CEO SUMMARY: By issuing a multi-count criminal indictment against three former UroCor executives, one federal attorney is creating new legal precedents for the laboratory industry. The criminal charges accuse UroCor of inducing physicians through such gambits as deeply-discounted pricing and “free testing” when not a contracted network laboratory. Labs should review compliance with these types of sales practices.
HAS ONE FEDERAL ATTORNEY thrown down a marker for the laboratory industry and the anatomic pathology profession?
Even if it wasn’t meant to be an industry-wide warning, the criminal indictments of three ex-UroCor executives filed last month in an Oklahoma City federal court may have that effect. Competitive sales practices among the nation’s laboratories will never be the same if these indictments lead to convictions and lengthy prison sentences.
Two-Parts To Indictment
The federal case against Hagstrom, Dimitroff, and McDonald (see this article) is divided into two sections. The first section deals with “conspiracy to provide kickbacks” in violation of Title 42, United States Code, Section 1320a-7b(b)(2)(A). This is the Medicare/ Medicaid anti-kickback law. The second section addresses “conspiracy to commit securities fraud in violation of Title 18, United States Code, Section 371.”
It is the first section of the criminal case which should be studied by any laboratory or pathology group practice offering laboratory testing services to physicians and billing Medicare/Medicaid. In this section, the indictment describes three basic types of criminal acts.
The general charge states that from around January 1990 until around November 1999, defendants Hagstrom and Dimitroff did “knowingly and willfully offer and pay remuneration directly and indirectly, overtly and covertly, in cash and in kind to doctors to induce them to refer patient specimens for laboratory testing, the payment for which testing was made in whole or in part under a federal health care program in violation” of the anti-kickback law.
Under this first section, the first criminal act described is “the offer of ‘special pricing’ discounts.” The language describes a fairly common business practice within the laboratory industry: “Hagstrom and Dimitroff and other unindicted co-conspirators encouraged UroCor sales representatives to offer substantially discounted pricing for laboratory tests for non-Medicare patients in return for the referral of Medicare business. Discounted or ‘special pricing’ was offered to those doctors who the sales representatives determined were ‘hard-to-close’ accounts and had a significant number of Medicare patients. UroCor priced some laboratory tests substantially below the Medicare reimbursable rate and in some cases below UroCor’s own cost of performing the tests.”
“UroCor priced some laboratory tests substantially below the Medicare reimbursable rate and in some cases below UroCor’s own cost of performing the tests.”
The indictment then notes that these arrangements were often predicated on selecting doctors with a specific payer mix “because approval was based on the doctor’s ability to refer a significant amount of Medicare business to make the offer of special pricing profitable to UroCor.”
Next is a specific mention that the doctors benefited from “special pricing” because, as explained in the indictment, “doctors could then bill the patient or the patient’s insurance plan at rates that substantially exceeded the ‘special prices’ charged by UroCor to the referring doctor, thereby providing financial benefit to the doctors.”
It should be noted that the indictment makes two clear points in the following paragraph. One point is that “The effect of the ‘special pricing’ program was that no discounts were given to Medicare patients, and UroCor did not inform Medicare of the discounts provided to non-Medicare patients.” The other point was that defendants “promoted the offer of ‘special pricing’ to referring doctors even after being advised by UroCor’s legal counsel and employees that the practice could violate Medicare regulations.”
THE DARK REPORT interjects here to ask an interesting question. How would many lab managers and sales reps answer questions about their labs’ use of discount or “client bill pricing” if they found themselves testifying in front of a grand jury investigating this practice? After all, in many instances, the purpose of discounted pricing is to allow a physician to mark-up the lab test and submit the claim to a payer or patient.
On the surface, a lay observer may see little difference in UroCor’s use of discount pricing and that of many laboratories today. This point illustrates one way UroCor’s criminal indictment may affect legal opinions and change laboratory compliance programs.
Pricing For PSA Tests
The indictment does provide specific examples of how deeply UroCor was willing to discount its test prices to selected urologists. In one case, the indictment lists the Medicare reimbursable rate for a PSA test in 1994 as $27.33. UroCor offered doctors at H. Urological a PSA rate of $12.00 in 1992 for non-Medicare patients. This rate was lowered to $7.00 in 1994 and further lowered to $5.50 in 1997! UroCor priced PSA tests to another urology client at $2.75 per test.
The second criminal act identified in Part One of the indictment is “the insurance reimbursement assessment (IRA) program.” This was a ploy developed by UroCor to address situations where it did not hold managed care contracts. It lasted from 1992 through 1999. “UroCor used the program to induce doctors to send all their laboratory business to UroCor, including Medicare and out-of-network specimens. This program provided a benefit to doctors by saving staff time that would be spent packaging and sending the specimens to different lab- oratories as required by their patients’ managed care plans.”
