Lab billing fraud alleged at rural Oklahoma hospital

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Oklahoma City -- Just over two years ago, a small western Oklahoma hospital was within a week of financial collapse, when outsiders came to town with an offer that might have seemed too good to be true.

It was May 2016, and managers at Newman Memorial Hospital in Shattuck were preparing to announce they couldn't make payroll and would be closing their doors. Then they heard People's Choice Hospitals, a management company that bills itself as a turnaround specialist, was courting Sayre Memorial Hospital, about 75 miles to the south. Someone from Newman reached out to People's Choice, and less than 48 hours later, a team was in Shattuck with what seemed like a solution, according to a lawsuit Newman filed earlier this month.

The hospital's complaint said People's Choice told Newman's administration that it could save the hospital if Newman agreed to follow its plan to bring in more lucrative lab tests. People's Choice portrayed itself as a "white knight" dedicated to helping hospitals, the lawsuit said, but Newman later came to believe it had been tricked into an illegal billing scheme.

Newman and People's Choice settled out of court and declined to discuss their arrangement, but the story isn't over. Insurance company Aetna is taking People's Choice to court, alleging fraud that cost it millions.

Short-term gain

On the surface, laboratories in tiny rural hospitals seem like an odd place to look for a financial windfall. They typically run only a small number of tests each year. The advantage they have, however, is that insurance companies pay a relatively generous rate for the tests, to cover the basic costs of running a lab. Those high rates create a tempting source of funds, if hospitals could increase the number of tests they perform.

New ideas for lab arrangements and similar moneymaking ideas come up about every five years, said Brian Bauer, a lawyer specializing in health care with Hall, Render, Killian, Heath and Lyman in Michigan. Bauer spoke on the issue during a webinar delivered earlier this year to the National Rural Health Association.

The common denominator seems to be an outside organization coming in to manage laboratory services and generate more revenue, Bauer said. Organizations have been more careful about following regulations and avoiding kickbacks, but that doesn't mean they don't carry risks, he said.

In some cases, "they're well-written, but they're not necessarily written in the best interest of the hospital," he said.

The lab billing issue was at the heart of a dispute between Blue Cross Blue Shield of Oklahoma and four rural hospitals earlier this year. Blue Cross cut payments to Fairfax Community Hospital, Haskell County Community Hospital, Drumright Regional Hospital and Prague Community Hospital, alleging they had abused their lab arrangements. Administrators for some of the hospitals contended they were just seeking new customers.

Communities are highly invested in keeping their hospitals afloat, which makes lab billing arrangements appealing, Bauer said. Even if the outside companies charge relatively high fees, hospitals can still improve their financial positions -- until insurers figure out what's going on and cut what they'll pay rural hospitals, he said.

"Initially, in the short term, we're looking at big dollars," he said. "In some cases, the insurance companies have gone so far as to say they constitute fraud and demand a refund."

Millions at stake

In Newman's case, insurance giant Aetna has accused People's Choice of falsely claiming Newman was processing large numbers of blood and urine tests, when it actually sent the samples to other labs. The Aetna lawsuit states People's Choice officials went as far as to send in pictures of a state-of-the-art lab in another city, claiming they were taken at Newman.

Aetna says it lost $21.6 million on more than 10,000 bills for lab tests over 16 months. The insurer said it paid about $2,250 for some tests it believed were performed at Newman, when it would have paid as little as $120 for the same tests at a larger lab.

"The entire scheme is designed to use struggling rural hospitals as a front, so that defendants could share in reimbursements paid by Aetna and other payers to the rural hospitals," the complaint said. "Aetna agreed to pay higher rates to Newman in order to ensure that Aetna members in rural Oklahoma had access to quality health care, but defendants perverted this access arrangement to line their pockets with ill-gotten gains."

Derick Rodgers, who is representing People's Choice, said he is asking the court to toss out Aetna's suit.

"My clients deny the allegations and believe that they did nothing wrong," he said.

The lawsuit also alleges the labs People's Choice partnered with paid kickbacks to doctors to send blood and urine to them for testing. It included an email from Dr. Mike Murphy, who was affiliated with Texas-based labs, to Thomas Palmer, a California man who collected blood and urine samples for Fortis Diagnostics.

In it, Murphy allegedly asked, "Thomas, what amount do you think I could distribute next week to keep your docs and you happy?"

Murphy's attorney didn't respond to messages seeking comment. Michael Alfred, who is representing Palmer, said he denied taking kickbacks.

"Mr. Palmer has done nothing wrong and looks forward to proving his case at trial," he said.

If a judge agrees that the defendants committed fraud, Aetna could regain some of the money it paid out to People's Choice, said Bauer, the lawyer specializing in health care. So far, Aetna hasn't pursued any repayment from Newman, and alleges People's Choice and its partners took the vast majority of the lab revenue.

A small rural hospital doesn't have the assets to repay that much money, and forcing a small-town hospital to close would work against Aetna's members in that area, he said.

"Maybe I'm giving an insurance company too much credit, but I don't think they want to close a small rural hospital," he said.

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