Restitution and Guilty Plea in Two Lab Fraud Cases

Outcomes in separate cases alleging fraud involving lab tests were announced last month

CEO SUMMARY: In one case, owners and a sales rep agreed to pay restitution totaling almost $10 million. In the second case, three defendants pled guilty to federal charges involving payment or receipt of kickbacks and illegal inducements. A fourth defendent in this second case, a physician, awaits trial. These smaller cases come just months after the announcement last fall of two huge fraud investigations that involved labs and genetic testing and represented about $6 billion in fraudulent Medicare claims.

The US Department of Justice (DOJ) recently announced decisions in two separate fraud cases involving clinical laboratories. In one case, the defendants agreed to pay restitution for their roles in the fraud and in the other case, several co-defendants pled guilty and are scheduled for sentencing this summer.

Neither of the two cases filed by federal prosecutors involved fraud on the scale of, say, the Health Diagnostics Laboratory (HDL) case of 2015, when the Department of Justice claimed that fraudulent actions by operators of that lab company had defrauded federal health programs of as much as $500 million in just 48 months. (See TDRs, April 20 and June 22, 2015.)

Feds Prevail in Both Cases

What is significant about those two cases is that they show that DOJ prosecutors are willing to file charges in federal court against the operators of even smaller clinical laboratory companies that violate federal laws, particularly the Anti-Kickback Statute. The outcomes of both cases show that these federal court actions can have teeth and result in criminal convictions and even jail time for lab owners, managers, and sales representatives who are alleged to have violated federal laws by illegally inducing test referrals from physicians and other providers. 

The DOJ announced in late March that two former owners of a now-defunct North Carolina laboratory known as Physicians Choice Laboratory Services (PCLS), agreed to pay more than $7 million in reparations for allegations that they violated the federal Anti-Kickback Statute (AKS) and swindled taxpayers with fraudulent medical claims involving urine tests. 

The Anti-Kickback Statute makes it illegal for any person to knowingly and willfully solicit or receive, or offer or pay, any remuneration in exchange for the referral of items or services that are paid for by a federal healthcare program. In this situation, the federal Centers for Medicare and Medicaid Services (CMS) were fraudulently billed for unnecessary medical tests. 

One of the former owners of PCLS, Douglas Smith, agreed in federal court to settle claims against him for $4.5 million. Prosecutors alleged that Smith violated the AKS by paying kickbacks to a Knoxville medical practice in exchange for drug-testing referrals. 

Smith’s Business Partner

His former business partner, Philip McHugh, agreed to pay $2,021,795.57 in restitution for his part in the AKS fraud scheme. Federal prosecutors alleged that McHugh participated in several AKS violations including:

  • Providing free urine drug testing equipment to two physicians,
  • Paying volume-based commissions and a salary to an individual in exchange for that person’s influence over medical practices, and
  • Providing loans to two doctors to convince them to refer drug-testing business to PCLS. 

“This laboratory used prohibited financial instruments and giveaways to physicians for patient referrals,” said Derrick Jackson, CFE, Special Agent in charge at the US Department of Health and Human Services (HHS), Office of Inspector General (OIG) in Atlanta, in a statement. “Such quid pro quo arrangements are kickbacks that stifle competition and steer business to the company offering the inducements.” 

‘Illegal enticements’

Court filings indicate that McHugh’s use of these illegal enticements resulted in numerous fraudulent claims, totaling millions of dollars, to Medicare between 2013 and 2015. 

Acting US Attorney Bill Stetzer added that the actions of the defendants damaged the credibility of labs and an important diagnostic procedure, particularly with regards to urine testing and drug abuse.

“Offering financial incentives to medical providers in exchange for performing these tests not only violates the law, it undercuts the significant efforts that the medical and law enforcement communities have made to combat the opioid crisis in America,” Stetzer said in a statement following the announcement of McHugh’s settlement, The Charlotte Observer reported. 

The DOJ did note that the aforementioned resolved claims are allegations only and that there has been no determination of liability. 

