Ex-UroCor Execs Face Criminal Indictments

Federal prosecutors allege UroCor paid kickbacks & inducements to urologist-clients

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CEO SUMMARY: Criminal charges filed against ex-UroCor executives center around several marketing practices that have much in common with marketing strategies used by many lab- oratories today. These include discounted pricing for non-Medicare specimens, offering to waive charges to payers and patients where UroCor was an “out-of-network” provider, and offering “consulting services” payments to client physicians.

ACROSS THE LABORATORY INDUSTRY in recent years, there have been plenty of complaints about “uneven” compliance practices, the lack of clear regulatory guidelines, and the absence of vigorous federal enforcement of Medicare/Medicaid fraud and abuse statutes.

That situation is about to change dramatically. Federal prosecutors filed criminal charges against three former executives of UroCor, Inc. for violations of securities laws and Medicare Fraud and Abuse statutes.

Named in the indictment are William A. Hagstrom (Chairman, President and CEO from 1989 through 1999), Mark G. Dimitroff (employed from 1990 to 1999, Vice President of Sales and Marketing), and Michael N. McDonald (employed 1992 to 1999, Chief Financial Officer). There are hints that other former employees of UroCor may be indicted later.

The indictment was filed on June 16, 2004 in an Oklahoma City federal court by Robert G. McCampbell, United States Attorney for the Western District of Oklahoma. The indictment lists a range of crimes. Most charges center around Medicare fraud and abuse violations and cover activities within UroCor from January 1990 until November 1999.

THE DARK REPORT believes this federal prosecution will turn out to be a milestone event for the clinical laboratory industry and the anatomic pathology profession. At their core, several categories of the alleged crimes are extreme examples of general sales tactics used daily by many laboratories and pathology group practices to woo new physicians and win their laboratory testing business.

From today forward, every laboratory and pathology group practice will have to weigh this indictment’s description of UroCor’s criminal actions against their own sales tactics. The indictment’s language will complicate the decisions conscientious laboratories make about when and how to offer physicians discounted pricing terms and “waiver of charges to managed care patients.”

Invaluable Intelligence

THE DARK REPORT provides a full analysis of this federal indictment in the two stories which follow. The next story provides details about the specific charges contained in the criminal indictment. (See pages 5-8.) Following that, an attorney with substantial knowledge about laboratory compliance and business practices shares her views and analysis of the criminal indictment. (See pages 9-11.)

This criminal indictment is linked to a Medicare Fraud and Abuse settlement entered into by UroCor in July 2001. At that time, the company paid $9 million to settle allegations that it submitted fraudulent claims to the Medicare program during the years 1992 through 1998.

Serious Financial Woes

Not coincidentally, just three days ear- lier, on June 28, 2001, UroCor had announced that it would be acquired by DIANON Systems, Inc., based in Stratford, Connecticut. (See TDR, July 23, 2001.) Further, by this point in time, UroCor had replaced Hagstrom, Dimitroff, and McDonald. It was UroCor’s new executive team which negotiated the Medicare Fraud and Abuse settlement with federal regulators and made the decision to sell UroCor to DIANON Systems.

Combing hindsight with the new rev- elations in the criminal indictment about UroCor’s financial manipulations of its revenues, accounts receivables, and bad debt policies, it appears that UroCor was backed into a financial corner.

It reported revenues of $52.6 mil- lion in 2000. Yet it had written off $4.7 million in receivables in late 1998 and the federal indictment says that, around that time, UroCor had over $10 million in receivables aged 150 days or longer. With its net worth falling, UroCor’s need to pay $9 million to the Medicare program in 2001 was probably the tipping point in its decision to sell.

DIANON was a willing buyer, because it removed a tough competitors from the urology marketplace. During most of the 1990s, DIANON and UroCor waged intense sales and marketing battles to capture urology clients from one another. It paid $180 million to acquire UroCor.

Did DIANON Overpay?

Again, with the benefit of hindsight gained from the fresh financial revelations in the criminal indictment, a strong argument can be made that DIANON overpaid for UroCor. DIANON paid $180 million for a company with little net worth, $52 million in revenues, and a base of urologists clients who, by the facts laid out in the indictment, were benefiting from test prices discounted to ridiculously low prices and plenty of “waived charges” arrangements.

There was probably an emotional component in DIANON’s decision to acquire UroCor. The two companies had each made earlier, hostile attempts to take each other over and DIANON got to remove its toughest competitor from the marketplace.

The speculation that DIANON overpaid is not irrelevant. By October 2002, DIANON had sold itself to Laboratory Corporation of America for a price of $598 million. Could UroCor’s “financial rot” and the poor margins from its urologist client base have eroded just enough of DIANON’s financial margins to encourage its board to accept an aggressive sales offer?

Further speculation could center around the idea that LabCorp may, similarly, have found that DIANON’s true operating margins were less than anticipated after it acquired the company. UroCor may have indeed been an expensive prize for two different buyers.

Where Are They Now?

Since leaving UroCor in 1999, William Hagstrom served as Chairman and CEO of Inoveon Corporation. In the past 18 months, he moved to a start- up pharmaceutical company, Selexys Pharmceuticals, where he is CEO. Both firms are located in Oklahoma City.

Mark Dimitroff, who had worked at DIANON before he started at UroCor, is Vice President of Marketing and Sales at Resolution Health, Inc., based in San Jose, California. This company’s information services pro- vide health plans with the health status and risk profiles of its beneficiaries. Michael McDonald is not working in the laboratory business.

Assuming that there are no plea bargain arrangements and this criminal case goes to trial, it will be closely watched by the laboratory business. Laboratory directors and pathologists should be clear about the implications of this criminal case. By filing these indictments, one federal attorney is staking his reputation that he can demonstrate, to the satisfaction of a judge and jury, that UroCor violated various Medicare/Medicaid prohibitions because of the manner in which it used pricing concessions and other forms of “remuneration” [of benefit to the referring physician client] to win new accounts.

This is a new legal case, one without a comparable precedent in the laboratory industry. Even before it goes to jury, it is sure to inject uncertainty into many aspects of laboratory compliance.

UroCor, Inc.
Key Facts

➔Founded in 1985 in Oklahoma City, Oklahoma as CytoDiagnostics, Inc.
➔Files Chapter 11 bankruptcy in 1990. Company reorganizes around a business strategy of providing specialized diagnostics and therapeutics to urologists.
➔Revenues hit $2.1 million in 1991.
➔Name is changed to UroCor, Inc. in 1994.
➔UroCor named to Inc. Magazine’s
“Fastest Growing 500 Companies” list for four consecutive years (1992-95).
➔Initial Public Offering (IPO) in 1996, UroCor’s revenues are $27 million.
➔In October 1998, UroCor writes off $4.7 million of receivables.
➔In July 2001, UroCor pays Medicare settlement of $9 million.
➔DIANON Systems, Inc. buys UroCor for $180 million in June 2001.
➔DIANON Systems is bought by Laboratory Corporation of America in February 2003 for a purchase price of approximately $598 million.
➔Criminal indictments against three ex-UroCor executives are filed
in federal court in Oklahoma City on June 16, 2004.

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