Is New Cycle of Fraud Plaguing Lab Industry?

Sins of a few labs may cause unnecessary pain for all clinical labs and pathology groups

CEO SUMMARY: Taken collectively, the growing number of federal investigations of clinical lab companies and health insurer lawsuits against lab companies alleging fraudulent business practices signals a disturbing new trend for the lab industry. Although these allegations are leveled at just a handful of lab companies, the amount of money these labs took out of the system exceeds a billion dollars. Some experts expect payers will enact tough requirements to stop such abuses.

STARTING ABOUT TWO YEARS AGO, a stream of news stories about federal investigations of certain clinical laboratory companies for fraudulent practices have made regional and national headlines. During this same time, a number of health insurance companies have also made news after filing lawsuits against certain clinical lab companies that allege similar fraudulent practices.

Examples of recent federal criminal or civil cases against laboratories include:

  • BioDiagnostic Laboratory Services, Parsippany, NJ, March 2013: federal convictions of 38 people, including 25 physicians, for offering bribes or accepting inducements to refer lab tests.
  • Health Diagnostic Laboratory, Inc., Richmond, VA, April, 2015: civil settlement of allegations that the lab paid
    inducements to physicians for referrals and billed Medicare and Medicaid for medically-unnecessary tests.
  • Singulex Laboratories, Alameda, CA: April 2015: civil settlement of allegations that the lab paid inducements to physicians for referrals and billed Medicare and Medicaid for medicallyunnecessary tests.
  • Bostwick Laboratories, Nashville, TN, August, 2013 and October, 2014: two civil agreements with the federal DOJ to settle allegations of offering kickback incentives to physicians in exchange for referrals.
  • Millennium Health LLC, San Diego, CA, case not settled: In June, The Wall Street Journal reported that Millennium, a large toxicology testing lab company, was in settlement talks with the federal government to resolve allegations of billing Medicare and Medicaid for medically-unnecessary tests (and possible other violations). Settlement amount rumored to be in the range of $250 million.

Big-Dollar Fraud Cases

Several of these federal cases against lab companies involve large sums of money. Biodiagnostic Laboratory Services was said to have generated revenue of $200 million in the eight years of 2006 through 2013. Health Diagnostic Laboratories is reported to have produced revenue of $417 million in calendar 2012 and was projected to post revenue of $383 million in calendar 2013. That’s a total of $800 million in revenue at this one lab company in just two years!

Pathologists and lab managers should not miss the point: this handful of bad actors in the lab industry accused of fraudulent business practices have taken more than $1 billion out of the healthcare system in just a couple of years! Keep in mind that the total spent on clinical laboratory testing is about $75 billion per year (per a recent Cain Brothers lab industry report).

Thus, if this small group of labs was able to pull $1 billion and more from their schemes to induce medically-unnecessary testing, what is the total amount of fraudulent lab test billing that Medicare, Medicaid, and private health insurance officials see?

Given the explosive growth over the past decade in the number of labs dedicated to toxicology and pain management testing, the dollar amount of lab claims paid based on fraudulent business practices in this industry sector may be a number that is too large for the payer establishment to ignore any longer.

But go beyond toxicology and pain management lab companies. Payers may also be seeing a substantial number of lab test claims from certain lab companies with proprietary molecular diagnostic assays and genetic tests that the payers consider suspect on grounds of: not clinically useful (or not supported by published studies in credible, peer-reviewed journals), medicallyunnecessary, or test claims in which the test was ordered on the basis of suspected illegal inducements between the ordering physician and the lab.

Lab managers working in hospital and health system laboratories often see one aspect of unethical business practices from these molecular and genetic testing labs. There are labs that will tell the physician that the patient will never see a bill.

These labs price their proprietary tests at several hundreds to several thousands of dollars. They then submit claims—often as an out-of-network lab—to the patient’s insurance company. They accept whatever the insurance company pays and some of these labs never bill the patient.

