Seven Doctors Settle Lab Test Fraud Case

In Texas, seven doctors and a hospital CEO will pay a total of $1.1 million in lab fraud case

CEO SUMMARY: In January, a U.S. Attorney from East Texas announced that seven physicians and a hospital CEO had agreed to settle allegations of fraud involving the payment of bribes in exchange for lab test orders. This is a positive development for the clinical laboratory profession because it demonstrates that the federal Department of Justice is willing to prosecute doctors who accept bribes and illegal inducements in exchange for ordering clinical laboratory tests. 

It takes two parties to violate the federal Anti-Kickback Statute (AKS): one party to pay the illegal inducement and one party to accept it.

Yet the majority of actions federal prosecutors bring against lab companies for violating the AKS seldom include charges against the physicians who accepted the illegal bribes. 

Seven Doctors Were Indicted

However, that is not what happened in a recent federal court case involving laboratory testing and illegal kickbacks. Seven physicians faced charges for accepting illegal inducements and agreed to pay restitution. A notable element in this case is the role of management service organizations (MSOs) as a vehicle for the alleged fraud.

The case, filed in federal court in Texas, involved the CEO of a multi-hospital health system and the seven physicians. Collectively, the defendants agreed to repay $1.1 million to the federal government to settle allegations of kickbacks related to clinical laboratory test orders, the U.S. Department of Justice (DOJ) announced on Jan. 20.

Another fact that makes this case noteworthy is it includes several types of healthcare fraud schemes involving clinical lab test orders that sprouted during the decade of the 2010s and continue into the present. One example is the pass-through lab billing scheme that uses a rural or small hospital to bill for substantial volumes of lab tests originated in multiple states outside that hospital’s community. (See TDR, “Mississippi Blue Cross Sues Hospital, Tox Labs,” June 5, 2017, and “Why Lab Companies Buy Bankrupt Rural Hospitals,” May 29, 2018.)

MSOs as Vehicles for Fraud

Another example is the use of Management Service Organizations by some lab companies. The labs recruit physicians to be owners and members of the MSO who earn payments or dividends paid through the MSO that are directly linked to the volume of lab tests they referred to the participating labs. (See TDR, “Lab Fraudsters Recruit Hospitals to Bill as In-Network Providers,” Oct. 30, 2017.)

All of these elements are present in the federal case in Texas that was settled in January. The doctors received tens of thousands of dollars from 2015 through 2018 from eight management service organizations in exchange for ordering clinical laboratory tests from Little River Healthcare, which ran several hospitals and clinics in southeast Texas. Little River closed in 2018. 

Volume-Based Commissions

Little River funded the illegal remuneration to the doctors in the form of volume-based commissions paid to independent contractor recruiters, who then used MSOs to pay numerous physicians for their referrals, according to the U.S. Attorney’s Office of the Eastern District of Texas. The accused agreed to pay back about $1 million to settle the allegations.

In a related investigation, Richard DeFoore, the former CEO at Stamford Memorial Hospital in Stamford, Texas, will pay back $50,000 for his role in an alleged scheme with True Health Diagnostics in Frisco, Texas, and Boston Heart Diagnostics in Framingham, Mass. True Health filed for bankruptcy in 2019. (See TDR, “After Two-Year Battle with CMS, True Health Diagnostics on Verge of Collapse,” August 12, 2019.) 

Illicit Lab Test Billing Scheme

Prosecutors said DeFoore and the two companies entered into arrangements in 2015 and 2016 for the hospital to profit from illicit billing of diagnostic lab tests. In addition to the monetary settlement, DeFoore is barred from participation in federal healthcare programs for three years. 

The Dark Report previously detailed some of the legal issues behind these cases, revealing that a lab company paying for packaging and handling of patients’ specimens could be liable for filing false claims. (See TDR, “Federal Judge Rules ‘Pull-Through’ Is Illegal Inducement in Boston Heart Case,” Oct. 1, 2018.)

The DOJ settlements with the seven Texas doctors who agreed to settle can be useful to lab administrators, pathologists, and lab sales representatives. 

