Insights from Jury Verdict in HDL, BlueWave Case

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CEO SUMMARY: After a two-week trial, the executives of Health Diagnostic Laboratories and BlueWave Healthcare Consultants were found guilty of violating the federal False Claims Act. Defendants Tonya Mallory, Floyd Calhoun Dent III, and Robert Bradford Johnson were ordered to pay the United States millions for causing HDL to submit more than 35,000 false claims to Medicare and Tricare. Also, Dent and Johnson were found liable to pay the US for certain Singulex lab test claims.

ON JAN. 31, A JURY IN U.S. DISTRICT COURT for the District of South Carolina found Tonya Mallory, the founder and former CEO of Health Diagnostic Laboratories (HDL) of Richmond, Va., guilty of violating the federal False Claims Act (FCA). Also, the jury found Floyd Calhoun Dent III and Robert Bradford Johnson guilty of violating the FCA. Dent and Johnson had served as sales representatives for HDL while working for BlueWave Healthcare Consultants, HDL’s former marketing partner.

In the jury verdict, the court ordered Mallory, Dent, and Johnson to pay $16,601,591, which, the jury found, was the value of filing 35,074 false claims for HDL’s services, said attorney Peter W. Chatfield of Phillips and Cohen in Washington, D.C.

Under the treble-damages provisions of the FCA, the defendants’ $16,601,591 liability will be tripled, said Chatfield. He followed the case closely because he represents Michael Mayes, MD, an internal medicine specialist in Hilton Head Island, S.C., who filed one of three whistleblower suits in the case. As a whistleblower, Mayes stands to collect an amount that is yet to be determined, Chatfield said.

The jury also found Dent and Johnson guilty of violating the FCA for paying $10 to $20 process-and-handling-fee kickbacks to doctors to induce them to order tests from Singulex, a specialty heart lab in Alameda, Calif., the law firm said. For the 3,813 claims filed in the Singulex portion of the case, the court ruled Dent and Johnson must pay $467,935, an amount that would be tripled as well, Chatfield said.

Under the FCA, damages are automatically trebled to compensate the government for the costs it incurred in identifying and remedying fraud and to deter future fraud. In this case, that means the total combined liability of the defendants amounts to about $54 million, plus additional, mandatory penalties in an amount the court will determine, Phillips and Cohen said.

The government alleged that Mallory, Dent, and Johnson conspired to pay kickbacks in the form of blood draw and processing and handling fees that totaled $20 for each blood test referral to HDL. In finding the defendants liable for those false claims, the jury must have concluded that at least one purpose of the payments made with respect to those claims was to induce doctors to order cardiovascular blood tests for federally-insured patients from the former defendant labs that the doctors might otherwise have thought were not medically necessary, the firm added.

Additional Penalties

After the two-week trial in Charleston, the jury found the three defendants jointly and severally liable for 35,074 false claims that HDL submitted to the government, causing damages totaling $16.6 million. Under the FCA, the defendants face additional penalties of $5,500 to $11,000 for each false claim, said the law firm.

Katie O’Connor reported for the Richmond Times-Dispatch that Mallory would contest the decision by filing a post-trial motion and may file an appeal. The court scheduled a mediation hearing for March 7 for the parties to negotiate an end to litigation, Chatfield said.

“The defendants wanted a jury to decide whether or not they violated the anti-kickback statute and/or the False Claims Act,” noted Chatfield. “The jury has now rendered its verdict based on a review of all the relevant facts. It is time for the defendants to get serious about accepting the consequences of their actions and to make full, appropriate restitution to taxpayers.”

The case began in 2011 when Mayes and two other whistleblowers alleged that the defendants paid kickbacks to physicians to induce them to use HDL’s blood-testing services. The U.S. Department of Justice joined the case in 2014.

HDL, Singulex Settlement

In April 2015, the DOJ announced that HDL and Singulex agreed to resolve allegations that they violated the FCA by paying remuneration to physicians in exchange for patient referrals and billing federal healthcare programs for medically unnecessary testing. Soon after the agreement was announced, HDL filed for bankruptcy and later was sold to True Health Diagnostics of Frisco, Texas. (See TDRs, April 20 and Sept. 14, 2015.)

For clinical lab directors and pathologists, one important take-away from the cases of Mallory, Dent, and Johnson is that all labs should ensure that they get good legal advice from lawyers who specialize in healthcare law, Chatfield cautioned.

“The first lesson is to recognize that, whenever you run businesses in healthcare, it is essential to get advice from people who specialize in healthcare law and understand the complex legal issues of financial arrangements,” advised Chatfield.