THE DARK REPORT is aware of a number of lab companies over the past 15 years that have followed this practice, which goes as far back as the late 1990s. One example was Impath, Inc., the high-flying breast cancer testing company of that era. It typically priced its proprietary tests at double that of competing labs, billed most insurers as an out-of-network provider, and never aggressively collected money patients owed.

Financial Fraud At Impath

Impath turned out to be one of the lab industry’s biggest financial frauds. When discovered in 2003, it was estimated that, in addition to the business practices described above, the company had reported $64 million in “phantom revenue” between 1999 and 2002. Eventually, CEO Anu Saad, M.D. and five other ex-Impath executives faced criminal charges for their roles in this case. (See TDR, April 18, 2005.)

In fact, private health insurers may be reaching a point where they will no longer tolerate any lab that fails to bill and collect the amounts that a patient owes for his or her lab tests. In the intelligence briefing which follows on pages 6-8, THE DARK REPORT is first to report on how Cigna, one of the nation’s largest health insurance companies, is sending audit letters to toxicology lab companies asking for documentation that the patient paid his/her deductible or copay before the insurer will issue payment to the lab that performed the test.

Attorney Richard S. Cooper, of McDonald Hopkins, was interviewed about the Cigna audit letters. As you will read on the following pages, he points out that payers will often start by auditing certain provider practices as a first step. The second step is to include language in provider agreements that addresses what the payer believes must change.

New payer requirements?

Effectively, Cooper is pointing out that Cigna may introduce language during the renewal of provider agreements that requires laboratories to document that they billed patients and patients paid their required deductibles. This would be a new burden for laboratories when submitting claims. Such contract language could also violate prompt-payment laws of some states.

On the other hand, it should not be overlooked that tens of millions of patients are now enrolled in high-deductible health plans (HDHPs). Thus, by design, HDHPs can only succeed when patients pay the full amount of their required deductible. Independent of any perceptions of lab fraud and abuse, HDHPs may be another reason why Cigna, AetnaUnitedHealth, and other payers are becoming motivated to require all providers—including labs—to demonstrate that the patient has paid before reimbursing the claim.

The upside for the entire clinical laboratory industry from these developments is that the sooner payers take action against that class of labs considered to be engaged in fraudulent business practices, the sooner the competitive playing field will be leveled. The downside is that, should the federal Medicare and Medicaid programs enact onerous new requirements to stop these fraudulent schemes, this would add another expensive burden for those lab organizations that have always taken great care to fully comply with all laws and the terms of their provider contracts.

Health Insurers Are Suing Labs Over Fraud in Billing for Tests

NE OF THE FIRST LAWSUITS by a health insurer against a lab company alleging fraud in how lab claims were submitted was filed on October 15, 2014, in the U.S. District Court of Connecticut by Cigna Health and Life Insurance Co. against Health Diagnostic Laboratory, Inc., of Richmond, Virginia. Cigna accused HDL of “a fraudulent fee-forgiving scheme” and seeks $84 million in damages.

Aetna, Inc., was the next insurer to sue HDL. Its lawsuit was filed on April 10, 2015, in the U.S. District Court for the Eastern District of Pennsylvania. Aetna is seeking “tens of millions in monetary damages” because of the “fraudulent billing scheme” that was operated by HDL and Blue Wave, a contract sales entity that represented HDL.

In a separate lawsuit, Cigna targeted several lab companies that provide toxicology and pain management testing services. In court documents filed on July 17 in U.S. District Court for the Southern District of Florida in West Palm Beach, Cigna named Sky Toxicology, Ltd., Sky Toxicology Lab Management, LLC, Frontier Toxicology Ltd., and Hill Country Toxicology, Ltd., as defendants. Court documents in this case show that, “Cigna has paid well over $20 million in claims that it was not obligated to pay under the terms of the relevant plans.” (See sidebar on page 7.)

These court cases may be an early sign that private health insurers are prepared to launch court actions against labs they consider to be engaged in fraudulent business and billing practices. If true, this development will be welcomed by lab administrators in labs that take extra effort to comply with state and federal compliance laws.


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