For more than a year Larry Husten has been following the story of Health Diagnostics Laboratory in his CardioBrief blog. In this feature, which is the first of multi-part feature series, he drills down to uncover the full details of the scandal.
Earlier this year the U.S. government froze hundreds of millions of dollars in assets belonging to former owners of the bankrupt and now defunct Health Diagnostics Laboratory, a lab company that in a few short years sold more than a billion dollars worth of >cardiovascular risk tests. What prompted the government to take such drastic action?
The answer is complicated but can be summed up in a four-letter word: Scam.
Most of the tests were unnecessary and they were ordered by doctors who took kickbacks from the company. Even more: HDL promised the vast majority of patients taking the tests that they would not have to pay for their tests -- but the company didn't tell them that it is illegal not to bill patients.
HDL is now gone, though its legacy continues. As a result of bankruptcy proceedings those former patients are now receiving bills for thousands of dollars worth of tests, despite those earlier promises.
And now other laboratory companies and services are springing up to take its place, promoting fresh variations on the same old schemes. Many industry insiders think the schemes will continue until the threat of criminal charges becomes a reality and people start going to jail. Until then fines and penalties seem to be viewed as the cost of doing business, since a lot of people have gotten very rich off these activities.
In the beginning ...
The story starts with Berkeley Heart Lab, a small lab company (now owned by the lab giant Quest Diagnostics) that helped introduce the novel concept of selling a broad panel of cutting-edge blood tests to help improve the identification of people at high risk for a heart attack or stroke. This sounds like a fantastic idea but in the real world it turns out to be extremely difficult and ridiculously expensive, with little or no demonstrable advantage over the traditional and far less expensive tests now used to assess cardiovascular risk.
As it later became clear -- since Berkeley itself became the subject of a government investigation -- Berkeley sold its tests through illegal schemes. Several key Berkeley employees saw an opportunity and believed -- correctly, it turned out -- that they could do much better for themselves by going out on their own. One Berkeley employee, Tonya Mallory, along with several colleagues, started a new company, Health Diagnostic Laboratory (HDL), based in Richmond, Virginia.
At the same time two Berkeley salesmen, Floyd Calhoun Dent and J. Bradley Johnson, left to form a second company, BlueWave Healthcare Consultants, that served as HDL's external sales force. From the start the two companies worked hand in glove to perfect and exploit the illegal business model later investigated and uncovered by the government and others.
In a few short years Mallory, Dent, and Johnson were overseeing ventures with annual revenues in the hundreds of millions of dollars.
Details of the Scam
The foundation of that success was recognition of a basic human weakness: the irresistible allure of something for nothing coupled with greed. In this case, the something was medical tests – needed and unneeded – all performed without billing patients for the unreimbursed portions of their lab tests. Physicians, who took kickbacks in the guise of inflated processing fees, supplied the greed.
How did that add up? In one year alone, 2012, even before reaching its peak, the company wrote off $208 million as "adjustments for noncollectable accounts." "This is the cornerstone of their scheme," said Robert Michel, , a respected lab industry newsletter. "A major element of the sales pitch to doctors is that 'your patients will never be billed.'"
People hate them, of course, but copayments are actually a key safeguard against fraud and the unbridled use of unnecessary tests and procedures. As one veteran lab industry executive explained to me, "copayments ensure shared responsibility with patients. Copayments prompt patients to ask why tests and procedures are being ordered. If a company has an ongoing policy of never charging copayments, they have bypassed a critical check on potential fraud."
A Fraud, Waste and Abuse Investigator for a company that manages insurance claims (and who did not want to be identified by name) told me that he became suspicious of HDL when his company allowed less than $6,000 in payments for billings totaling nearly $120,000.
"The rest," he said, "have all been found to be not medically necessary." Because the patients weren't complaining about these large scale denials of coverage he concluded that the company was "not collecting patients' deductibles, co-pays, or making them pay for any charges that are denied as not medically necessary."
Suspicion became certainty when doctors and patients sent me copies of documents from HDL addressed to patients promising that in the vast majority of cases patients would not be held responsible for their portion of the bill.
The most common type of kickback or bribe was excessive payments for"processing and handling" fees. Medicare and private insurance companies generally allow a $3 payment for a blood draw. Court documents reveal that HDL paid as much as $17.
Even worse, many of the BlueWave salespeople conspired with physicians to split the blood samples and send off tests to multiple companies. (In addition to HDL several other smaller lab companies, including Singulex and Innovative Diagnostic Laboratory have been investigated by the government and have paid penalties.) By combining multiple tests from multiple companies fees to the doctors could climb as high as $100 per patient. This, my sources in the lab industry tell me, is called "stacking."
In addition, there have been widespread rumors in the industry that HDL paid many doctors to serve as speakers and consultants.
Explosive Growth
HDL was astonishingly successful. By 2012, only a few years after it was formed, HDL had revenue of $417 million, $138 million of which was profit, according to financial documents sent to me by a former HDL employee who had access to the financial records at the time. This works out to a profit margin of 33%. These are astonishing figures, far above the industry average of about 10%, according to Michel. The profit margin also suggests that "they have been inflating the prices they charge for tests," he said.
