Under scrutiny

What a difference a year makes.

Last December, Tonya Mallory, the co-founder, president and CEO of Health Diagnostic Laboratory Inc. (HDL), was named Virginia Business magazine’s 2013 Virginia Business Person of the Year. Her drive to create a new model for treating chronic disease and HDL’s impressive ramp up  — one of the biggest expansions ever in Richmond’s biotechnology park — made her stand out.

Less than 11 months later, Mallory has stepped down as CEO, citing family reasons. HDL is under scrutiny as part of a federal investigation into reimbursement practices in the clinical laboratory industry. The company also is being sued by Connecticut-based health insurer Cigna, which seeks to recover $84 million in insurance claims paid to HDL.

At issue in the Department of Justice investigation is HDL’s former practice of paying doctors for blood samples sent to its labs for testing.  Federal regulators have warned that such remittances posed a risk of amounting to kickbacks. 

In early September, The Wall Street Journal ran an unflattering front-page story on HDL and the investigation.  About two weeks later, Mallory announced in a letter to employees that she was resigning as CEO to help her widowed brother start a business. Mallory remains on HDL’s board and serves as an adviser to the new CEO. The company has said her departure was not related to the federal probe.

In mid-October, Cigna filed suit in U.S. Federal District Court in Connecticut, accusing HDL of a “fraudulent fee-forgiving scheme.” Cigna’s suit alleges that HDL entices Cigna plan members into using its blood-testing services by not charging patients for their share of the cost. The result, the suit says, are “exorbitant and unjustified charges” for these tests.

Fast-track growth
The company’s new leader is Joe McConnell, HDL’s chief laboratory officer and the former director of cardiovascular laboratory medicine for the Mayo Clinic. 

Mallory co-founded HDL with McConnell and the company’s Chief Scientific Officer G. Russell Warnick in 2009. Under Mallory’s leadership, HDL saw phenomenal growth, swiftly becoming one of the fastest-growing companies in the region with more than $400 million in annual revenue and a local staff of more than 750 workers (about 30 of whom have recently been laid off).  In 2012 Mallory received Ernst & Young’s National Entrepreneur of the Year award in the Emerging Company category, one of the country’s most prestigious business awards.

This spring HDL opened an expanded 283,000-square-foot, $100 million headquarters and laboratory in downtown Richmond. HDL’s buildings are owned by a public/private joint venture.  The Virginia BioTechnology Research Park owns 11 percent of Biotech 8 LLC, with HDL and Lingerfelt Development in Richmond being the other partners.

One of the largest cardiovascular and diabetes testing labs of its type in the world, HDL can process as many as 60,000 lab tests a day. The company says its panel of advanced biomarker tests helps physicians more accurately predict and prevent cardiovascular disease.

Change in practices
In June the Office of the Inspector General for the Department of Health and Human Services issued a special fraud alert, warning that the practice of paying physicians for blood tests represented “a substantial risk of fraud and abuse under the anti-kickback statute.” HDL had reimbursed most physicians $20 per blood sample for processing and handling the samples, a fee slightly higher than what some other labs paid but $17 more than the $3 reimbursement paid by Medicare, according to The Wall Street Journal.

The Journal raised the question of whether the reimbursements improperly incentivized doctors to order tests. It noted that HDL collected hundreds of millions of dollars from Medicare while using this payment model. According to the newspaper, $157 million, or 41 percent of HDL’s 2013 revenues of $383 million, came from Medicare reimbursements, with the company’s billings for some procedures far exceeding Medicare payments to other labs. 

HDL stopped physician reimbursements, which it said was an industry-wide practice, as soon as it received guidance from the federal government in June, says company spokesman Jeff Kelley. The company has shifted its operations since then, using a variety of means to obtain blood samples. HDL now provides free testing materials to physicians, is opening its own blood labs and is placing HDL-employed, blood-draw technicians in some doctor’s offices. The company also is contracting with independent lab testing sites across the U.S. to draw blood for its tests.

“The last few months have included significant changes at our company. Like all young, innovative companies in the health-care and biotechnology arena, we are constantly evolving to respond to the needs of physicians and their patients. Looking to the future, our mission and focus is clear — bringing physicians valuable testing tools and providing state-of-the-art disease prevention information for millions of people,” says Kelley.

