Hospital, Laboratory, Referring Physician, and Lab Employees Pay More than $7.2 Million To Resolve Civil Allegations of Fraudulent Laboratory Testing

LEXINGTON, Ky. - A hospital, a laboratory, three lab employees, and a referring physician and his office manager have agreed to collectively pay the United States more than $7.2 million dollars to resolve civil allegations that they defrauded federal healthcare programs in connection with laboratory tests that were not medically necessary or were tainted by violations of the federal Anti-Kickback Statute.

Physicians' Medical Center, LLC ("PMC"), a hospital in New Albany, Indiana, operated a clinical laboratory that was managed by the now defunct United States Medical Scientific Indiana, LLC ("US Med Sci Indiana"). The United States alleged that PMC, through its lab manager's fraudulent conduct, violated the False Claims Act by submitting false claims for laboratory services to Medicare, Kentucky Medicaid, and TRICARE, from December 2016 to September 2018.

Federal healthcare programs only pay for laboratory services that are used for medical diagnosis or treatment. As set forth in the settlement documents, the United States alleged that PMC billed Medicare, Kentucky Medicaid, and TRICARE for urine drug tests referred by various entities - including a homeless shelter and peer-to-peer recovery centers - that did not use the test results for medical diagnosis or treatment. These nonmedical entities only used the test results to monitor clients' compliance with the conditions of their programs and with court orders. In total, the United States alleged that PMC submitted nearly $3 million in false claims to Medicare, Kentucky Medicaid, and TRICARE, for urine drug tests referred by these nonmedical entities.

Two lab employees also entered settlement agreements to resolve their False Claims Act liability, for causing PMC's submission of false claims for lab tests from these nonmedical entities. The United States alleged that Bobby Sturgeon, a sales representative for PMC's laboratory, knew that these entities did not provide medical services, but nonetheless pursued and worked with them as clients. And Sturgeon financially benefited from these fraudulent sales practices because his salary was based in part on the amount insurers paid PMC for his clients' tests, including those from the nonmedical entities. Similarly, the United States alleged that Derrick Arthur, one of the peer-to-peer recovery center's directors, worked as a specimen collector for PMC's lab and helped arrange for a volunteer doctor to order urine drug testing, despite knowing that the doctor did not provide medical treatment to the center's clients. By doing so, Arthur facilitated the improper billing of laboratory tests to federal healthcare programs.

After PMC closed its laboratory in October 2018, Sturgeon became a sales representative for Bluewater Toxicology, a laboratory in Mount Washington, Kentucky. As set forth in the settlement documents, Sturgeon then caused Bluewater to submit false claims for medically unnecessary urine drug tests, from the same peer-to-peer recovery centers and homeless shelter, through July 2019. Like PMC, Bluewater knew that federal healthcare programs would not pay for urine drug tests used for nonmedical purposes, but still submitted the claims for payment. In total, the United States alleged that Bluewater submitted nearly $450,000 in false claims to Medicare and Kentucky Medicaid for urine drug tests referred by the nonmedical entities. Bluewater, Sturgeon, and Arthur have entered settlement agreements resolving their liability for the submission of Bluewater's false claims for tests from these nonmedical entities.

In a related scheme, Steve Moore, a laboratory sales representative for PMC and Bluewater Toxicology, allegedly paid a physician, Pablo Merced, M.D., and his wife and office manager, Theresa Merced, to induce referrals of laboratory tests to PMC and Bluewater Toxicology. To gain Dr. Merced's large volume of referrals, Moore paid cash to the Merceds and paid additional salary to lab specimen collectors who worked at their office. PMC, through its lab manager, also employed specimen collectors in Dr. Merced's medical practice, who were alleged to perform office work unrelated to their specimen collection duties. Moore's cash payments and the PMC lab manager's in-kind payments to the Merceds violated the Anti-Kickback Statute, 42 U.S.C. § 1320a-7b(b). PMC and Bluewater submitted millions of dollars of claims to federal healthcare programs for the lab tests that were tainted by their sales representative's kickbacks. PMC, Moore, and the Merceds have entered settlement agreements resolving their liability for the submission of the false claims tainted by kickbacks.

PMC's settlement agreement also resolved its False Claims Act liability for claims for lab tests referred by medical providers at Prescribe Recovery, a medical practice in Paris, Kentucky. The United States alleged that PMC's lab manager, US Med Sci Indiana, actually owned Prescribe Recovery, and directed its medical providers' referral of laboratory tests to PMC's lab. As PMC's lab manager, US Med Sci Indiana received 78% of the laboratory claim reimbursements paid to PMC, including the reimbursements from Prescribe Recovery. PMC's payment of 78% of laboratory reimbursements to US Med Sci Indiana induced them (as the lab manager) to direct Prescribe Recovery's lab referrals to PMC, and violated the Anti-Kickback Statute.

Collectively, these civil healthcare fraud settlements return more than $7.2 million to the Medicare, Kentucky Medicaid, and TRICARE programs. For their roles in the scheme as the laboratories submitting the false claims, PMC agreed to pay $5,219,000 and Bluewater Toxicology agreed to pay $895,952. Sturgeon and Moore, agreed to pay $713,466 and $40,000, respectively, to resolve their liability. Arthur agreed to pay $5,500 to resolve his liability; and Dr. and Mrs. Merced collectively agreed to pay $450,000 to resolve their liability, under the False Claims Act and Dr. Merced's liability for separate conduct under the Controlled Substances Act. The value of Moore's, Arthur's, and the Merceds' settlements included factoring in their inability to pay, based on financial disclosures.

"Through a complex patchwork of schemes, the federal government was defrauded out of millions of dollars," said Carlton S. Shier, IV, United States Attorney for the Eastern District of Kentucky. "This money was appropriated to provide medical services to eligible Americans; instead, it improperly yielded proceeds to those who were submitting false claims. When fraud and abuse deplete these valuable resources, it injures all of us. With the assistance of our partners and the filing of a qui tam complaint, vital resources are now being returned to their intended purpose."

"Individuals and entities participating in the federal health care system must comply with laws designed to protect program funds and ensure patients receive appropriate, quality care," said Special Agent in Charge Kelly J. Blackmon of the U.S. Department of Health and Human Services Office of Inspector General (HHS-OIG). "We will continue to collaborate with our law enforcement partners to hold health care providers accountable for improper payments from federal health care programs."

The settlements resolve a lawsuit brought by a private citizen under the qui tam provisions of the False Claims Act. Under those provisions, a private party can file a civil action on behalf of the United States, thereby bringing allegations of fraud to the Government's attention, and share in any financial recovery. As part of this resolution, the individuals who filed the qui tam complaint will receive a portion of the settlement proceeds. The civil case is captioned United States ex rel. Clark et al. v. United States Medical Scientific, LLC, et al., Case No. 0:18-cv-109-KKC.

The settlement agreements resulted from the joint efforts of the United States Attorney's Office for the Eastern District of Kentucky; U.S. Department of Health and Human Services, Office of Inspector General; U.S. Drug Enforcement Administration; U.S. Department of Defense, Office of the Inspector General, Defense Criminal Investigative Service; and the Kentucky Attorney General's Office of Medicaid Fraud and Abuse Control. The United States was represented by Assistant U.S. Attorney Meghan Stubblebine. The claims resolved by the settlements are allegations only, and there has been no determination of liability.

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