HDL LogoBy Peter Galuszka

Critics of the American healthcare system have long cited hidden charges as one reason why costs are so high and why reform is needed.

So, it is disturbing to read a report on the front page of today’s Wall Street Journal that Health Diagnostic Laboratory, arguably the most successful of the biotechnology firms to come out of a much-touted research park in Richmond, is implicated in a possible scheme to pay kickbacks to doctors who use its blood testing services.

The Journal reports:

Until late June, HDL paid $20 per blood sample to most doctors ordering its tests — more than other labs paid. For some physician practices, payments totaled several thousand dollars a week, says a former company employee.

HDL says it stopped those payments after a Special Fraud Alert on June 25 from the Department of Health and Human Services, which warned that such remittances presented “substantial risk of fraud and abuse under the anti-kickback statute.

HDL Chief Executive Tonya Mallory told the Journal that her firm “rejects any assertion” that the company grew as fast as it did “as a result of anything other than proper business practices.”

Meanwhile, HDL has sent Bacon Rebellion this updated response.

Others say that paying doctors fees sets up the chances for fraud, especially in Medicare, one of HDL’s biggest markets, the Journal reports. Other testing firms, the Journal reports, pay doctors nothing for using their services.

This is bad news for what was Richmond’s Poster Child of successful high tech startups after years of flops at the Virginia Biotechnology Research Park. Founded in 2008 under Mallory’s leadership, HDL zipped up to $383 million in revenues with 41 percent of that coming from Medicare,” the Journal says.

Much of the issue seems to be related to how accurately and fairly to define what is merely drawing a patient’s blood and how much goes for “P&H” or processing and handling. A problem is that Medicare doesn’t pay any more than $3 for merely drawing blood. HDL has estimated that the “P&H” part is worth about $17. The firm claims it has special proprietary methods that give it an edge.

According to Virginia Business magazine, which named Mallory its person of the year last year:

Mallory, 48, founded HDL in the summer of 2009. Since then, it has grown from a kitchen-table business plan to a corporation earning more than $420 million in annual revenue, employing 750 people, processing 4,000 lab samples and running more than 60,000 lab tests each day. HDL has driven near constant construction at its home in downtown Richmond’s Virginia BioTechnology Research Park, where a $68.5 million expansion soon will triple the company’s footprint to 280,000 square feet.

Last year Mallory received the Ernst & Young National Entrepreneur of the Year award in the Emerging Company category. One of the country’s most prestigious business awards for entrepreneurs, it recognizes leaders who demonstrate innovation, financial success and personal commitment as they build their businesses.

The Journal, however, quotes several disgruntled employees and notes that Mallory had worked for a California firm called “Berkeley Heart Lab Inc,.” which began using tests called “biomarkers” which can predict future health problems by analyzing blood.

Mallory, who was raised in Hanover County and attended Virginia Commonwealth University, was senior lab-operations manager at Berkeley until she left for Richmond in 2008, the Journal says. Two Berkeley sales executives went with her and formed a company that ended up marketing HDL’s products.
Berkeley sued HDL, accusing it of stealing its business. HDL denied the allegations. HDL settled one case for $7 million, the Journal says, but other cases are pending.

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4 responses to “Richmond’s Tech Star in Kickback Scheme?”

  1. Peter brings up interesting issues but sometimes I can’t help but think that innovation and disruption take on many facets.

    I’d be the first to admit – the “innovation” and “gaming the system” might be close friends at times – like the Uber issue.

    having said that – paying doctors kickbacks for blood tests tickles the suspicion bone… In fact, anytime any company is paying doctors cash or in-kind services or gifts undermines the “innovation” claim.

    the funny thing about this is that it’s the Medicare boards that determine the price for services – not the free market.

    Even private companies use the Medicare numbers not the free market numbers.

    If Medicare says it costs$3 to draw blood – that’s the price…. that’s the price that private insurance uses when reimbursing.. as far as I can tell there is not a competing “free market” number even from folks not on Medicare – using their own money.

  2. Peter Galuszka Avatar
    Peter Galuszka

    Some of the disturbing things in the Journal report are that HDL is not really a homegrown company and that paying off doctors is not innovation.

  3. Peter – I guess I missed the significance of whether or not they were homegrown or not …

    but with Medicare – I knew someone whose sole business was teaching medical professionals about the Medicare diagnostic codes – so people would know how to maximize their reimbursements from Medicare and also what tests they could order that would be reimbursed. If you don’t put the correct codes on the on the claim – you won’t get reimbursed or the test itself will not be reimbursable.

    so looks like another company had figured out that a certain sequence of diagnostic codes would be reimbursable – and further that since they figured it out – they (I think) considered it proprietary….

    it’s turned out to be big business on knowing how codes can be strung together correctly for successful reimbursement. My friends classes would fill up almost immediately… when offered and they were pricey. Made a good living just telling others how to do those codes.

    Someone who really understands how Medicare does the codes could:

    1. – game the system (or maximize reimbursement depending on one’s viewpoint including the opinion of the Medicare Fraud group.

    2. – in some folks minds, innovate new/additional reimbursable options for treating people

    reading the article, apparently the kickbacks are not outright illegal….surprising ….

    the article also alluded to Quest and other companies like Labcorp putting satellite sites in the doctors office suites… I been to several doctors locally that do this – it’s a separate company located in the doctors offices.. and I wondered if they pay rent or it’s a free office because it’s mutually beneficial.

    You can see if there is a person working for the lab in the doctors office – who knows the reimbursable codes – and who can be directly consulted with that it would result in more reimbursable tests.

    is that a questionable practice ? probably not what Medicare likes, I suspect.

    here’s an example – actually written by Virginia for MedicAid reimbursement:

    Top 50 Billing Error Reason Codes With Common Resolutions


    you always write insightful articles that motivate further investigation!

  4. There’s a lot more to this story than the WSJ reported, and I can’t understand why the Richmond paper keeps publishing these vacuous stories. They must know what is really going on.

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