The same lab billing arrangement put in place at a small, rural hospital in Unionville, Missouri, is the subject of a federal lawsuit in Georgia that calls it a fraudulent scheme designed to enrich its architects.
The lawsuit, filed by Blue Cross and Blue Shield of Georgia, alleges that since August 2016, a 49-bed hospital in rural north Georgia has billed it more than $174 million for lab tests Blue Cross did not agree to pay for.
The arrangement at Chestatee Regional Hospital in Dahlonega, Georgia, is strikingly similar to the one at tiny Putnam County Memorial Hospital in Unionville, which is now seeking to oust its owner.
The owner of the Unionville hospital is a company controlled by Florida resident Jorge Perez, who is one of the defendants named in the Georgia case. The suit alleges he “engaged in similar schemes” at Putnam County Memorial Hospital and other financially ailing hospitals around the country.
Two weeks ago, Perez’s company sued Putnam County’s board of trustees as well as Missouri State Auditor Nicole Galloway after the board moved to terminate Perez’s contracts with the hospital. Galloway released a stinging audit last August questioning the legality of $92 million the hospital billed for lab tests over the course of just a few months.
The Georgia lawsuit says Perez and other defendants billed for lab tests as if they had been performed at and by Chestatee Regional Hospital to take advantage of its favorable reimbursement rates from Blue Cross and Blue Shield of Georgia.
“To maximize their profits, Defendants leveraged a nationwide network of healthcare providers and laboratories, who provided their patients’ specimens because the pass-through scheme made the testing immensely profitable,” the lawsuit alleges. “Some of the referring healthcare providers and laboratories provided their patients’ specimens in exchange for a cut of the amount that Chestatee was reimbursed by BCBS Georgia.”
The submitted claims were mainly for drug testing of urine and blood, according to the lawsuit, which was joined by more than a dozen Blue Cross and Blue Shield affiliates claiming to have been bilked. The affiliates, all subsidiaries of Anthem Inc., include three Missouri-based companies: RightCHOICE Managed Care Inc., Healthy Alliance Insurance Co. and HMO Missouri Inc.
The suit was filed after an investigation of Chestatee’s lab billings last month by CBS News. CBS reported that shortly after the hospital was sold in summer 2016 to a Florida man named Aaron Durall, “huge checks from insurance companies started rolling in – some as large as half a million dollars.”
Durall and his company, Durall Capital Holdings, are also named in the Georgia lawsuit, as is his lab company Reliance Laboratory Testing Inc., and a billing company, Medivance Billing Service Inc. The suit says Reliance paid health care providers and other labs kickbacks to induce them to send lab specimens to Chestatee.
Durall, an attorney in Sunrise, Florida, said in an email to KCUR that his attorneys would respond to the litigation filed by Blue Cross, “which we expect to defend vigorously.”
Reliance also performed the laboratory tests at Campbellton-Graceville Hospital in Graceville, Florida, a 25-bed facility where Perez briefly served as CEO. The hospital closed last June after filing for Chapter 11 bankruptcy but not before Reliance Labs received about $25 million in insurance company reimbursements.
And last June, Durall, through his holding company, entered into a lab agreement with 25-bed Sonoma West Medical Center in Sebastopol, California, a financially strapped hospital that had twice filed for bankruptcy before Durall came to the rescue. Durall told the Sonoma West Times & News that the hospital would run between 10,000 and 15,000 tests a month, generating payouts from insurers of about $2.8 million a month. In return for managing the lab, Durall was to be paid $150,000 a month.
The president of the hospital, John Peleuses, did not return a phone call seeking comment.
But after the CBS News report, The Press Democrat in Santa Rosa, California, two weeks ago reported that Peleuses and the hospital’s chief nursing officer had defended the billing arrangement and said it allowed the hospital to remain open. Peleuses told the newspaper that the program generated a net profit of $31 million since last summer, of which $21 million was paid to Reliance.
A board member of the local health district, Jim Horn, told the paper that the CBS investigation raised serious concerns about the program.
“I want the district to conduct a full review of the legality and propriety,” the paper quoted Horn as saying. “Because even if something is legal it may not be proper for us to be billing insurance companies 10 times what the same service would cost an independent lab.”
Another legal challenge
The Georgia lawsuit is not the first time a Blue Cross affiliate has challenged the legality of such lab billing programs. A lawsuit filed by Blue Cross and Blue Shield of Mississippi last year claimed that the insurer had been billed for nearly $34 million in lab services that were not performed at Sharkey-Issaquena Community Hospital in Rolling Fork, Mississippi.
That case is set to go to trial next week.
Blue Cross Blue Shield of Oklahoma raised questions about a similar billing arrangement with four rural hospitals in that state, all owned by Perez. As of February, those hospitals are no longer included in Blue Cross’s network.
It’s not clear whether the lab billing programs are illegal. But legal experts say that when insurance carriers cut deals with rural hospitals to pay them at higher rates, they typically don’t envision high-volume programs generating tens of millions of dollars a year.
“I think the real issue always gets down to, you have the payers that have negotiated a contract with the providers with certain expectations on volume and usage and cost for the provider,” says Brian Bauer, a health care lawyer with Hall Render in Troy, Minnesota.
“I think each one's got to be looked at pretty much on its own merits and evaluated on its own merits and its own agreements,” he says.
Dan Margolies is a senior reporter and editor for KCUR. You can reach him on Twitter @DanMargolies.