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Allstate Insurance Co. v. Total Toxicology Labs, LLC

United States District Court, E.D. Michigan, Southern Division

August 23, 2017



          Denise Page Hood Chief, U.S. District Judge.

         I. BACKGROUND

         On June 16, 2016, Plaintiffs Allstate Insurance Company and Allstate Property and Casualty Insurance Company (collectively “Allstate”) filed a Complaint against Defendants Total Toxicology Labs, LLC (“Total Toxicology”), Martin Bluth (“Bluth”), Scott P. Zack (“Zack”), and Corey J. Mann (“Mann”) alleging that they conspired to defraud and defrauded Allstate by perpetrating a healthcare billing fraud scheme. (Doc # 1) The Complaint includes the following seven counts: Violation of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. § 1962(c) against Bluth, Zack, and Mann (Count I); Violation of RICO, 18 U.S.C. § 1962(d) against Bluth, Zack, and Mann (Count II); Common Law Fraud against all Defendants (Count III); Civil Conspiracy against all Defendants (Count IV); Payment Under Mistake of Fact against Total Toxicology (Count V); Unjust Enrichment against Total Toxicology (Count VI); and Declaratory Relief Pursuant to 28 U.S.C. § 2201 against Total Toxicology (Count VII).

         On October 27, 2016, Defendants filed a Motion to Dismiss. (Doc # 18) On November 14, 2016, Allstate filed a Response. (Doc # 21) Defendants filed a Reply on December 5, 2016. (Doc # 23) Allstate filed a Motion to Strike Reply on December 6, 2016. (Doc # 24) Defendants filed a Motion for Extension of Time to File Reply as well as a Response to Allstate's Motion to Strike also on December 6 2016. (Doc # 25; Doc # 26) Allstate then filed a Response to Defendants' Motion for Extension of Time to File Reply also on December 6, 2016. (Doc # 27) The Court held a hearing on January 18, 2017. Allstate filed a Notice of Supplemental Authority on March 8, 2017. (Doc # 30)

         The facts as alleged in the 88-page Complaint, with an additional 520 pages of attached exhibits, are as follows. Total Toxicology is a clinical urine drug testing laboratory servicing referring providers. (Doc # 1, Pg ID 1-2) Bluth is Total Toxicology's Chief Medical Officer. Id. at 2. Zack is Total Toxicology's President and Chief Financial Officer. Id. Mann manages Total Toxicology. Id. at 3. According to the Complaint, Total Toxicology purports to provide urine drug testing services to doctors who treat patients with chronic pain in order to ensure that patients are complying with their medication regimes, and/or to ensure that patients are not abusing prescription medications and/or illicit drugs. Id. at 2. Allstate alleges that Total Toxicology and its managers, Bluth, Zack, and Mann, conspired to and engaged in a healthcare billing fraud scheme to provide unnecessary urine drug testing and to submit false and fraudulent documentation to Allstate for payment of No-Fault benefits for patients who were involved in motor vehicle accidents and were eligible to obtain Personal Insurance Protection (“PIP”) Benefits under Michigan's No-Fault Act, M.C.L. §§ 500.3105, 500.3107(1)(a). Allstate claims to have paid over $15, 802.00 to Total Toxicology for allegedly fraudulent urine drug testing on specimens collected from patients insured under Allstate policies. Id. at 7-8.

         The Complaint describes a scheme involving hundreds of acts of mail fraud containing fraudulent claims that occurred in 2015 and 2016. Id. at 70. Attached to the Complaint is a chart highlighting representative examples of the mail fraud, detailing 121 acts of alleged mail fraud from February 4, 2015 to March 21, 2016. (Doc # 1-35) The chart includes claim numbers, patient initials, dates, senders, and contents of the mailings. Id. Also attached to the Complaint is another chart listing each Current Procedural Terminology (“CPT”) Code billed for each claim at issue. (Doc # 1-7) This chart includes claim numbers, patient initials, dates of service, CPT codes billed, CPT code descriptions, and amount billed for each CPT code. Id. The Defendants allegedly continue to submit misrepresentation-laden bills and medical records to Allstate through the U.S. Mail, and Allstate's damages continue to accrue. (Doc # 1, Pg ID 72)

         According to Total Toxicology's website, “liquid chromatography tandem mass-spectronomy (LC-MS/MS), is a more specific method [than in-office, qualitative urine drug testing], and returns a quantitative analytical result. These results provide precise identification of all drugs and metabolites present or absent.” (Doc # 1-8, Pg ID 387) The Complaint alleges that Total Toxicology's most prevalent urine drug testing methodology, LC-MS/MS, consists of a single test that identifies all of the drugs present. (Doc # 1, Pg ID 13) The cost of performing this single test is the same regardless of how many drugs the referring provider requests that Total Toxicology test for. Id. at 15. According to the Complaint, Defendants push referring providers to refer for testing of as many drugs as possible per specimen regardless of need, since each subsequent drug test ordered after the first drug generates purely additional profits for Defendants. Id. at 16.

         Reimbursement claims submitted to Allstate contain CPT codes that are published annually by the American Medical Association to facilitate the efficient processing of healthcare charges by insurance carriers. Id. The CPT Code Book details which urine drug testing CPT codes are applicable for different types of urine testing. Id. at 17. The Complaint alleges that Total Toxicology billed Allstate for services not rendered every time that it sought reimbursement for CPT code 83789 because (1) its LC-MS/MS methodology does not meet the criteria for the testing methodology encompassed by that CPT code, and (2) that CPT code can only be billed once per specimen. Id. at 18-20. Allstate further alleges that Total Toxicology almost always billed Allstate for multiple units of CPT code 83789 related to a single urine specimen, falsely indicating that multiple tests were performed when in fact no testing was performed that warranted billing that CPT code. Id. at 20.

