Legal Dispute Highlights Contract Terms that Also Raise Compliance Issues

One of the more important functions a compliance officer performs is the review of contractual and non-contractual arrangements between their laboratory and the entities who make referrals to it. In any case where the laboratory is providing remuneration in any form to a referral source, there should be a written agreement detailing the arrangement. When there is remuneration between a laboratory and a referral source, both the Anti-Kickback Statute (AKS) and Stark physician self-referral laws and regulations are implicated. The compliance officer should review these agreements for any language or terms that might implicate Stark and AKS. A recent lawsuit involving a laboratory and its contracted sales and marketing company, involving liability potentially exceeding $200 million highlights the risks of Stark or AKS violations in such agreements. The sales agreement attached to BlueWave’s complaint meant to substantiate its claims for unpaid commissions, provides other details that may ultimately prove to work against BlueWave.

HDL and BlueWave Terms

According to court documents filed on Jan. 9, BlueWave Consultants (BlueWave), a sales and marketing company sued its client, Health Diagnostic Laboratory (HDL), a Richmond, Va.-based cardiac biomarker laboratory, for about $205 million on the same day HDL cancelled the marketer’s contract. BlueWave, an Alabama corporation, had a Sales Agreement with HDL, which stipulated BlueWave receive payment in a tiered base amount for the first five years of the agreement plus a commission ranging from 13.8 to 19.8 percent of HDL’s revenue in the sales territory covered by BlueWave. In addition to the compensation outlined above, the two founders of BlueWave, F. Calhoun Dent, III and Robert Bradford Johnson each received 29.4 shares of the outstanding common stock of HDL.

HDL Already In Trouble

As previously reported here in the September, October and December issues of G2 Compliance Advisor, the federal government is investigating HDL for, among other claims, allegedly paying kickbacks disguised as specimen collection fees to physicians and other laboratories in return for referrals and inducing physicians to order unnecessary tests through the use of panels rather than individual tests. HDL disputes the allegations, saying the fees are paid to cover the costs of drawing and processing specimens for HDL and argues the testing is ordered by physicians, is necessary and improves patient care. According to a Jan. 12 story in the Wall Street Journal, HDL is currently negotiating a settlement related to these and other allegations.

In a separate complaint filed by Connecticut General Life Insurance Co (Cigna), reported in the December issue of G2 Compliance Advisor, HDL is being sued for $84 million for allegedly operating a scheme to forgive patient copays and deductibles if they use HDL. Cigna also alleges the same kickback scheme the federal government is pursuing related to the payment of specimen collection fees. HDL denies the allegations and has filed a motion to dismiss the lawsuit. That case is winding its way through the courts.

In September, Tonya Mallory resigned and was replaced by the chief laboratory officer Joe McConnell.

BlueWave Contends HDL Owes Compensation for Entire Period of the Agreement

BlueWave’s Jan. 9 complaint filed in the Northern District of Alabama alleges that HDL owes it $3.1 million in commissions due Dec. 15, 2014, for work already done. BlueWave claims HDL also owes it another $2.7 million in commissions due Jan. 15, 2015, and an additional $19 million for sales activity for which HDL allegedly has failed to account.

Finally, BlueWave’s complaint contends that HDL owes it for the loss of approximately $3 million a month over the 60 months remaining in the life of the agreement, amounting to approximately $180 million. The complaint argues that, regardless of the $180 million, HDL should be ordered to pay BlueWave at least $24.8 million for interest, fees and costs relating to the work BlueWave already performed.

Additionally, BlueWave claims that HDL violated the agreement’s terms for termination of the agreement. BlueWave’s complaint also alleges that HDL is responsible to report to BlueWave the amount of revenue collected as a result of its sales activities and to accurately calculate commissions owed to BlueWave. BlueWave contends that the accounting is overly complex and that it does not have access to HDL records to allow for a full accounting of what it is owed. Therefore, BlueWave’s complaint includes a demand for a full accounting for the entire period of the agreement.

Specimen Collection Fees Required by Sales Agreement

The agreement between BlueWave and HDL shows that BlueWave required, and HDL agreed to pay specimen fees. Section 3(b) of the agreement says HDL shall, “provide processing and handling fees to physicians in the range of eighteen to twenty-one dollars ($18.00 – $21.00) and processing and handling fees to outside labs in the range of eighteen dollars to twenty-five dollars ($18.00 – $25.00), provided that, any fee change shall be mutually agreed upon by the Parties unless required by any state or federal laws or regulations.” Any payment paid per item or service should raise a flag for further evaluation under AKS and Stark laws. In fact, these are the kinds of fee payments that the OIG has expressed concern about in a 2014 Fraud Alert.

At least one other provision in this section of the agreement presents a potential risk for violations of federal or state laws and regulations. Section 3(e) says in part that HDL shall “provide zero balance billing for Medicare, PPOs, POSs and Medicaid” in its territory. Generally, balance billing is illegal in most states. Specifying that HDL cannot do it for these specific payers may imply that HDL balance bills other payers and patients.

A compliance officer reviewing these or similar terms should determine if a potential violation of AKS or Stark exists and if so, seek modification or deletion of the terms. If such revision had been undertaken when the agreement was first proposed, it could have saved HDL from the current legal problems that now plague it.

Compliance at HDL

HDL currently includes a section titled Compliance on its website under a tab titled “About HDL, Inc” which includes a document titled Code of Conduct and Business Ethics, dated September 2013. That date falls after the execution of the Agreement, after HDL was aware of the problems with the collection fee and before the problems with the government first became public. It includes an appendix A, Compliance Guide for Interactions with Health Care Professionals which provides information and guidance instructing HDL employees and agents on how they should interact with referral sources. Even though the specimen processing fee issue had been raised by both customers and employees at that point and by the OIG in 2014, the document doesn’t specifically address such fees in the Code of Conduct.

Takeaway: While the lawsuit brought by BlueWave alleges HDL’s contract duties were not satisfied, the lawsuit highlights an agreement whose terms could implicate Antikickback and Stark laws. Compliance officers must always be given the opportunity to review such agreements and they should be alert for such terms to avoid the potential legal impact they may have on the laboratory.

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