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July 2024 Labs in Court

by , | Jun 24, 2024 | Essential, Lab Industry Advisor, Labs in Court

Genetic testing related fraud was a theme in recent enforcement actions involving medical laboratories and lab testing

Marketing Company Sues Diagnostic Lab for not Adhering to Oral Modification to Written Contract

Case: GF Industries of Missouri, LLC (GFIM), a company that provides marketing and support services to companies involved in genetic and molecular laboratory testing, sued Lehigh Valley Genomics (LVG), a diagnostic laboratory, for not adhering to an oral modification to the parties’ written agreement related to paying GFIM bonus payments.1

GFIM filed a claim alleging breach of contract, unjust enrichment, and racial discrimination, stating that LVG agreed to, but then failed to pay the agreed upon bonus. LVG denied the existence of an oral agreement and argued, among other things, that the bonus agreement was illegal and unenforceable under the Eliminating Kickbacks in Recovery Act (EKRA). The court expressed its displeasure that LVG did not raise the illegality defense until the third day of trial (it was not raised in the pleadings, motions, or pretrial memorandum as it should have been), which was unfair to the plaintiff and potentially wasted the court’s time. However, the court evaluated the illegality defense, reasoning that contracts against public policy cannot be the basis of a cause of action.

In its evaluation, the court held that the contract, including the oral bonus arrangement, did not violate EKRA by drawing a distinction between “advertising” and “inducing referrals.” The court concluded that there was not enough evidence to show that GFIM was paid kickbacks to influence healthcare decision makers. Instead of inducing referrals, the court found that the arrangement compensated for advertising and marketing services, which is permissible under the Anti-Kickback Statute and EKRA. Analogizing the case to the Fifth Circuit’s decision in United States v. Marchetti, the court emphasized that “the structure of the contract alone” is not sufficient evidence to violate EKRA. Rather, there must be evidence that GFIM was paid to induce referrals instead of being compensated merely to provide advertising and marketing services.1

Significance: Given the limited guidance available on EKRA and the ongoing debate surrounding its limitations on commission-based compensation arrangements, this case may seem like a life raft suggesting commissions are permissible. However, laboratories are wise to remain cautious given this case seems to have a lot of factual nuances, including a court that was not inclined to side with the plaintiff based on their procedural errors. The court noted the record was undeveloped on this issue and emphasized that its holding was narrow based on limited and unusual facts. Though this is another reference point for those hoping to distinguish paying sales commissions from the prohibitions in EKRA, it is not a home run.

Lab Owner Receives Prison Time, Must Pay More Than $97 Million in Restitution for Multiple Fraud Schemes

Case: On May 7, a Pennsylvania federal court sentenced Daniel Hurt for his involvement in three healthcare fraud and illegal kickback schemes. Hurt received 120 months in prison, followed by three years of supervised release, and was ordered to pay $97 million in restitution and forfeit $30 million in proceeds from the sale of a yacht. From late 2018 through October 2019, Hurt and his co-conspirators collected thousands of cancer genomic (CGx) testing samples from Medicare beneficiaries. Hurt entered into sham contracts with marketers, who targeted beneficiaries to submit CGx samples via “health fairs.”2

Hurt directed CGx specimens to Ellwood City Medical Center (ECMC), where the samples were re-packaged and sent to third-party reference laboratories for testing. Hurt used ECMC as the billing entity for Medicare and obtained orders from telemedicine physicians who never conducted proper telemedicine visits or treated the Medicare beneficiaries. At Hurt’s direction, ECMC staff transferred millions of dollars to bank accounts Hurt controlled, and he used these funds to pay marketers for obtaining CGx samples. Similarly, Hurt had arrangements with ECMC to disguise payments as management services at ECMC’s laboratory. In total, this scheme resulted in a $25 million loss to Medicare.

In a separate scheme, Hurt admitted to also paying kickbacks and bribes to entities that supplied referrals and orders for CGx from Medicare beneficiaries—regardless of medical necessity—to clinical laboratories that Hurt owned. This kickback scheme resulted in an additional $53.3 million loss to Medicare.2

In conjunction with the criminal penalties, Hurt entered into a civil settlement to pay $27.9 million to resolve allegations that he and his companies Fountain Health Services, First Choice Laboratory LLC, Landmark Diagnostics LLC, Verify Health, and Sonoran Desert Pathology Associates conspired to violate the False Claims Act. Through qui tam actions, the United States alleged that Hurt and his companies knowingly submitted false claims to and received payments from Medicare for CGx tests that were medically unnecessary. Specifically, Hurt allegedly conspired and paid kickbacks to telemarketing agents, telemedicine providers, and reference laboratories to solicit, prescribe, and conduct unnecessary CGx tests, respectively. As part of the settlement agreement, Hurt and his companies also agreed to exclusion from Medicare, Medicaid, and all other federal healthcare programs.3

Significance: This case demonstrates the government’s ongoing commitment to prosecuting not only laboratories but also individuals responsible for promoting and orchestrating medically unnecessary tests and using rural hospitals to bill Medicare. Given that genetic testing only requires a simple cheek swab to obtain a sample, these tests seem particularly prone to abusive schemes. The lesson here is that the government is well aware and monitoring closely. In addition, this is another example in a series of cases in recent years involving rural hospitals—usually in financial distress—that have gotten caught up with laboratory management companies funneling billing for testing through their hospitals for higher reimbursement.

