How does a clinical laboratory company grow in a few short years from nothing to more than $400 million in revenue and over $100 million in profit? Since the same company just settled with the DOJ for as much as $100 million, it's reasonable to suspect that growth was probably not entirely legitimate.
Now new information, gleaned from documents containing previously unreported details about the company, provides an inside look at the inner workings of the company and its rampant growth, fueled by greed and a massive disregard for law and industry standards. Except where otherwise indicated, the details of HDL's finances reported below come from a financial statement and a spreadsheet prepared by the company and made available to me by a source. The details are consistent with information revealed by a former company employee with intimate knowledge of HDL's finances.
Health Diagnostic Laboratory (HDL) was started in 2009 by Tonya Mallory (the founding CEO who resigned last year when the scandal became public), Joseph P. McConnell (the current CEO) and G. Russell Warnick, the chief scientific officer of the company. As the documents show, by 2012 HDL had attained revenue of $417 million, $138 million of which was profit. With numbers like that it's no wonder Mallory was named the 2013 Virginia Business Person of the Year, but the timing of the award was unfortunate since by then rumors had already started to circulate that the rocket-like growth of the company had been achieved by illegitimate or questionable means. In 2014 those rumors gained credence as reports surfaced that the company was under investigation by the Department of Justice. These reports were recently confirmed with the announcement of a penalty that could reach as high as $100 million. And the story is by no means over. Although HDL itself has settled, the DOJ has not settled with either Mallory or several other key figures in the scandal. They may well be liable for additional fines and, some believe, they may be subject to criminal prosecution. In addition, the doctors who accepted kickbacks from the company may well come under DOJ scrutiny as well.
Explosive Growth
The numbers tell the story. The 2012 total revenue of $417 million was more than double the the previous year's number, $170 million. The 2012 net income of $138 million works out to a profit margin of 33%. These are astonishing figures. Most privately-owned lab companies, according to Robert Michel, publisher of the highly regarded laboratory industry newsletter The Dark Report, are extremely happy if they have a net profit margin of even 10%. The HDL figures are evidence that "they have been inflating the prices they charge for tests," he said.
The financial documents offer powerful evidence illustrating the two main charges against HDL as alleged by the DOJ.
The first charge is that HDL didn't bill patients for the unreimbursed portions of their lab tests. In 2012 the company wrote off $208 million as "adjustments for uncollectible accounts." (Of course they never could have collected all that money directly from patients but if they had their revenue would have been a staggering $625 million.) "This," says Michel, "is the cornerstone of their scheme. A major element of the sales pitch to doctors is that 'your patients will never be billed.'"
The second charge is that HDL bribed doctors by paying excessive processing and handling fees for collecting blood from their patients. Medicare and private insurance companies generally permit a $3 payment for a blood draw. HDL paid as much as $17, as previously reported and alleged by the government. (Some doctors, spurred by salesmen from the independent sales company BlueWave (see below), received multiple P&H fees by sending different tests to more than one laboratory at a time. Some doctors received as much as $100 per patient by doing this.)
In 2013 the company sent out roughly $1.5 million each month to doctors, contained in 1,400 to 1,700 monthly checks, according to the documents. The reason the company sent paper checks, according to one source, is because Tonya Mallory, the CEO, told employees that "doctors love to see the paper checks in their hand." Furthermore, except for the salesmen, no one in the company except the salesmen were allowed to talk with the physicians. When employees in the accounting department asked why patients were not being billed they were told by the CFO that "the policy was to make more money by not billing the patients."
BlueWave
As a lab company it's probably not surprising that in 2012 the company spent $95 million on lab supplies and $18 million on lab salaries and benefits. But then it spent almost as much, $81 million, on sales, marketing and advertising. I'm told by an authoritative source that 95% of this went directly to the company's external sales force, BlueWave Healthcare Consultants Inc.
BlueWave has deep and troubling ties to HDL. The company is owned by Floyd Calhoun Dent and J. Bradley Johnson. Along with the co-founders of HDL, the BlueWave owners came from Berkeley Heart Lab, which they left in 2008 to start their respective companies. From the start the two companies worked together to create the "business model" uncovered by the DOJ. The BlueWave owners also own a small piece of HDL, but most of their earnings came from the sales, marketing and advertising stream.
Big Profits
In 2012 the company spent $60 million on "general and administrative" expenses. This includes generous salaries the owners gave themselves, along with monthly bonuses of $200,000 for each of the three co-founders.
In addition to the salaries and bonuses and fees to BlueWave, in 2012 HDL distributed $83 million in profits to its 16 individual shareholders, all of whom were investors. (HDL is a subchapter S corporation in which the taxes for the corporation's profits are paid by the shareholders rather than the company.)
In 2012 one principal, who was also a co-founder of the company, Satya Rangarajan, had a disagreement with Mallory and left the company. For his 5.102% share of HDL he received $18.8 million plus a $1.2 million bonus, for a tidy sum of $20 million. (On the one hand Rangarajan's timing was fortunate, since he got out near the top and before the scandal emerged. On the other hand, it's unlikely that he will realize the full amount since a final payment of $5.8 million is due later this year.)
One of the outside investors who helped start the company with a $4 million investment, according to Virginia Business, was Tipton Golias, the founder and owner of Helena Laboratories. One source said that Golias and his family members own a substantial portion of the company and received a large share of the profits.
At this point there is no indication from the government whether it will go after distributions received by the individual stockholders, though the government has specifically stated that it is involved in ongoing cases involving Mallory and BlueWave's Dent and Johnson.
At one point the company opened an office in the Cayman Islands. Employees were told that the company would receive samples from the office, but no samples ever arrived and there was never any billing associated with the Cayman Island office. But, according to the same source, there were expense reports and credit card bills, mainly attributed to T&E, from Mallory and other top HDL people.