“One big issue in the case was this: at what point did the unlawfulness of what was being done become clear to the lab directors and the marketers?” he asked. “Originally, the lab directors and marketers relied on legal advice that was based on a description of conduct that did not focus on the most relevant facts. “That’s because the lab executives or the marketers or both didn’t disclose to the attorneys the full details of how the lab (such as failing to alert the attorneys that tests were being marketed at least in part as a way for referring doctors to generate extra revenue for their practices) and the marketing programs were being conducted based on the incorrect assumption that the labs needed to pay doctors for work associated with processing and handling blood samples that would be sent to the labs.

“That problem with the incorrectly framed questions was compounded by the fact that the attorneys being consulted were not specialists in healthcare and did not understand all the relevant issues,” Chatfield explained.

Another major issue in the case was how much HDL paid physicians for sending patients’ blood samples to the lab company. Those fees were paid to doctors for processing and handling lab specimens.

“HDL had been paying those fees to physicians before the Inspector General of the federal Department of Health and Human Services issued an advisory opinion in June 2014 that said the payment of P&H fees was illegal,” stated Chatfield. The OIG issued its “Special Fraud Alert: Laboratory Payments to Referring Physicians,” on June 25, 2014.

Confusion About Payments

Chatfield explained the issue, saying, “Medicare and Medicaid will not permit labs to pay processing and handling fees to referring doctors so that there is no economic incentive to refer specimens to a specific lab.”

“But for HDL and BlueWave, there was confusion about these payments because they started paying those fees before the OIG opinion and they were paying P&H fees above the blood draw fee as a way to compensate physicians for preparing the lab samples for shipping to the lab,” he added. “Their premise was that they could pay doctors to do this because otherwise the physicians were doing work for the lab [processing specimens] that was not compensated. That premise was factually and legally wrong.

“At this point, if HDL and BlueWave had a healthcare lawyer look at the CPT codes for how doctors are compensated, they would have discovered the CPT code for processing and handling shows a zero payment,” Chatfield said. “The payment is zero for that work because physicians are already paid as part of a panoply of payments to doctors that compensate them for that work.

“Ultimately the defendants’ lawyers argued that maybe the defendants had made a mistake and didn’t understand the rules—at least at first,” he explained. “But working against that argument was the fact that the OIG ruling came out in June 2014, and other advice was coming from outside lawyers who worked for various doctors who claimed that the defendants needed to stop paying those P&H fees

“In addition, there were internal healthcare lawyers that HDL hired directly who were telling HDL to stop paying those fees,” added Chatfield. “These internal lawyers said that the OIG opinion was considered to be a red flag, meaning HDL needed to move away from paying these fees.

“At that point, the problem appears to have become that HDL and BlueWave were so wrapped up in how much money the strategy was generating for them, that they were reluctant to put the brakes on it,” he stated. “They were especially reluctant because they thought other labs might continue to pay these fees to physicians.

“When the jury looked at the evidence, the issue seemed to be this: at what point did the records show that the strategy became more than a mere mistake? At what point did it become clear that the defendants knew that what they were doing was wrong?” Chatfield asked. “At what point did they know it was illegal and then just refused to quit?

“It appears from the verdict that the jury was hitting the defendants for the period when the record shows there was a meeting with BlueWave, HDL, and the lawyers to discuss this issue,” he said. “In this big meeting, the lawyers told HDL and BlueWave to stop without saying specifically, ‘You need to stop.’

“By that time, the lawyers were in this weird position where, on the one hand the companies were making $450 million in sales over the course of four or five years, and, on the other hand, the lawyers for HDL and BlueWave gave the defendants an absolutely clear statement from OIG that this particular pattern of conduct was likely illegal,” he noted.

Health Diagnostics Lab, Singulex Settled in 2015

AN EARLIER LEGAL CASE against Health Diagnostic Laboratories and Singulex was settled in 2015. On April 9, 2015, the U.S. Department of Justice reported that Health Diagnostic Laboratory and Singulex, a heart lab in Alameda, Calif., agreed to resolve allegations that they violated the FCA by paying remuneration to physicians in exchange for patient referrals and billing federal healthcare programs for medically unnecessary testing.

Under the settlements, HDL agreed to pay $47 million and Singulex agreed to pay $1.5 million. In the lawsuits, the DOJ alleged that HDL and Singulex induced physicians to refer patients to them for blood tests by paying them processing and handling fees of between $10 and $17 per referral and by routinely waiving patient co-payment and deductibles.

Warning Points

“The conduct meets all the normal warning points of being illegal because the conduct was volume-based—meaning the more times the physicians sent lab samples, the more money they made in payments from HDL,” Chatfield said. “That’s a problem, especially when they targeted money-hungry physicians, as they told their sales representatives to target. And also because they were telling the doctors to order lab tests that wouldn’t normally be considered medically necessary.

