DOJ Reaches Settlement with Laboratory Over Commission-Based Compensation Arrangements with Independent Contractors, Medical Necessity

Earlier this month, the U.S. Department of Justice (“DOJ”) announced a $5.9 million FCA settlement resolving allegations that Genotox Laboratories Ltd., a toxicology and pharmacogenetics testing laboratory: 1) violated the Anti-Kickback Statute (“AKS”), and thereby caused the submission of false claims, through commission-based compensation arrangements with its independent contractors, and 2) submitted claims to federal healthcare programs for unnecessary drug tests.  In parallel proceedings, the U.S. Attorney’s Office for the Western District of Texas and Genotox entered into an eighteen-month Deferred Prosecution Agreement to resolve a criminal investigation into the same conduct.  The settlement highlights DOJ’s ongoing interest in pursuing independent contractor arrangements that do not fit within a safe harbor to the AKS, where such relationships are also accompanied by conduct that traditionally attracts enforcement scrutiny, such as submission of claims for medically unnecessary services.

The investigation arose from a qui tam complaint filed in the Southern District of Georgia, alleging that Genotox violated the AKS and the Eliminating Kickbacks in Recovery Act, which prohibits, across all payor types, the paying or offering of any remuneration to induce referrals to laboratories.  See U.S. ex rel. Alex Digiacomo v. Matthew F. McCarthy, No. 2:20-cv-00097-LGW-BWC (S.D. Ga. 2020).  The settlement resolves claims solely based on the alleged AKS violations; specifically, from 2014 to 2020, Genotox’s independent contractors allegedly marketed Genotox’s laboratory services to providers and were compensated through commission payments calculated based on a percentage of the revenue generated by the tests “arranged” or “recommended” by those independent contractors.  The settlement also resolves claims arising from allegations that the laboratory submitted claims for tests that were not reasonable and necessary, including through the use of “blanket orders” for all patients in a healthcare provider’s practice.

The settlement reinforces DOJ’s ongoing interest (as discussed here) in using the breadth of the AKS’s prohibition to strengthen a case that incorporates other alleged misconduct—here, the lack of medical necessity for certain drug screen tests.

Given the increased vulnerability of commission-based independent contractor arrangements under the FCA, life sciences companies with such arrangements should consider whether they are consistent with the company’s current risk-tolerance levels and confirm that compliance guardrails are in place to address any concerns that such arrangements might incentivize specific conduct known to increase enforcement scrutiny, such as promoting medically unnecessary items or promotional statements that are potentially misleading.

A copy of the Genotox settlement agreement is available here.

This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.