Physician defends company
One of those physicians is Dr. Sam Fillingane, who specializes in treating patients at high risk for cardiovascular disease. The Flowood, Miss., doctor was singled out in the Journal article for the high volume of tests he sends to HDL. Fillingane serves on the company’s medical advisory board and receives payments from HDL for delivering medical lectures about the company’s biomarker testing. According to the WSJ story, he stood to earn more than $23,000 in reimbursements from HDL for blood testing in the first half of 2010, after sending in 1,179 blood samples.

Fillingane says that, by using HDL’s tests, he’s able to help patients prevent heart attacks, strokes and a host of other health problems that are more costly to insurers. Speaking to HDL’s former reimbursement practice, Fillingane says “doctors don’t order these tests because they’re going to get reimbursed. … But I will tell you there’s a lot of work to be done to draw seven tubes of blood: process, spin, separate, label, put in plastic bags, put in ice appropriately and get it to Fed Ex … by a certain time of day … because it’s a time-sensitive blood test. So there is work to be done for all of that, and I really feel like the medical profession is treated wrongly. We’re treated like criminals for getting paid for doing a service.”

In a statement released to the WSJ, Mallory said HDL “rejects any assertion that we have grown and succeeded as a result of anything other than proper business practices,” adding that HDL “has consistently complied with all applicable laws.” The company has launched a website, hdlinckeyfacts.com, to address the controversy and refers all media questions about the investigation to the website.

Despite the timing of her resignation, Fillingane says it’s nonsense to think that Mallory resigned from HDL for any other reason than to help her family. “Tonya Mallory’s one of the finest people you’ll ever meet,” he says. “She has done more good for cardiovascular disease in America than any one single individual. … If anyone ever disrespected her, they would have to do it over my cold, dead body because that lady has stepped up and taken risks personally and financially to make these biomarker tests more accessible” to a wider variety of patients, including those with lower incomes.

The Cigna suit
Cigna’s 28-page lawsuit against HDL stems from insurers’ use of health-care networks in which providers agree to accept fixed rates. Health-plan members are allowed to use providers outside the network, but they are required to bear a portion of the cost of that treatment because out-of-network providers generally charge higher rates.

“Without this obligation, out-of-network providers could demand prices from health-care plans which have no relation either to their actual costs or to the actual market for medical services, and members would have no incentive to avoid these providers,” the suit says.

HDL undermines this system, the suit says, by “misrepresenting those responsibilities under the plans by promising not to collect a co-payment, co-insurance or deductible obligation, and further promising not to seek reimbursement for any portion of its bill the plan does not cover. HDL then misleadingly bills the plans themselves at exorbitant and unjustified ‘phantom’ rates — rates that misrepresent what HDL actually intended to collect.”

Because patients don’t pay any portion of the charges, Cigna contends, they have no incentive to control their demand for HDL services, leading to increased cost to the plan.
The insurer also mentions in its lawsuit the fraud alert issued by the federal government, saying fees paid to physicians and other health-care providers encourage them to order a “litany” of tests that may not be necessary.

HDL’s business model “is designed to game” the health-care system, the suit charges. Kelley, the HDL spokesman, said the company does not comment on pending litigation.

Mallory’s successor
In a statement released by HDL when Mallory resigned, her successor,  McConnell, said he looked forward to leading HDL “as it continues its critically important advanced testing that provides actionable information that can lead to early detection of diseases … improved treatment and even disease reversal.”

McConnell declined to be interviewed for this story. However, in an interview with Virginia Business last December McConnell, 50, recounted that he was motivated to go into cardiovascular medicine and research because of a lengthy family history for cardiovascular disease.

“My grandparents died in their late 50s and early 60s of heart attacks and strokes. My dad had his first heart attack when he was 61. … He had a second heart attack when he was 62 and died … Nobody in my family had ever lived past 63 years of age. That really hit home.”

In a statement provided to Virginia Business, Mallory endorsed McConnell’s leadership. “Joe McConnell succeeding me as president and CEO of HDL Inc. is a natural progression of the business we co-founded together…. Preventative medicine is in Joe McConnell’s DNA, and he will serve HDL well.”