Arkansas Pathology Laboratory and Owners Agree to Pay $30 Million to Resolve Kickback and Medically Unnecessary Testing Allegations

The Department of Justice recently announced that Arkansas-based pathology lab Advanced Pathology Solutions, along with its management services organization and current and former owners, agreed to pay $30 million to resolve False Claims Act allegations involving alleged kickbacks and medically unnecessary pathology testing. The DOJ alleged that the defendants used financial arrangements with gastroenterology practices to induce referrals and submitted claims to federal healthcare programs for medically unnecessary testing.

The settlement is another reminder that laboratory relationships with physician practices remain a major focus of federal healthcare enforcement. Although the facts of every case are different, the government’s theory in this matter should get the attention of laboratories, physician practices, management services organizations, and anyone involved in structuring ancillary service arrangements.

According to the government’s complaint, APS built its business around what it called a “lean lab” model. Under that model, APS partnered with gastroenterology practices to create limited-purpose pathology laboratories inside the practices’ own offices. Those in-office labs could perform the technical component of certain pathology services, such as preparing slides and applying routine and special stains. The slides would then be sent to APS’s laboratory for pathologist review and interpretation.

The government alleged that this model allowed the gastroenterology practices to bill Medicare and other payors for the technical component of the testing, while APS billed for the professional component and, in many cases, additional testing. The government alleged that APS marketed the model to gastroenterology practices as a way to generate significant “passive income.” APS allegedly prepared personalized projections showing practices how much revenue they could make by hosting a lean lab rather than sending biopsy specimens to an outside lab that would perform the services globally. The government alleged that this arrangement violated the Anti-Kickback Statute (AKS).

The government further alleged that APS provided valuable goods and services to the practices at little or no cost. Those alleged benefits included assistance with lab design and buildout, medical director services, histotechnician supervision and coverage, lab inspection support, training, EMR integration, specimen storage, supplies, equipment maintenance, and other operational support. Although APS allegedly charged a one-time consulting fee and a monthly medical director fee, the government contended those amounts did not reflect the fair market value of what APS actually provided.

The complaint also alleged that APS’s lean lab model created incentives for overutilization. Because the gastroenterology practices could bill for the technical component and APS could bill for the professional component and additional testing, the government alleged that both sides benefited financially when more stains and tests were ordered. The medical necessity allegations focused heavily on special stains and immunohistochemical stains. According to the complaint, a routine H&E stain is often sufficient for a pathologist to review a biopsy slide and determine whether additional testing is needed. The government alleged that APS nevertheless directed lean lab personnel to prepare certain special stains automatically, before a pathologist reviewed the routine H&E slide and before there was any individualized determination that the additional stains were medically necessary.

The DOJ also alleged that APS caused claims to be submitted for medically unnecessary testing. Specifically, the government alleged that APS directed lean lab personnel to automatically order certain “special stains” before a pathologist reviewed the routine hematoxylin and eosin stain to determine whether additional testing was needed. The government further alleged that APS ordered additional confirmatory immunohistochemical testing that was not medically necessary in many cases.

These allegations are typical of how the government often links kickback theories with medical necessity theories. In many healthcare fraud cases, the alleged kickback is not treated as a standalone issue, but the government instead argues that the financial relationship influenced utilization, increased testing volume, and caused federal healthcare programs to pay claims they otherwise should not have paid.

The settlement also resolved separate allegations involving epidermal nerve fiber density testing. According to DOJ, APS and its CEO allegedly paid an individual a 4% commission on payments APS collected for referred ENFD testing, which the government contended violated the AKS and resulted in false claims.

As part of the settlement, APS entered into a five-year Corporate Integrity Agreement with HHS-OIG. The CIA requires, among other things, a compliance program, training and education requirements, auditing and accountability provisions, and review of physician referral relationships.

There are several practical takeaways for providers and laboratories.

First, arrangements involving in-office laboratories, management services, technical component billing, or shared pathology workflows should be carefully reviewed before implementation. These arrangements may be lawful when properly structured, but they can create significant risk if the economics of the arrangement depend on referral volume or if the arrangement gives a referring practice something of value in exchange for sending work to a particular laboratory.

Second, medical necessity protocols matter. Standing orders, automatic testing protocols, reflex testing, and confirmatory testing should be grounded in clinical judgment and supported by documentation. The government’s allegations focused heavily on the claim that additional testing was ordered before individualized clinical review occurred. That is the kind of fact pattern that can create serious FCA exposure, particularly when the testing is high volume and reimbursed by Medicare or Medicaid.

Third, physician practices should not assume that compliance risk belongs only to the outside laboratory. The DOJ noted that this settlement followed a separate $4.75 million settlement with an Atlanta-based gastroenterology practice.

Fourth, individual accountability remains a theme. This settlement involved not only corporate entities, but also current and former owners. That is consistent with the government’s broader focus on holding individuals responsible where it believes they personally participated in, approved, or benefited from allegedly improper arrangements.

Finally, this case is a reminder that whistleblowers continue to drive healthcare FCA enforcement. DOJ stated that the case followed three whistleblower lawsuits filed under the qui tam provisions of the False Claims Act. Those provisions allow private parties to sue on behalf of the United States and potentially receive a portion of the recovery. Former employees, competitors, contractors, billing personnel, and business partners often have access to the kinds of internal facts that can form the basis of a government investigation.

GWB represents healthcare providers in connection with government investigations and False Claims Act litigation. If you need assistance with such a matter, please contact us.