US government points finger at HDL founder

Health Diagnostic Laboratory CEO Tonya Mallory, pictured at the ribbon-cutting ceremony at HDL’s new headquarters. Photos by Burl Rolett.

The feds got what they wanted out of HDL. Now they’re going after the former face of the embattled blood testing firm.

Tonya Mallory, the co-founder and former CEO of downtown-based Health Diagnostic Laboratory was sued Friday by the United States, which alleges that her involvement in a massive kickback scheme caused the federal government to pay hundreds of millions of dollars in improper reimbursements from Medicare and Tricare.

Three whistleblower cases filed several years ago in South Carolina led to a federal investigation, which spurred Friday’s 48-page lawsuit that names Mallory and four other defendants.

Also named as defendants in the suit are BlueWave Healthcare Consultants, HDL’s former third-party sales contractor; BlueWave’s co-founders Floyd Calhoun Dent and Robert Bradford Johnson; and Berkeley Heartlab, which had employed Mallory, Dent and Johnson before the three founded their respective companies.

The government’s case centers on kickback payments – which the defendants called process and handling fees – paid to physicians by HDL, California lab company Singulex and Berkeley Heartlab to encourage them to use those labs’ services. The government claims those payments violate the False Claims Act and anti-kickback statutes.

The lawsuit alleges that the defendants between them paid $80 million in “improper” process and handling fees to doctors. That resulted in false claims to government healthcare programs that ultimately sent back $500 million in reimbursements to HDL, Singulex and Berkeley, according to the lawsuit.

The government claims that BlueWave paid physicians $68 million in kickbacks on behalf of Mallory and HDL between 2010 and 2014.

And between 2009 and 2014, HDL collected $333 million from Medicare and Tricare, the two federal programs mentioned in the case.

Read the lawsuit (PDF)

Mallory resigned abruptly as CEO last year.

HDL and Singulex were not named as defendants in the case. They each entered into settlements with the federal government earlier this year to resolve a similar kickback inquiry. HDL agreed to pay $47 million as part of that settlement.

The allegations could force Mallory to pay millions of dollars in civil penalties and are the latest chapter in the HDL saga, in which the once fast-growing company and all-star of the Richmond startup scene became a bankrupt firm on the verge of being sold off in an auction.

Mallory, a VCU grad, founded HDL in 2008 after leaving Berkeley. The company became a sudden success story that, publicly, was built on the benefits its blood tests offered in predicting ailments like heart disease and diabetes.

It quickly grew its Richmond lab while BlueWave used its army of independent sales contractors to peddle HDL’s tests. Mallory became a darling of the Richmond business community, speaking frequently at business events and winning Virginia Business magazine’s Business Person of the Year award.

But behind the scenes, according to the government’s case, Mallory, Johnson and Dent knowingly and willfully had worked together to develop the kickback ploy after learning of P&H fees at their previous employer.

The government’s position revolves largely around the relationship between the three, who worked together at Berkeley, a California-based lab that has allegedly been paying P&H fees since 1999.

All three left Berkeley between 2008 and 2009, the suit states, and started their respective companies with a model that would beat Berkeley at its own game.

When the trio broke away from the company, Berkeley had been paying about $7.50 in P&H fees, the case states. HDL paid $20. That difference allowed HDL to lure “a significant amount of business” from Berkeley to HDL and Singulex. By 2009, Singulex had hired BlueWave as a sales contractor, only two months after HDL.

Mallory, Dent and Johnson also allegedly induced physicians to order medically unnecessary tests and even tested blood samples with no medically valid reason to do so, in further violation of the False Claims Act.

Mallory, Johnson and Dent “could afford to offer such high processing and handling fees,” the suit claims, “because Defendants promoted the ordering of large panels of tests, many of which were medically unnecessary, which generated substantially more revenue than ordering only those tests that were medically necessary for each patient.”

HDL is trying to lease out some of its downtown office space to VCU.

Mallory, the suit alleges, at one point ordered her staff to perform a genetic test on thousands of samples “despite the fact that (the test’s) sole utility is detecting whether a patient has an extremely rare gene that makes the drug Plavix ineffective.” That test was performed even on patients who were not taking that particular drug.

And beyond what it paid to physicians, HDL paid commissions to BlueWave that were also kickbacks, the government claims.

In return for samples being referred to its lab, HDL paid BlueWave $74.37 million in commissions in 2012, then $67.1 million in 2013. Those commission payments, the government argues, “were nothing more than thinly disguised kickbacks.”

Mallory, the suit claims, was fully aware of the illegality of her actions.

“Even though Defendants claimed that the processing and handling payments were just meant to reimburse the (physician’s) practice for the time spent processing and handling the blood samples, Mallory authorized and HDL paid some physicians directly rather than the physicians’ practice,” the case alleges. “HDL also mailed checks directly to a physician’s house rather than to his practice.”

Doctors who wanted more P&H fees from HDL were also encouraged to order tests from Singulex, which paid $13 in P&H fees, the case claims. One representative allegedly told the doctor that more money was available by ordering a Singulex test, “without even explaining the Singulex testing to him.”

“Mallory, Johnson, and Dent were personally aware of this practice and encouraged the sales representatives to do it,” the suit states.

Mallory declined to comment when reached by phone Monday. Her attorney, Chris Hall of the law firm Saul Ewing, said in a prepared statement: “Ms. Mallory … will vigorously challenge the government’s evidence in court.”

The Department of Justice, which took over the case after intervening in the previous whistleblower suits, released a prepared statement in response to requests for comment, stating that Friday’s suit “reflects the department’s on-going commitment to ferret out alleged improper Medicare and TRICARE billings, including claims for medically unnecessary tests by health care companies looking to increase their profits at the expense of taxpayers.”

HDL spokesman Douglas Sbertoli commented on the suit Monday, saying, “While many of our competitors remain subject to that investigation, we are pleased to have put this matter in our rearview mirror.” He referenced the fact that HDL settled with the federal government “and admitted no wrongdoing or liability.”

The government alleges five counts against the defendants, including presentation of false claims, presentation of false statements material to false claims, conspiracy to present false claims, payment by mistake of fact and unjust enrichment.

The charges against Mallory, Johnson and Dent are civil rather than criminal, which is not uncommon when a claim originates from a whistleblower lawsuit.

The lawsuit was filed in federal court in South Carolina, where three whistleblowers had initially brought claims against Mallory, Dent and Johnson, along with HDL, BlueWave, Berkeley and Singulex, in 2011.

The government’s suit does not specify how much it believes it is owed in damages. That number may be determined during a trial, the suit states, and would also include civil penalties between $5,500 and $11,000 for each violation of federal law.