger bathroom so that the urine could be portioned out and sent to Next Health for multiple unnecessary and expensive drug tests that were later billed to United and its customers. This one kick-back scheme resulted in UnitedHealth paying Next Health subsidiaries more than $11.1 million in less than one year,” said the lawsuit.

‘Unlawful Conduct’ Cited

One characteristic that Medicus Laboratories and Proove Biosciences have in common is that they specialize in testing for pain management and drugs of abuse. This sector of the clinical laboratory industry has a reputation for fraud and abuse on an unprecedented scale. Is the Medicus case—involving enforcement action by federal lab regulators and a lawsuit by a major health insurer—a first sign that federal prosecutors and private payers are ready to get tough with lab companies accused of illegal activities?

Troubled Proove Biosciences Forced Into Receivership

IN AUGUST, Proove Biosciences, a genetic testing company in Irvine, Calif., was ordered into receivership for restructuring and asset sale, according to Stat News. In a report by Stat’s West Coast Editor Charles Piller, he wrote that, on Aug. 7, the court supervising the case appointed Michael Thatcher of Glass Ratner Advisory & Capital Group of Atlanta as receiver.

Since last December, Piller has written several critical stories about Proove. In his article on Aug. 31, Piller reported that Proove founder Brian Meshkin blamed the company’s problems on Stat’s reporting, specifically articles published in December and February. “Those articles quoted experts who expressed deep doubts about the company’s scientific claims that it could predict a patient’s likelihood of becoming addicted to opioids,” Piller wrote. In his earlier reporting on Proove in December and February, Piller had written that one researcher said the company’s claims about its tests linking a patients’ genetic profile to addiction to be “hogwash.”

“Stat’s investigations also described business practices—including coercing patients to take unnecessary genetic tests—that former Proove employees and outside experts described as unethical and possibly illegal,” Piller wrote.

FBI agents and representatives from the federal Department of Health and Human Services raided Proove’s offices in June collecting documents in a criminal probe, Piller wrote. “According to legal experts, Proove and many of its affiliated doctors operated in ways that could violate federal and state anti-kickback laws, which are meant to prevent unneeded testing,” he added.

In defending his company, Meshkin called the reporting on the company’s practices to be “erroneous and damaging” and said they were based on false allegations from disgruntled employees.


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