“The Anti-Kickback Statute is meant to protect patients and federal health programs from medical decision-making corrupted by financial motive,” said Andrew Murray, JD, former United States Attorney for the Department of Justice (DOJ) Western District of North Carolina, in a statement. “My office will aggressively pursue such claims.” 

Lab Sales Rep 

Previously, Manoj Kumar, a former sales representative and manager at Physicians Choice Laboratory Services (PCLS), consented to pay $649,407 in restitution for claims that he also participated in ploys to encourage physicians to send medically unnecessary urine drug tests to PCLS.

“Tests and other services should be ordered by physicians based on sound medical judgment, not on financial benefit,” said Murray in the DOJ Western District of North Carolina statement. “Paying inducements to obtain orders for tests and other services corrupts medical decision-making and causes unnecessary costs to federal healthcare programs.” 

Federal prosecutors filed the complaint against PCLS after the company had been named in two separate whistleblower lawsuits in Tennessee and Florida. The two cases were later consolidated and transferred to the Western District of North Carolina in 2017. 

In a separate case, a Pennsylvania man, Jeremy Richey, admitted guilt for his involvement in a conspiracy to receive kickbacks and bribes from several laboratories in exchange for patient referrals of DNA samples and genetic testing in violation of the AKS. 

According to documents in this case, Richey and his co-conspirators operated Ark Laboratory Network LLC (Ark), a company that claimed to operate a network of labs that performed genetic testing. The suit alleged that Richey and others entered into kickback agreements with certain clinical laboratories where bribes were paid to Ark in exchange for delivering DNA samples and orders for genetic tests. 

Counterfeit Invoices

Ark concealed these kickbacks through the issuance of counterfeit invoices to other labs that reflected fictitious services being provided at an hourly rate, even though the involved parties had already agreed upon the amount of the bribes. The total sum of each bribe was based on the revenue the labs received from Medicare or a predetermined amount paid for each DNA sample. 

Between January 2018 and January 2019, Medicare paid these laboratories approximately $4.6 million for genetic tests that were the result of these bribes. Ark received at least $1.8 million in kickbacks for these inducements. 

Richey’s sentencing is scheduled for August 9 and he faces up to five years in prison and a fine of $250,000. 

Three Other Guilty Pleas

Three of Richey’s co-conspirators, Kacey Plaisance, Kyle McLean, and Edward Kostishion, previously pled guilty to the charges. Plaisance is scheduled for sentencing on June 21 and McLean and Kostishion are scheduled to be sentenced on July 26. 

Matthew Ellis, MD, who served as the Chief Medical Officer for Ark, also has been charged for his role in the conspiracy. Ellis allegedly served as the ordering physician for genetic tests and certified that those tests were reasonable and necessary. However, the test requests contained fraudulent information regarding patient medical histories and conditions and patients were provided with misinformation about the genetic testing. Ellis’ case is pending. 

Although the magnitude of the fraud in both of these cases is not as large as many of the headline-grabbing laboratory fraud cases, the details of cases like these can deliver information to clinical laboratory managers regarding fraudulent practices and how they are used. 

This type of information also can help lab professionals understand how federal fraud investigations occur and how DOJ prosecutors build such cases.

$6 Billion Fed Fraud Case Involved Lab Drug Tests 

LAST SEPTEMBER, the Department of Justice announced what it described in a press release as a “National Health Care Fraud and Opioid Takedown.” It charged 345 defendants and, in court documents, reported that the alleged fraud losses totaled $6 billion. 

One interesting aspect of this case is that the DOJ said schemes using telemedicine were responsible for “$4.5 billion in allegedly false and fraudulent claims submitted by more than 86 criminal defendants in 19 judicial districts” that included medically-unnecessary “genetic and other diagnostic testing [and that] durable medical equipment companies, genetic testing laboratories, and pharmacies then purchased those orders in exchange for illegal kickbacks and bribes and submitted false and fraudulent claims to government insurers.”

Also, last September, the DOJ announced Operation Double Helix. These cases involved 35 individuals accused of submitting $2.1 billion in fraudulent genetic test claims. The DOJ press release said that nine physicians were charged in these cases.



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