Not over yet

Health Diagnostic Laboratory (HDL) Inc.’s $47 million settlement with the federal government in April ended an investigation into the blood-testing lab’s reimbursement practices, but the company and its co-founder and former CEO Tonya Mallory, are not off the hook.

Financial and legal obstacles that lie ahead could further crimp the performance of one of Richmond’s former shining stars.

The settlement agreement with the U.S. Department of Justice (DOJ) spells out financial liabilities far beyond the $47 million fine, while related whistleblower lawsuits — which prompted the investigation in the first place — open the door to legal action against Mallory.  

In announcing the settlement, the DOJ unsealed civil whistleblower claims and said it would intervene with suits against two other companies and three individuals, including Mallory, for similar violations under the federal False Claims Act. This means the DOJ will file its own complaint in those actions within 120 days of the court’s order confirming the government’s decision  to intervene. 

Mallory, reached by Virginia Business, had no comment on the whistleblower lawsuits.  Her lawyer, Christopher Hall, of Saul Ewing LLP in Philadelphia, released a statement saying,  “Ms. Mallory welcomes the unsealing of the complaint and will vigorously challenge the government’s evidence in court.”

While it’s uncertain how the legal skirmishing will play out, HDL’s continuing financial liability was clearly spelled out by the settlement.  It includes contingency provisions that would require the downtown Richmond lab to pay more than $47 million if its ability to pay improves five years from the April 9 settlement date. 

For instance, if HDL sells its ownership interest in Biotech 8 LLC, the legal entity that owns its new headquarters building, the settlement stipulates that 75 percent of the net, after-tax proceeds would go to the federal government.  If a sale does not happen within four years, HDL may meet contingent fee obligations by obtaining an appraisal of the building and paying the government 75 percent of the proceeds it would receive if the building were sold at the appraised value.  

Once one of the region’s fastest-growing companies, privately held HDL has invested $100 million in new equipment and the new building in Richmond’s biotechnology park. Opened in April 2014, the 283,000-square-foot building currently is assessed at $63 million. 

In the event of a merger or if HDL is sold, the government would get 10 percent of the net proceeds of a sale, merger or transfer to an entity other than a wholly owned subsidiary of HDL. 

The agreement sets a settlement cap at $100 million, which includes the $47 million fine and contingent fees.  

HDL’s settlement with the Department of Justice stemmed from allegations that the lab induced doctors to order blood tests by paying them a $20 fee for each test.  According to data obtained by the Wall Street Journal, HDL received hundreds of millions of dollars for claims for payment submitted to federal health-care programs. HDL received $139 million from Medicare in 2012 and $157 million in 2013, the Journal reported. 

HDL admitted no wrongdoing in the settlement. The company contends that the fees were an industry practice and notes that it discontinued them last summer after the federal government warned they might violate anti-kickback statutes.

In a news release on the settlement agreement with HDL and another lab, California-based Singulex Inc., the DOJ advised the court that it would sue Alabama-based BlueWave Health Care Consultants Inc. and California-based Berkeley HeartLab Inc., along with Mallory and BlueWave’s owners, Floyd C. Dent and J. Bradley Johnson.

One whistleblower lawsuit brought against HDL, Mallory and other defendants had been sealed since 2013. It was brought by a nursing supervisor, Kayla Webster, and Scarlett Lutz, the owner of a billing service. Both women worked for a primary-care physician in Florence, S.C. The suit is one of three that the DOJ said it would join.

The Webster/Lutz claim alleges that HDL provided financial inducements to physicians in the form of a $20-per-patient fee in exchange for referrals of patients for laboratory testing in violation of state and federal anti-kickback statutes. HDL characterized the fee as a reimbursement to doctors for the labor of processing and handling blood samples.

HDL’s sales contractor and marketing agent, BlueWave Healthcare Consultants, also is a defendant in the suit, along with its executives, Dent and Johnson. Singulex, which allegedly offered $10 for each patient referral for blood lab testing, also was named as a defendant.

Like Mallory, Dent and Johnson are former employees of Berkeley. The suit says BlueWave allegedly sold HDL’s and Singulex’s tests as a bundle to physicians. Doctors were paid a total of $30 in “processing” fees per patient.

With HDL operating in 45 states, the suit refers to “a national scheme” that it says caused damage to government health-care programs “ … and in many cases, medically unnecessary tests themselves.” 

It goes on to say that “the scheme caused beneficiaries of government health-care programs and private insurance plans in California and Illinois to receive other unnecessary health care, including follow-up physician visits, follow-up testing and unnecessary medications related to the illegal referrals to HDL and Singulex.”