One doctor who has been cited in previous reports, Sam Fillingane, a family doctor in Mississippi, may have benefited more than other doctors. According to sources, he received $6,000 a month to serve on an advisory board, was paid separately for giving talks on behalf of the company, and received $10,000 a month in processing and handling fees. Despite all these revenue streams, the company gave him $100,000 in unsecured loans "because he was struggling in his business."
Employees were disinclined to question policy. At its peak in 2013 each day the company handled about 4,500 samples, or patient test requisitions. (Each requisition represents one patient's test orders and usually yields more than one test.) Whenever the daily sample reached a new milestone every employee received a bonus equal to the number of samples: around Thanksgiving in 2012 the company hit the 4,000 sample per day milestone and each employee received a $4,000 bonus.
The issue of samples raises another important issue that demonstrates just how far HDL deviated from industry standards. In general, according to Michel, for most clinical laboratories the number of tests ordered on a single patient by a physician averages in the range of 2.2 to about 2.8. From the HDL spreadsheet it appears that the company performed an average of 31 tests per requisition. "This is another indication of what the feds would consider fraud and abuse: inducing physicians to order medically unnecessary tests," said Michel.
Decline and Fall
Once the scandal hit the company's numbers flattened and then declined. By the end of 2014 the number of samples per day had been cut in half to about 2,300. Making matters worse, the company was making less from tests after contractual adjustments: at its peak the company received 29.5% of what it billed from insurance companies. (If they billed $2500 for one patient they would typically receive $850 from an insurance company.) By the end of 2014 the percentage had fallen below 20%.
In addition to its problems with the DOJ, HDL is now being sued by insurance companies. On April 10, according to the Pennsylvania Record, Aetna filed suit against both HDL and BlueWave, alleging fraud, tortious interference, civil conspiracy and unjust enrichment. Last year another large insurance company, Cigna, filed suit against HDL for $84 million.
Whether or not the company can now survive is an open question that no one can answer. Also unclear now is whether the company co-founders, the BlueWave owners, and other investors will face additional financial penalties and/or criminal charges.
Another open question is the fate of the doctors who participated in these schemes. In the last year the DOJ has reported a string of cases in which doctors have received prison terms for participating in a similar scheme involving kickbacks with a different laboratory, Biodiagnostic Laboratory Services. It is quite possible that a later stage of this case could include physicians who accepted kickbacks from HDL.
I spoke with Derrick Jackson, the HHS OIG special agent who supervised the HDL case (among many others). He said that the HDL settlement was just one part of an ongoing investigation into laboratory companies. He specifically pointed out that the cases against Mallory and the BlueWave owners Dent and Johnson were ongoing. He did not absolutely rule out a criminal case against them, or other ongoing cases that have not yet been revealed, but he did note that it is much more difficult to prove a criminal case than a civil case. Recovering funds is a top priority, he said. "At the end of the day we want to make the taxpayer whole."
More generally, Jackson said, "physicians need to make medical referrals based on a patient’s needs, not based on bribes in exchange for referrals. The Federal healthcare system and patient care is greatly harmed by kickback arrangements like these. It is appalling when healthcare providers put their greed before the health and welfare of their patients. HHS OIG is committed to investigating these cases which can disrupt the integrity of the Federal healthcare system.”
Comment:
The HDL story is unlike any other story I have covered. Since my initial report about the DOJ investigation I have been contacted by a former HDL employee, an insurance company investigator, doctors, a phlebotomist, patients, and industry veterans who have long observed the rise (and now fall) of HDL. The stories from these quite different sources have been remarkably consistent. Patients are told by their doctors that they can get a comprehensive blood test to measure cardiovascular risk for which they will not be charged.
Let's not forget, as I pointed out in an earlier story, there is absolutely no evidence to support this sort of screening and, in fact, it can easily lead to all sorts of negative unintended consequences.) The doctors profit handsomely, and in some cases, obscenely, from the processing and handling fees for drawing blood. Here's how James De Lemos, a cardiologist at the University of Texas Southwestern Medical Center, put it:
"This is an eye opening story on many levels. it reminds us of the pervasive nature of financial conflicts of interest that occur within the context of general medical practice. Many of these conflicts, like the one uncovered here, feed into our patients’ natural desire for tests that provide more 'certainty' about their health status. Of course, many of these tests are of dubious value at best. It also reminds us that the bar should be much higher before laboratory tests enter wide clinical use—they should have demonstrated value beyond simply the ability to measure something."
Until recently many industry veterans wondered when, if ever, HDL would suffer the consequences of its behavior, which was an open secret within the clinical lab industry. They have been frustrated by the apparent lack of concrete action, at least until recently. But many believe that a financial settlement does not go far enough. Without criminal prosecution the message sent to industry is that settlements with the DOJ may be just the cost of doing business in the lab world today. The DOJ has an obligation to reclaim money gained through schemes like HDL's. But it also has an even greater obligation to send a strong message that the consequences of this sort of behavior will be greater than a slap on the wrist and a fine.
Previous Stories About HDL:
- Beyond Kickbacks: More Questions About Unnecessary Cardiovascular Biomarker Tests
- Way Beyond Kickbacks: More Serious Misconduct Alleged Against Medical Testing Company HDL
- Embattled HDL Laboratory CEO Resigns Amid Federal Investigation
- Doctor: You're Going To Have A Heart Attack! Patient: Your Tests Results Are Giving Me A Heart Attack!
- Cigna Sues Embattled HDL Laboratory For $84 Million
- Embattled Lab Nears Settlement With Government Over Kickbacks
- DOJ Settles With Embattled Lab, Criminal Charges For Executives Still Possible
