Labs In Court

A roundup of recent cases and enforcement actions involving the diagnostics industry

Reference Lab Pays $26.7 Million to Settle False Claim Charges

 Case: The feds claim that Laboratory Boston Heart Diagnostics contracted to provide lab testing services to Texas hospitals in exchange for per-test payments and then orchestrated the creation of management service organizations (MSOs) to generate referrals to the hospitals. The alleged role of the MSOs was to identify referring physicians interested in being paid kickbacks disguised as investment returns in exchange for referrals. Rather than risk a trial, Boston Heart agreed to settle the claims for $26.67 million, of which the whistleblowers who brought the suit will pocket roughly $4.36 million.

Significance: Reference lab arrangements in which a provider outsources the performance of tests it’s contractually required to provide to an outside lab at a rate below the contracted reimbursement price have become a prime target for federal enforcers and private payors. In addition to false billing red flags, these arrangements raise kickback concerns when MSOs are used to recruit physicians and generate referrals to the reference lab.

 Lab Gets Chance to Prove Fraud Claims against Software Vendor at Trial

 Case: After being hit with a slew of CLIA penalties, a toxicology lab hired a software and IT services firm to help get its information systems back into compliance. But while progressing toward recertification, the lab discovered glitches in the software, including a defect leading to duplicate container numbers for patients and a Trojan Horse resulting in passwords and other security information being discoverable on Google. The lab sued the firm for fraud. The firm asked for summary judgment, i.e., dismissal without a trial but the Louisiana court said no dice.

Significance: To prove misrepresentation, the lab would have to show three things: (i) the firm made a misrepresentation about the software; (ii) it did so deliberately to gain an unjust advantage or damage the lab; and (iii) the lab relied on the misrepresentation in buying the software. The lab had evidence to support each of these allegations. Although not enough to prove the allegations, at this point in the proceedings it was adequate to allow the case to go forward and give the lab the opportunity to prove the claims at trial [Trinity Med. Servs., LLC v. Merge Healthcare Sols., 2020 U.S. Dist. LEXIS 2424, 2020 WL 97162].

Lab Pays $311K for Giving Physicians Free Specimen Collection Supplies

 Case: Histopathology Services LLC d/b/a Pathline Emerge (Pathline), New Jersey, will fork over $310,978 after self-disclosing to the OIG that it violated kickback laws by giving physicians free medical collection supplies.

Significance: As was vividly demonstrated in the Millennium Health case, free supplies to facilitate the collection of specimens may constitute remuneration banned by the Anti-Kickback Statue and Stark Laws. Ditto for fees paid to physicians to collect and process the specimens they send to your lab. (For more details, see Lab Compliance Insider, (LCA), Dec. 10, 2018.)

Lab Management Contract Dispute Must Go to Binding Arbitration

 Case: A lab management services contract sent conflicting messages: Clause 32 said that all disputes under the contract would be resolved by binding arbitration; but Clause 7 said that all claims under the agreement would be submitted to the federal court in New Jersey. So, when a dispute broke out and the lab sued, the management firm asked the court to send the case to arbitration. The court refused. Parties must use clear and unambiguous language to waive their right to a court trial, it reasoned. And the fact that they stuck Clause 7 into the agreement undermined the required clarity. However, the appeals court reversed.

 Significance: The appeals court relied on technicalities that you need to be aware of in negotiating your own contracts:

  • There’s a law called the Federal Arbitration Act that governs the interpretation of arbitration clauses in contracts transacting interstate commerce (as was the case here);
  • The FAA requires courts to enforce binding arbitration when the parties show a clear intent to arbitrate;
  • According to court cases, a provision indicating the parties’ agreement to conduct the arbitration in accordance with the American Arbitration Association (AAA) is evidence of such an intent; and
  • Clause 32 included such a clause.

Bottom Line: If your lab contracts with a party from a different state and wants to ensure disputes will be decided by arbitration rather than litigation, make sure the arbitration clause includes language like the following:

The parties agree that the arbitration to take place under this Agreement will be performed in accordance with the commercial arbitration rules of the American Arbitration Association (AAA), which are herby incorporated into this Agreement.

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