“Remember, referring physicians were ordering tests from a specialty heart lab,” he added. “That means a lot of tests were ordered that typically are not considered medically necessary for the general population. HDL’s client physicians were using these tests more as screening tests in a general population.

Medical Necessity

“Physicians were being told to consider ordering these tests all the time because it might save a handful of patients’ lives,” commented Chatfield. “That’s really the difference between screening and medical necessity—but as screening tests, these tests are very expensive.

“In addition, HDL was doing zero balance billing, which is generally not something labs should do as a marketing strategy,” continued Chatfield. “HDL did this for all kinds of insurance—whether it was commercial, Tricare, Medicare, or Medicaid. For Medicare, zero balance billing is required of all insurers providing lab services, so the promise can be misleading in suggesting these labs were offering a special benefit. But with Tricare and many private payers, such offers violate program rules. Defendants made those claims broadly for the benefit of the physicians to avoid patients complaining to physicians about having to pay copayments for expensive tests. HDL decided not to charge any patients anything so that the physicians would not get such complaints.

“That’s how the case fell into place,” he said. “From my perspective, the jury did a fabulous job of listening to all the testimony and using common sense to recognize that the testimony showed there were improper sales pitches that occurred,” he said. “I think the verdict shows that the jury bought the notion that the defendants had just sort of run amuck in their eagerness to make all this money.

“It was clear from the testimony that two lab salesmen—Dent and Johnson— were making almost $50 million in income over four or five years,” he added. “And Mallory, the CEO of the lab, was making $21 million. Clearly, the finances influenced the defendants’ decisions about not wanting to heed the lawyers’ warnings.”

Contact Peter Chatfield at 202-833-4567 or

Lawyer Explains Why Attorneys Might Equivocate When Millions Are at Stake

IF A QUESTIONABLE BUSINESS STRATEGY IS GENERATING millions in revenue, lawyers may give advice that seems less than perfectly clear, said Peter W. Chatfield, an attorney in a case involving Health Diagnostic Laboratories.

“In a civil suit, the defense can raise what’s called an affirmative defense,” he continued. “It can do so based on the use of advice of counsel, which is one of the legal strategies that the defendants used in this case. They argued that they made business decisions while relying on the advice of counsel. Therefore, they argued, they could not be liable for any kind of knowing misconduct.

“The challenge in arguing that you relied on advice of counsel is twofold,” continued Chatfield. “First, in raising that defense, you automatically waive attorney-client privilege because you can’t say you relied on advice of counsel unless the jury can hear everything that the attorneys told you, good or bad. The entirety of the case becomes about the reasonableness of relying on the attorney’s advice under all relevant circumstances.

“Second, the advice you get from counsel is only as good as the information you give them,” he added. “If you fail to give them all the information necessary for your lawyers to understand all the circumstances and the legality of what you’re doing, you cannot establish the affirmative defense of advice of counsel.

“That’s what happened in this case,” Chatfield explained. “The defendants never disclosed certain elements of what was happening to the attorneys, including, in part, the purpose of the payments used to induce referrals.

“Also, relatively early in the process HDL got information from others who said the lab was wrong to offer payments for processing and handling,” he added.

“In fact, a healthcare lawyer in Florida wrote and explained to HDL that paying the processing and handling fees was illegal and showed how physicians are already paid for processing and handling in the per-visit fee,” he said. “Therefore, the lawyer wrote, paying a separate fee for P&H is a double payment, meaning there’s no way it can be legal.

“In a case like this, it is easy to see that even an excellent healthcare lawyer who has a client making $100 million a year or more from a business strategy might struggle to give a clear and unequivocal answer if the CEO is asking that attorney to give an absolute ‘yes-or-no’ answer to a question about whether it’s legal or not,” he explained.

“Lawyers know there is always a small chance of a surprise verdict in a case or opinion from an administrative regulator,” he said. “As a lawyer, you may be reluctant to tell clients they absolutely must stop immediately and give up all this money, if there is any chance that unexpected events will make the advice turn out to be wrong. Attorneys who incorrectly present a question as having an absolutely clear answer when even a little doubt remains can end up getting sued for malpractice if they ignore the slight chance of a surprise outcome or reversal of government position.

“Instead, the lawyer will say something like, ‘It’s not looking at all good for you’ or ‘All the signs point to the fact that you need to stop.’ They won’t come flat out and say, ‘You need to stop,’” Chatfield said. “In law, it’s difficult to have absolute answers. Then, the defendants will respond by saying, ‘Well, if you won’t tell us, then I don’t care if the government says it’s illegal. The government can be wrong and we’re willing to do it until someone tells us it’s absolutely illegal.’

“At some point, that decision becomes reckless, and that’s what happened in this case involving HDL, Singulex, and BlueWave,” concluded Chatfield.


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