For example, when visiting their client physicians, sales reps for hospital laboratory outreach programs often hear the physicians tell them about various forms of inducements and remuneration that sales reps from certain labs will offer them—forms of remuneration that are clearly illegal. 

When told that those inducements potentially violate federal laws—such as the Anti-Kickback Statute—there are physicians who will answer, “I don’t believe it and I don’t have any colleagues who have been prosecuted by the federal government for accepting money in exchange for ordering lab tests.” 

DOJ Will Charge Doctors

In such situations, the hospital lab outreach sales reps would find it helpful to show those doctors this and similar stories in The Dark Report which describe federal prosecutors winning criminal convictions and civil settlements from physicians who accepted illegal bribes in exchange for referring lab tests. 

Criminal prosecutions of physicians who violate state and federal laws are intended not just to punish the lawbreaker, but to deter others from commiting similar criminal acts. That is why it can benefit sales reps from law-abiding clinical laboratories to educate physicians in their communities that federal prosecutors are indicting doctors for accepting bribes from labs. 

News stories about these indictments are powerful evidence that physicians who take these illegal payments from labs can find themselves indicted by the DOJ. 

In the following story, we provide the names of the seven Texas physicians and the Department of Justice description of their alleged acts that violate the AKS. 

Why the Management Services Organization May Be Healthcare’s “Scam of All Scams”

DURING THE DECADE OF THE 2010s, AN INTERESTING HEALTHCARE FRAUD MODEL EMERGED and became surprisingly widespread, particularly in certain states, including Texas. This fraudulent scheme used the MSO—management service organization—as the vehicle that enabled organizers to enlist willing physicians to refer them a healthcare service, such as lab tests, in exchange for inducements that violated the federal Anti-Kickback Statute and the Stark Law.

The Dark Report picked up this scheme by the second half of the 2010s. The story of how MSOs turned into a useful vehicle for healthcare fraud starts after passage of the Affordable Care Act of 2010 (ACA, also called Obamacare). Just as the ACA required health insurers to include mental health benefits and drug rehabilitation services in their health plans (thus creating the huge fraud and abuse seen in the pain management and drug rehab sector in the following years), the law also created a new fraud opportunity that was quickly spotted by scamsters. 

Fabulously Profitable

This fraud centered around orthopedic implants and similar medical devices. It was fabulously profitable to the organizers. The scheme was simple and followed these steps:

  • Organizers would create an MSO, primarily using an LLC. 
  • Doctors would buy shares in the MSO, typically $15,000 to $25,000. There would be no more than 10 to 20 doctors in each MSO, and the paid-in capital enabled them to share in the MSO’s profits.
  • MSOs could buy orthopedic appliances directly from the manufacturers at wholesale prices. The MSO could then sell the appliances to the MSO’s physicians at retail prices (which were reimbursed by the health plans). 
  • The fraudsters, in their roles as the MSO’s general partner, would then pay “dividends” to the physicians, proportionate to the volume of service referrals they generated. 

This fraud was so rampant that by about 2014, Office of Inspector General opinion letters and changes in state laws shut down the “MSO as orthopedic device wholesaler” scheme. That caused the fraudsters to look around at another healthcare service that could be run through an MSO. Lab testing fit the bill. 

Many MSOs in Texas

In Texas, The Dark Report became aware of a number of MSOs handling lab tests that had the referring physicians as shareholders. Also, by the second half of the 2010s, health insurers like Aetna were filing lawsuits in Texas against some of the most egregious schemes, and the court documents described these illegal arrangements in great detail. 

In fact, these MSOs were cash generating machines for the scamsters. First, the organizers would sell shares to, say, 10 doctors, who each invested $20,000. That gave the fraudsters $200,000 in cash, with no upfront costs! Lawsuits filed by health insurers described defendants who organized as many as 30 of these MSOs. That put $6 million in their pockets before they even ran lab tests through the MSOs!

The MSOs would commonly pass the tests referred by their shareholder doctors to a rural hospital that would bill under its contracts with payers. Because rural hospitals were allowed to charge health plans more for lab tests, the pass-through billing arrangement allowed the fraudsters and physician shareholders in the MSO to reap huge profits.



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