Lab Operators Charged with $174 Million Conspiracy to Commit Healthcare Fraud

Case: On May 10, Jamie McNamara and John Spivey were charged by a grand jury in an 18-count superseding indictment for conspiracy to commit wire fraud, healthcare fraud, conspiracy to pay and receive kickbacks, offering and paying kickbacks, conspiracy to commit money laundering, and money laundering.4

McNamara and Spivey allegedly operated several laboratories, including Clarity, OPTEO, and Signify, among others, that obtained physicians’ orders for genetic testing from telemarketers who used aggressive campaigns to induce Medicare beneficiaries to receive medically unnecessary genetic testing.5 Purported telemedicine physicians, who were not the beneficiaries’ treating physician, signed orders without performing consultations or following up with the beneficiaries. According to the superseding indictment, McNamara and Spivey submitted more than $174 million in false and fraudulent claims to Medicare and received more than $55 million in reimbursements. If convicted, McNamara and Spivey both face significant prison terms, a fine of up to $250,000 (or twice the gross gain to any defendant or loss to any person), and a special assessment of $100 per count.4

Significance: These allegations underscore the government’s commitment to shutting down fraudulent testing schemes. Medicare requires the practitioner who orders the test to have a treatment relationship with the patient. Cases involving a laboratory paying an affiliated practitioner without an ongoing treatment relationship with the patient to order testing are relatively easy for the government (or whistleblowers) to bring given Medicare’s very clear “treating physician” rule. Laboratories should ensure that orders are coming from a practitioner who is actually treating the patient.

Physician Convicted of $70 Million Medicare Fraud Scheme

Case: On May 24, a federal jury convicted David Young, MD, for submitting over $70 million in false claims to Medicare. Young prescribed medically unnecessary orthotic braces and genetic tests to over 13,000 Medicare beneficiaries without ever seeing or treating these patients. In turn, brace supply companies and laboratories used these prescriptions to bill Medicare. Young was convicted of one count of conspiracy to commit healthcare fraud, with a maximum sentence of 10 years imprisonment, as well as three counts of false statements relating to healthcare matters, each carrying a maximum sentence of five years imprisonment.6

Significance: This enforcement action is an example of the U.S. Department of Justice’s (DOJ’s) commitment to hold providers accountable for their involvement in healthcare fraud schemes. As with the case above, laboratories should beware of the healthcare entities and providers they work with to ensure that the ordered tests, particularly those billed to federal healthcare programs, are the result of a legitimate patient-provider relationship.


    1. Casetext. GF industries of Mo. v. Lehigh Valley Genomics, LLC, Civil Action 22-227. https://casetext.com/case/gf-industries-of-mo-v-lehigh-valley-genomics-llc

    1. U.S. Department of Justice, United States Attorney’s Office, Western District of Pennsylvania. “Florida Man Sentenced to 10 Years in Prison and Ordered to Pay More Than $97 Million in Restitution for Participation in Multiple Health Care Fraud and Kickback Schemes.” https://www.justice.gov/usao-wdpa/pr/florida-man-sentenced-10-years-prison-and-ordered-pay-more-97-million-restitution

    1. U.S. Department of Justice, Office of Public Affairs. “Florida Businessman Daniel Hurt to Pay Over $27 Million for Medicare Fraud in Connection with Cancer Genomic Tests.” https://www.justice.gov/opa/pr/florida-businessman-daniel-hurt-pay-over-27-million-medicare-fraud-connection-cancer-genomic

    1. U.S. Department of Justice, United States Attorney’s Office, Eastern District of Louisiana. “Missouri And New Orleans Men Charged with $174 Million Conspiracy to Commit Health Care Fraud.” https://www.justice.gov/usao-edla/pr/missouri-and-new-orleans-men-charged-174-million-conspiracy-commit-health-care-fraud

    1. https://www.justice.gov/criminal/criminal-fraud/file/1520706/dl

    1. U.S. Department of Justice, Office of Public Affairs. “Doctor Convicted of $70M Medicare Fraud Scheme.” https://www.justice.gov/opa/pr/doctor-convicted-70m-medicare-fraud-scheme

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