Health Diagnostic Laboratory’s Ex-CEO Mallory and marketing partner’s owners found liable for Medicare fraud

CHARLESTON, SC, Feb. 1, 2018 – A federal jury in South Carolina has found the former CEO of a medical testing lab and two owners of the lab’s marketing partner liable under the federal False Claims Act for Medicare fraud, as alleged in three whistleblower cases.

The jury calculated the defendants – Tonya Mallory, the former CEO of Health Diagnostic Laboratory (HDL) in Richmond, VA, and Floyd Calhoun Dent III and Robert Bradford Johnson, who are the owners of BlueWave Healthcare Consultants Inc., an Alabama marketing company – owe the federal government single damages totaling in excess of $17 million. Under the False Claims Acts, those damages are automatically trebled, meaning the total combined liability of the defendants amounts to $51.2 million, plus additional penalties in an amount yet to be determined by the court.

The verdict, announced late Wednesday afternoon (Jan. 31), was the outcome of three separate “qui tam” (whistleblower) cases that were litigated together – including the one brought first by Phillips & Cohen LLP on behalf of Dr. Michael Mayes of Hilton Head, S.C., in 2011.

The whistleblowers and government alleged that the three executives conspired to knowingly and willfully pay kickbacks to doctors in the form of unwarranted process and handling fees of $20 for each blood draw and testing referral, to induce those doctors to order expensive cardiovascular blood tests for federally insured patients that were often medically unnecessary.

After a two-week trial in Charleston led by government attorneys, the jury found all three individual defendants jointly and severally liable for 35,074 false claims that HDL submitted to the government that caused damages to the government totaling $16.6 million.

This means that the defendants’ total liability for false claims they caused HDL to submit is $49.8 million, because the False Claims Act states that a liable person must pay three times the government’s single damages to compensate it for its direct losses and for the costs it incurs in investigating and remedying such fraud.

BlueWave owners Dent and Johnson also were found liable for paying additional $10 process-and-handling-fee kickbacks to doctors to induce them to order even more tests from another specialty heart lab, Singulex Inc., based in Alameda, California. That scheme resulted in the submission by Singulex of another 3,813 false claims to federally insured healthcare programs that cost the United States $467,935, making their combined liability $1.4 million in treble damages.

In addition, the defendants face False Claims Act penalties of between $5,500 and $11,000 for each false claim.

“The jury apparently excused the defendants’ conduct for a certain time period, based on the defendants’ argument that they initially, perhaps innocently, were following bad advice from counsel,” said Peter W Chatfield, a whistleblower attorney and partner at Phillips & Cohen. “But the trial proved that the defendants continued to pay kickbacks even after they received a growing flood of warnings and corrected legal advice that showed defendants’ continuation of such payments was a knowing or reckless disregard of the law.”

“The defendants realized they would kill their golden goose if they stopped paying process and handling fees used to induce some doctors to order their tests,” Chatfield said. “Kickbacks are a very effective way to get some doctors to order medical tests, but they are illegal.”

BlueWave also was a defendant in the trial, but the jury found the marketing company not liable, even though it found its two owners, Dent and Johnson, liable.

“The jury’s finding that BlueWave wasn’t liable probably means that it thought that BlueWave’s owners were operating for their personal benefit, rather than for the benefit of their company, when engaged in the conduct at issue,” Chatfield said.

Working together, the whistleblowers from all three cases and their respective counsel helped the government investigate their overlapping claims, reach settlements with other defendants, and ultimately bring to trial in Charleston, SC, the claims that remained against settlement holdouts Mallory, Dent and Johnson.

Chatfield commended Dr. Mayes and the other whistleblowers – Christopher Riedel, Scarlett Lutz and Karla Webster – for their efforts to stop the fraud. Dr. Mayes was the only whistleblower called to testify at the trial.

“Dr. Mayes’s strong sense of ethics compelled him to speak up, at a cost to his relationships with other doctors who had been enriching themselves by accepting the unlawful payments,” Chatfield said. “Dr. Mayes brought this case out of concern for Medicare patients, knowing that healthcare fraud can drive up Medicare premiums and Medicare costs, putting patients at risk of cuts in Medicare-covered services.”

Chatfield praised the government team that handled the litigation, in particular Assistant US Attorney James C. Leventis Jr. of the District of South Carolina, Assistant US Attorney Jennifer A. Short of the District of Columbia and four other Department of Justice trial attorneys: Michael E. Shaheen, Elizabeth A. Strawn, Christopher Terranova and Michael D. Kass.

“The judge said it was one of the best tried cases he had ever seen, by all sides,” Chatfield said. “The government attorneys did an outstanding job on a difficult and complex case, making it understandable to the jury.”

Chatfield and Dr. Mayes also thanked their local counsel, Bill Coates, of Roe Cassidy Coates & Price P.A.

Other defendants in the qui tam cases previously settled with the government. In 2015, HDL agreed to pay a total of more $48.5 million and Singulex agreed to pay more than $1.5 million. Last year, Quest Diagnostics and Berkeley Heartlab, which Quest Diagnostics had acquired, agreed to pay a total of $6 million to settle similar charges.

Dr. Mayes’s qui tam complaint and DOJ’s complaint intervening in the whistleblower cases are posted on the Phillips & Cohen website.

United States of America et al v. BlueWave Healthcare Consultants Inc et al., Case No. 9:14-cv-00230-RMG (Consolidated with 9:11-cv-1593-RMG and 9:15-cv-2485-RMG)

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