U. S. government sues Tonya Mallory, HDL’s former CEO and co-founder

The U. S. government has sued Tonya Mallory, the co-founder and former CEO of Health Diagnostic Laboratory in Richmond, on allegations that she participated in an $80 million kickback scheme that caused the federal government to pay hundreds of millions of dollars in false claims for tests.

The suit follows related civil whistleblower lawsuits that were unsealed in April and sheds new light on how the alleged scheme worked.  

It was filed Friday in U. S. District Court in South Carolina. Besides Mallory, it names four other defendants: BlueWave Health Consultants Inc., HDL’s former outside sales contractor based out of  Alabama;  BlueWave’s owners, Floyd Calhoun Dent III and Robert Bradford Johnson; and Berkeley Heartlab Inc., where Mallory worked previously as did Dent and Johnson, before Mallory started Richmond-based HDL in late 2008. 

The suit says the defendants “knowingly and willfully offered and/or paid kickbacks, primarily in the form of $80 million dollars in improper process and handling fees to induce physicians to refer blood samples,” to specialty laboratories for large panels of tests. The laboratories named are HDL, Berkeley, based out of San Francisco, Calif.; and Singulex Inc., another California lab.  They specialize in cardiovascular and advanced lipid testing.

According to the suit, the kickbacks resulted in false claims being submitted to Medicare and Tricare, which caused the federal government to pay more than $500 million dollars to the three laboratories. By causing kickbacks to be paid, the suit says that Bluewave, Johnson, Dent and Mallory induced physicians to order large panels of tests “that included a significant number of medically unnecessary tests.”

It also laid out the framework of what it describes as an “illegal sales agreement” between HDL and Bluewave for “commission-based payments in exchange for arranging for and recommending that physicians refer laboratory tests to HDL and Singulex that were reimbursed by federal health care programs” in what, the suit says, was a violation of the Anti-Kickback Statute.

HDL was not named as a defendant. In April, the company agreed to a $47 million settlement with the U. S. Department of Justice to end an investigation into the laboratory’s reimbursement practices. In doing so, HDL admitted no wrongdoing. It has since filed for Chapter 11 bankruptcy and is seeking a buyer under a court-monitored process.  Singulex also agreed to a settlement.

Mallory abruptly resigned from HDL in September of 2014 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 in Crewe, Va.

While president and CEO of HDL from 2008 to 2014 , the government’s lawsuit says Mallory “devised and implemented HDL’s practice of paying sham processing and handling fees to physicians who referred blood samples to HDL for testing.” The fee was $20 per referral — a $3 draw fee and $17 for processing and handling. 

The government notes that the plan was similar to a nationwide program that Berkeley had implemented earlier, which paid physicians a draw fee of $7.50 for samples referred to Berkeley’s laboratories. Berkeley was later acquired by Quest Diagnostics and stopped paying what it referred to as “processing and handling fees” in early 2012, after the suit says it lost “a significant amount of business to laboratories like HDL and Singulex that were paying significantly higher processing and handling fees.”

Peter Chatfield, a partner with Phillips and Cohen in Washington, D.C., and a lead counsel on one of the civil whistleblower cases that opened the door to legal action against Mallory, says the government’s suit shows that it believes it has sufficient information to show that Mallory and the other defendants were “knowing participants” in fraud.

“They’re looking for her to potentially pay back some of the debts for the other defendants that have ability-to-pay issues like HDL,” he said, referring back to the DOJ’s settlement against the clinical laboratory testing company.

According to the federal government, Mallory owns about 15 percent of HDL’s stock  and received at least $26 million from HDL in salary, bonuses and tax distributions between 2009 and 2014, with her salary and bonuses “directly tied to HDL's profits.”  The suit says Dent and Johnson each own 1.5 percent of HDL’s stock. 

Reached by Virginia Business, Mallory said she had no comment on the lawsuit, but she did say, “It would be nice to see Richmond focus on all the good HDL has done for thousands of people for a change.”  Virginia Business also contacted her attorney’s office, Saul Ewing LLP in Philadelphia, for comment.

The suit seeks five counts against the defendants – three under the False Claims Act, one for payment by mistake, and a claim for unjust enrichment.  The government is seeking unspecified financial penalties.

As part of its sales agreement, HDL agreed to pay BlueWave a monthly base fee plus a commission equal to 13.8 percent of the revenue collected by HDL in BlueWave’s territory. At other times, these commissions were higher, as much as 19.8 percent at one point. From January 2010 to January 2015, the suit says BlueWave served as an independent sales and marketing force for HDL in 47 states. It arranged and recommended that physicians order laboratory tests from HDL. The suits says that BlueWave arranged for physicians to order 753,062 samples in 2012 and 868,381 samples in 2013.

In return for the samples being referred, HDL allegedly paid BlueWave about $6.8 million in commissions in 2010 and $21 million in 2011. By 2012, the figure had grown to $74.3 million. In 2013, HDL paid Blue Wave $67 million and in 2014, about $54.1 million. “As sales increased exponentially, BlueWaves’s commission also increased dramatically, “the suit says.  “HDL’s commission payments to BlueWave were nothing more than thinly disguised kickbacks made in violation of the AKS [anti-kickback statute].”

The suit says that processing and handling fees totaled more than $100,000 a year for some physician practices. And it contends that between 2010 and 2014, BlueWave, on behalf of Mallory and HDL, paid doctors and physician groups about $68 million in p&h fees.

Between October 2009 and July 2014, Medicare and Tricare paid HDL about $333 million for tests referred by physicians who had received these fees.

To get the fees, the suit alleges that physicians were required to order multiple tests. 
Even though the defendants claimed that the fees were intended to reimburse practices for the time spent processing and handling blood samples, the suit points out that Mallory authorized,  and HDL paid,  some physicians directly rather than doctor’s practice. According to the filing, “HDL also mailed checks directly to a physician’s house rather than to his practice.”