Employee’s Refusal to Discuss Fee Waivers in Email Raised Reasonable Inference Company Knew Conduct Was Improper; United States District Court for the Northern District of California No. 16-cv-02043-TSH, U.S. ex rel. STF LLC v. Crescendo Bioscience Inc.

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The district court denied the defendants’ motion to dismiss a complaint alleging violations of the Anti-Kickback Statue and FCA. While the relator did not identify specific physicians who had received improper payments, it provided sufficient details of a scheme to overpay physicians for handling blood samples, which was intended to induce referrals for blood test work. Similarly, the complaint alleged enough details of a scheme to show how physicians would benefit from the defendants’ waivers of patient co-pay and deductible fees. The court also noted that in certain cases, a provider who routinely waives these fees could be liable under the FCA, even without evidence of a direct agreement with physicians. Finally, the court found that a salesperson’s refusal to discuss the details of the co-pay arrangement over email suggested the defendants knew the conduct may be improper and took steps to hide it.

Plaintiff-Realtor STF LLC sued Crescendo Bioscience Inc. and Myriad Genetics Inc. under the federal and California False Claims Act and the California Insurance Fraud Prevention Act. The defendants moved to dismiss.

According to the complaint, Crescendo conducts blood testing for auto-immune and inflammatory diseases for rheumatologists. Under several theories of liability, the complaint alleged the Crescendo and Myriad paid physicians above-market “processing” fees for drawing blood, in order to coerce them into shipping the samples to Crescendo’s California lab for processing. Second, the complaint alleged the defendants agreed to cap co-pays and deductible fee for those physicians’ patients at $25 and to not send the patients to collections when and if they failed to pay. According to the relator, these schemes encouraged doctors to refer patients for unnecessary testing, to refer additional patients to Crescendo, and to promise patients they will not be charged more than $25 or sent to collections.

More specifically, STF alleged Crescendo paid physicians a processing fee of $15 per blood sample, which the relator alleged is significantly higher than fair market value, which is set at $3 for Medicare reimbursement purposes. Crescendo also submitted the physicians’ “invoices” directly to Myriad for payment. Because the scheme improperly induced physicians to send blood samples to Crescendo for testing, the relator alleged that each claim for reimbursement for lab tests constituted a false claim to Medicare.

The relator also alleged that Crescendo improperly capped co-pay and deductible fees for the patients referred by these physicians. Though in many cases, the fees may amount to several hundred dollars, Crescendo capped the charges at $25 regardless of a patient’s responsibility and agreed not to send patients to collections, again to induce physicians to refer additional patients, especially government-pay patients.

While the arrangement directly benefits patients, STF asserted that it also benefited physicians. STF also argued that Crescendo attempted to conceal this arrangement by not discussing it in email communications, but used phone text messaging to discuss the co-pay maximums with physicians.

In their motion to dismiss, the defendants argued that STF failed to adequately allege they intended to induce referrals via the processing fee scheme. However, the court noted the complaint specifically stated the defendants paid more than five times the fair market value for sample processing, which was intended to induce physicians to use their testing services. The court found this sufficient.

Next, the defendants asserted that STF mistakenly assumed that any payment greater than $3 exceeds the fair market value for blood sample processing, and therefore it could not demonstrate that the $15 payments were an improper kickback. The defendants argued the payments covered collection, processing, packaging, and handling, not merely collection. Because the relator failed to allege that the $15 payment exceeded the fair market value of all the services provided, the defendants argued STF failed to allege inducement.

The court disagreed. First, the court noted that CMS has found that the Anti-Kickback Statute can be implicated whenever a clinical lab pays a physician for services, even if that payment doesn’t exceed fair market value. Neither a legitimate business purpose nor fair market value payment will legitimize a payment if there is also an illegal purpose, such as inducing referrals.

In its complaint, the relator alleged that Crescendo pays physicians a “processing” fee of $15 per SST, regardless of how many tubes a physician includes in a shipment or the number of patients from whom blood is drawn. If true, that allegation suggested the arrangement might implicate the FCA. More importantly, the allegation was coupled with the assertion of the co-pay cap scheme.

Next, the defendants argued STF failed to satisfy the particularity standard, because the complaint failed to allege a single specific payment amount, a single physician who received a payment, an employee of Crescendo or Myriad who were involved in the scheme, or the date any payment was made.

However, the court found STF alleged numerous details of the scheme, including how contracts were entered into and how those agreements worked. STF named a Crescendo employee who welcomed physicians into the processing fee arrangement and quoted from the letter. The relator also alleged how physicians would be paid, when it noted that Crescendo would create invoices on physicians’ behalf and send them to Myriad for payment. While the relator did not name a particular physician or transaction, the court found the pleading sufficiently detailed to give the defendants notice of the misconduct that was alleged to be fraudulent.

Next, the defendants argued STF had not alleged scienter, because it had not shown they knew the alleged conduct violated the AKS. The court disagreed, explaining that Rule 9(b) allows for scienter to be pled generally. The court noted the complaint states that the defendants knew the arrangements were illegal, and that they took action to cover up the conduct because they knew that other entities had been held liable for the same conduct. The court found this sufficient at this stage.

Further, the court noted that the facts alleged in the FAC support a plausible inference that the defendants were paying processing fees to physicians in order to induce them to refer patients, which can be the basis for a violation of the FCA, whether or not a party specifically intended to defraud the government. Furthermore, the FAC alleged that at least one of Crescendos’ salespeople knew that she was not supposed to discuss the waiving of patient co-pay fees in an email. The court held the relator had created a reasonable inference that the defendants knew that their conduct might be unlawful and were taking steps in response.

Next, the defendants moved to dismiss the alleged patient co-pay and deducible scheme, arguing STF failed to show a connection between the alleged fraudulent practice and the inducement of referrals. They also alleged STF did not show how physicians benefited from this program.

However, the court found STF alleged both. STF alleged the defendants told physicians that they could inform their patients that they would never be responsible for more than $25 for co-pays and deductibles for their blood work, regardless of what they owed. The court found it reasonable to infer that a patient would be pleased to know that fees would be waived and would be more likely to return to a physician who could make such a promise. Regardless, in certain cases, a provider that routinely waives Medicare copayments and deductibles may be held liable under the anti-kickback statute. Thus, whether or not STF alleged why routine waivers of co-pays or deductibles might run afoul of the AKS, STF managed to raise an inference that they do.

The defendants again argued this claim was not pled with particularity, first noting the complaint did not assert the details of any agreement requiring them to limit fees in exchange for referrals. However, the court found the complaint did assert that Crescendo agreed not to sent patients to collections, and alleged this violated the FCA. Further, the court found the complaint asserted that the schemes encouraged physicians to make referrals to Crescendo, not that physicians were required to do so.

Again, the defendants argued that STF did not name any physician who allegedly benefited from this scheme, but the court found this not fatal to the complaint, as the relator alleged the particulars of the scheme and identified the timeline and at least one employee who was involved. The defendants challenged the relator’s pleading of scienter, but the court again noted that at least one employee declined to discuss the arrangements in writing in email, which raised the logical inference that she knew the conduct was improper. The defendants’ motion regarding the state claims failed for identical reasons.

FCA - STF v Crescendo