Under the federal False Claims Act, whistleblowers with firsthand knowledge of fraud can bring what is known as a qui tam complaint and seek as much as 15 to 25 percent of recovered funds.

Mallory resigned from HDL last September, shortly after it became public that the clinical laboratory was under federal investigation. She said she was leaving to assist her brother with a new business venture, ITS Manufacturing, located about an hour away in Crewe. The small private company manufactures precision metal parts for the automotive and defense industries. 

According to HDL, she subsequently resigned from the board of directors in November and ended any advisory role with the company. “She remains a shareholder, but has no involvement in the management or operation of the company. We cannot speak on her behalf,” a company spokesman told Virginia Business.

Rachel Suddarth, an assistant professor at the University of Richmond and an expert in Medicaid and Medicare compliance and reimbursement, says it’s unclear whether federal authorities could bring civil or criminal charges against Mallory.

In a similar case, DOJ reached a $42.7 million settlement in 2012 with Dallas-based Tenet Healthcare Corp. over allegations of overbilling Medicare, and the DOJ also prosecuted individual executives. That’s rare, Suddarth says, “but it does happen when the government feels that that person has engaged in sort of individualized improper behavior.”

The DOJ’s decision to join the whistleblower suits may indicate that the government thinks that Mallory “had more than just your corporate, mistaken … I-didn’t-realize-it-was-wrong level of in­­volvement,” she says.

The suit also points out that Mallory personally signed the reimbursement checks to physicians, but Suddarth says it’s difficult to tell if that fact has any real significance or was standard procedure at HDL.
Mallory was Virginia Business magazine’s 2013 Virginia Business Person of the Year and in 2012 was Ernst and Young’s National Entrepreneur of the year in the Emerging Company category. By that time, three years after she had HDL up and running, she was the darling of Richmond’s business community. With generous donations of $2.2 million to the Science Museum of Virginia and $4 million to the athletics department of Virginia Commonwealth University — Mallory’s alma mater — the company appeared to be a hometown homerun.

Mallory started HDL with two other co-founders, Joseph McConnell, the company’s current CEO, and Russell Warnick, its chief scientific officer, in late 2008 with what essentially was a kitchen table business plan. The company met its five-year goals in 10 months. At its peak, the fast-growing HDL was bringing in annual revenue of $800 million, including payments from private health insurers, according to the WSJ, and adding 50 new employees a month, eventually growing to more than 800 workers. 

Before starting the Richmond lab, Mallory worked for Berkeley HeartLab, a clinical testing laboratory located outside of San Francisco. Mallory told Virginia Business in 2013 that Berkeley recruited her to start a second Berkeley lab in Richmond. As a senior lab manager, she commuted from Richmond to California from 2005 to 2008. When Berkeley was suddenly acquired by Celera Corp., she said the Richmond project was killed, and she left the company.

According to the whistleblower suit, she resigned from Berkeley in September 2008 and incorporated HDL that November. HDL began operations in June 2009, the suit says, and started processing blood samples in November 2009. 

In January 2010, Berkeley filed a lawsuit against HDL, Mallory, Warnick — who had formerly worked with Mallory at Berkeley — and the owners of BlueWave. It sought injunctive relief and $6 million in damages, with Berkeley alleging several claims, including claims for misappropriation of trade secrets and interference with Berkeley’s client relationships.  In short, Berkeley was accusing HDL of recruiting former employees and stealing the company’s business by getting doctors to switch from Berkeley to HDL when ordering blood tests. HDL denied any wrongdoing and settled the suit for about $7 million.

As a condition of the DOJ settlement announced in April, HDL will continue to be under federal scrutiny under the terms of a corporate integrity agreement. 
Suddarth says that if the government “really thought this was a bad-egg company that couldn’t be saved and it was all based on fraudulent billing, they would have just shut them down.” Instead, she points out,

HDL retains its ability to receive reimbursements from Medicare, Medicaid and Tricare, a health-care insurance system for military dependents and members of the military services.
Still, there are more legal hurdles ahead. HDL faces an $84 million federal court lawsuit from Cigna, a national health insurer, over allegations of fraudulent billing.  HDL has denied the allegations and asked the court to dismiss the suit. Aetna Inc., another national life insurance company based out of Hartford, Conn., also filed suit against HDL in April. The company seeks to recover “tens of millions in monetary damages” for what it alleges was a “fraudulent billing scheme” that Aetna said caused it to pay twice as much as it should have for services provided by HDL. HDL refused to comment on the latest suit, saying it does not comment on matters related to pending or threatened litigation.