The indictment continues, “In return for doctors agreeing to send UroCor all their laboratory business during the term of the IRA agreement (including their Medicare business), UroCor agreed to accept as full payment any amount (including a full denial of benefits) paid by managed care organizations to out- of-network providers, such as UroCor, for the patients’ laboratory services. In addition, UroCor agreed not to send statements to managed care patients for any balance not paid by the patient’s insurance when UroCor was an out-of- network provider. This eliminated doctors’ concerns that their patients would be penalized financially as a result of the doctor using an out-of-network lab.”
In describing the impact of this tactic, the indictment makes these points: 1) the IRA agreement forms stated that they were to last 90 to 180 days. In reality, “the agreements remained in effect until the program was terminated in April 1999”; 2) IRA agreements were offered “to doctors whose volume of Medicare business assured profitability to UroCor…Neither the Medicare program nor its patients received any benefit from UroCor under an IRA agreement.”
It shouldn’t be a surprise to learn that the indictment next states that Hagstrom and Dimitroff were advised, “by legal counsel, government fraud alerts, and UroCor employees” that such IRA agreements needed to be cancelled after the 90 to 180 day expiration to avoid concerns that they were inducements to the doctor in return for referral of Medicare patients. The extent to which UroCor used these agreements is surprising. IRA agreements were approved and in effect for 800 doctors!
As described in the indictment, UroCor’s IRA agreements allowed it to get a physicians’s account even though it was an out-of-network provider for one or more of the key managed care plans that covered the physicians’ patients. UroCor would not charge the managed care plan for the test, nor would the physician or patient get a bill for that test. This arrangement resulted in “free testing.” It seems to have close parallels to the “waiver of charges to managed care patients” tactic enabled by the OIG’s fraud alert of December 1994 and used in today’s lab marketplace by a number of laboratory companies.
Whether used by UroCor between 1992-1999 and by some laboratories today, this lab sales tactic effectively means that the lab is willing to do “free” testing for a portion of the physicians’ patients in return for access to in-network specimens and Medicare patients.
New Legal Consensus?
As lab industry lawyers parse through this indictment, it will be interesting to see whether or not there will be consensus on how they interpret the criminal indictment’s description of a “free testing” agreement by UroCor. Will there be legal opinions that say, based on the UroCor indictment, any laboratory using the “waiver of charges to managed care patients” tactic might face increased compliance risk?
The third criminal act described in the Medicare Fraud and Abuse section is UroCor’s use of “consulting services contracts.” The indictment describes a tactic where, to retain a urologist’s business, UroCor would enter into a “consulting services agreement.” A sum of money was to be paid to the doctor. The doctor, per the agreement, was to document the consulting services provided to UroCor in monthly reports.
The indictment provides examples of UroCor payments to specific urologists ranging from $36,000 to $75,000 per year. It also notes there is no record that any of these urologists filed a monthly statement that documented consulting services they provided UroCor.
Not Many Examples Today
When UroCor’s use of “consulting services contracts” with physicians is compared to current laboratory industry practices, there appears to be little evidence that a comparable practice is common in today’s laboratory marketplace. However, because such arrangements are well hidden from sales reps of competing laboratories, it is possible that a laboratory somewhere could be using this tactic.
This completes a summary of the criminal acts described in the first section of the indictment. The second section of the indictment describes how the defendants violated securities laws in a number of ways.
Most of these violations would not be relevant in privately-held laboratories or pathology group practices. The violations include misleading investors when making public statements, withholding information and misleading its public accounting firm during audits, and booking revenues from tests for which it never intended to bill.
This last violation is linked to the IRA “free testing” agreements described earlier. As an out-of-network provider, UroCor would perform tests for which it would never bill the insurer, the physician, or the patient, per terms of its IRA agreement with the physician. Yet it would still book that test as revenue and add the never-to-be-billed charge to accounts receivables (AR).
The indictment identifies this practice as eventually building to a point where UroCor’s “allowance for doubtful accounts” was “only $350,000 when the Company’s internal reports showed that the accounts receivable balance over 150 days old was nearly $10 million, of which approximately $3 million represented IRA account balances.”
This summary of the indictment, which ran to 40 pages, highlights how the federal attorney described and characterized several types of criminal actions which violated the Medicare and Medicaid anti-kickback law. THE DARK REPORT believes that many laboratory executives and pathologists, after reading the federal attorney’s descriptions, will want to revisit both their laboratory’s compliance program and its sales and marketing practices.
Physicians referring tests who have such arrangements with laboratories should also re-evaluate these arrangements, since they are equally at risk for violations of the anti-kickback law.
May Signal A Policy Shift
This criminal indictment should also be considered alongside last fall’s proposal by the Medicare program to change the way a laboratory calculates its usual and customary charges and then bills Medicare. Collectively, these two actions by federal healthcare regulators may be early signs of a major shift in how Medicare will establish reimbursement for laboratory tests and allow laboratories to file claims.
In several ways, the criminal indictment of three ex-UroCor executives will have significant ramifications across the laboratory industry. Their trial may reveal what a fine line separates UroCor’s crimes from the everyday practices of many labs.