In 2013 the company sent out roughly $1.5 million each month to doctors, contained in 1,400 to 1,700 monthly checks, according to the same documents. When employees in the accounting department asked why patients were not being billed they were told by the CFO that "the policy was to make more money by not billing the patients," said the former HDL employee.
The same documents show that Mallory and two other company co-founders gave themselves generous salaries along with monthly bonuses of $200,000.
In 2012 HDL distributed $83 million in profits to its 16 individual shareholders, all of whom were investors. (HDL was a sub chapter S corporation in which the taxes for the corporation's profits are paid by the shareholders rather than the company.) One principal, Satya Rangarajan, served as its chief information officer for several years and was also a co-founder of the company. He had a disagreement with Mallory and left the company. For his 5.102% share of HDL he received $18.8 million plus a $1.2 million bonus, to make a tidy sum of $20 million. (On the one hand Rangarajan's timing was fortunate, since he got out near the top and before the scandal emerged. On the other hand, it's unlikely that he will realize the full amount since he was still owed a final payment of $5.8 million at the time of the bankruptcy.)
One of the outside investors who helped start the company with a $4 million investment, according to , was Tipton Golias, the founder and owner of Helena Laboratories. One source said that the Golias family owned a substantial portion of the company and received a significant share of the profits.
At one point the company opened an office in the Cayman Islands. Employees were told that the company would receive samples from the office, but no samples ever arrived and there was never any billing associated with the Cayman Island office. But, the former employee told me, there were expense reports and credit card bills, mainly attributed to T&E, from Mallory and other top HDL people.
cited the case of one doctor, Charles "Sam" Fillingane, as "the most prolific test prescriber among 296 doctors who referred patients to HDL." He may have earned as much as $23,000 in six months on P&H fees at one point. In 2010, according to the Journal, he received $3,000 a month for serving on HDL's medical advisory board. By 2012, as the former HDL employee told me, Fillingane received $6,000 a month to serve on the advisory board. This was on top of the P&H fees and his fees for speaking on behalf of the company. Despite all these revenue streams, the company gave him $100,000 in unsecured loans "because he was struggling in his business."
Rapid Decline
With its early spectacular growth it's no wonder Mallory was named the 2013 Virginia Business Person of the Year. But shortly afterward, in 2014, it all started to fall apart and in 2015 HDL collapsed into bankruptcy and dissolution. The public began to pay attention when the that HDL was under investigation by the Department of Justice for kickbacks. Almost immediately the company's numbers flattened and then declined. By the end of 2014 the number of samples per day had been cut in half, from more than 4,500 samples of blood each day to about 2,300.
Making matters worse, the company was making less from tests after contractual adjustments: at its peak the company received 29.5% of what it billed from insurance companies. (If they billed $2500 for one patient they would typically receive $850 from an insurance company.) By the end of 2014 the percentage had fallen below 20%.
Then, in addition to the government, HDL was sued by two of the largest insurance companies, Aetna and Cigna.
Bankruptcy at this point was inevitable. Mallory resigned as CEO and said she was leaving to explore a business opportunity with her brother. The company reached a settlement with the government that left it responsible for a fine potentially as large as $100 million. But, , the government had not reached an agreement with Mallory and the two BlueWave founders. In fact, .
Fighting Over the Spoils
By all accounts the owners of HDL and BlueWave and its top sales people were enriched by the scheme. As HDL's assets were auctioned off in bankruptcy court it became clear that the government would not receive its settlement. As a result, the government earlier this year froze assets belonging to Mallory and the BlueWave owners to prevent them from walking away from government claims. The government claims include $240 million from the company itself and $58 million from the BlueWave owners, Dent and Johnson, individually.
In its the prosecutors described the"massive kickback scheme ... between the laboratory clients and ... BlueWave." The court then granted the government's request to garnish funds from bank accounts and to place liens on real estate, boats, and an airplane.
The government said the action was necessary because "the BlueWave Defendants have been rapidly disposing of or concealing their assets." The court document includes many examples of these efforts. As the HDL/BlueWave scandal began to unfold Dent bought properties for $1.6 million and $2.7 million and then on the same day sold them to his wife for $5 each. Dent's wife also registered corporations which now contain properties bought earlier by Dent.
Moreover, Dent "engaged in property reorganization which had the effect of removing his name from the ownership records for many properties previously titled in his name." In less than 6 months time Dent's wife's corporations owned eight properties. For one of the properties Dent's wife's parents were granted a life estate for $5.
Johnson was the sole owner of several properties that he sold to corporate entities that he controlled. In other cases he transferred the titles of other corporations to his accountant.
BlueWave now has only $180,000 available in cash and has told the government that "it has no ability to pay the damages in this case." However, according to the government, Dent and Johnson started a new healthcare marketing company, Cobalt. Since 2013 "BlueWave has deposited $5.4 million into Cobalt's account, along with another $4.6 million from Defendant Dent and $1.275 million from Defendant Johnson personally."
The government received writs of attachment on four boats owned by Dent and an airplane owned by Johnson. But, the government notes, Johnson and Dent will "continue to possess and be able to use the property."
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