         According to the Complaint, Bluth, Zack, and Mann maintained improper referral relationships with physicians at Mendelson Orthopedics (“Mendelson”), an orthopedic clinic surgery practice, in order to generate baseless and unnecessary referrals to Total Toxicology. Id. at 21. Physicians associated with Mendelson were responsible for the referral of 77% of Total Toxicology's patients who were insured by Allstate. Id. Zack and Mann allegedly have several connections with Mendelson and its physicians. Id. Mendelson owns an MRI clinic which Zack and Mann manage, sharing in the profits. Id. Zack, Mann, and the owners of Mendelson also share interests in an ambulatory surgical center. Id. at 22. Physicians at Mendelson allegedly submit urine specimens to Total Toxicology as a matter of course, and without regard for necessity. Id. Defendants are allegedly aware of the baseless and unnecessary nature of these referrals.

         Total Toxicology allegedly billed Allstate for unnecessary confirmatory urine drug testing of expected, negative point-of-care screening results, in contravention of the standard of care for clinical laboratories, for almost every claim at issue. Id. at 23-24, 27. According to the Complaint, confirmatory testing of a negative screening result is only appropriate if the referring provider determines that it is necessary after taking into consideration all known clinical facts for the specific patient at the time that the sample is collected. The Complaint alleges that no provider can make a blanket determination across all patients and all dates of service as to what constitutes reasonable confirmatory urine drug testing. Id. at 26. The Complaint acknowledges that referring providers ordered the confirmatory urine drug testing. However, Allstate claims that Zack and Mann knowingly used their relationship with Mendelson to generate these unnecessary referrals, and that Bluth falsely attested to the necessity of the urine drug testing. Id. at 28.

         The Complaint details several exemplar claims in support of these allegations, and Allstate attaches supporting documentation for each exemplar claim. For example, W.R., a patient of Mendelson, gave a urine sample to a Mendelson physician. Id. at 28. W.R.'s medical record indicates that there were no medications currently prescribed to W.R. and that his urine was appropriate. Id. Mendelson billed Allstate for point of care urine drug screening, the results of which indicated that the urine sample tested negative for each drug tested. Id. at 29. Mendelson nevertheless submitted a requisition form to Total Toxicology requesting a comprehensive panel of urine drug testing, also indicating on the requisition form that each medication or drug was tested via point of care screening and reported as negative, and that W.R. was not on any prescribed medication. Id. Total Toxicology then performed unnecessary confirmatory testing of the expected negative screening results, and billed Allstate through the U.S. Mail, indicating eleven CPT billing codes for drugs that had already been tested for by the referring provider and found to be negative. Id. at 29-30. Allstate was billed $995.85 relative to those eleven CPT codes. Id. at 30. Allstate was also billed for several other CPT codes corresponding to allegedly unnecessary testing pursuant to a predetermined comprehensive panel in contravention of the standard of care for clinical laboratories. Id. Bluth submitted and signed a medical necessity letter to Allstate to falsely support the charges for W.R.'s urine drug testing. Id. at 31.

         Allstate further claims that Total Toxicology performed quantitative testing in hundreds of instances in which referring providers did not perform point of care screening before sending specimens to Total Toxicology. According to Allstate, Total Toxicology should have performed presumptive/qualitative testing instead, pursuant to the standard of care for clinical laboratories. The Defendants' decision to perform quantitative testing in the first instance resulted in unnecessary testing. According to the Complaint, Total Toxicology did not perform presumptive/qualitative testing, which is reimbursed at a lower rate than quantitative testing, before March 2016 despite having the capacity to do so. Id. at 40.

         Allstate also alleges that Defendants' procedures and forms promote unnecessary urine drug testing. According to the Complaint, Total Toxicology's requisition form allowed providers to select a predetermined custom profile or panel preference that mandated that the full slate of drugs would be tested every time the provider referred a urine sample to Total Toxicology-without any patient-specific consideration. Id. at 45. Total Toxicology's requisition form did not allow referring providers to remove specific drugs from the selection of panel preferences, but rather only to choose additional tests. Id. Further, the referring provider's custom profile on file with Total Toxicology, and on which Total Toxicology has based testing, is necessarily not patient-specific because the custom profile is decided before the patient is known to the referring provider, at the beginning of the provider's relationship with Total Toxicology. Total Toxicology billed Allstate for urine drug testing that was ordered pursuant to a previously-filled custom profile or panel preference for 90% of the patients at issue in the Complaint. Id. at 47.

         The Complaint cites a U.S. Department of Health and Human Services compliance publication, attached as Exhibit 23. It states: “The following compliance program guidance is intended to assist clinical laboratories in developing effective internal controls that promote adherence to applicable Federal and State law, and the program requirements of Federal, State, and private health plans.” 63 Fed. Reg. 163 (Aug. 24, 1998) (Doc # 1-26, Pg ID 536). According to the guidance, a laboratory “should construct the requisition form to ensure that the physician or other authorized individual has made an independent medical necessity decision with regard to each test the laboratory will bill.” Id. at 538. According to Allstate, instead of following this guidance and other guidelines, Total Toxicology's requisition form is designed to increase the number of tests performed and ignores considerations of medical necessity. (Doc # 1, Pg ID 44) Nevertheless, Bluth submitted letters to Allstate attesting to the medical necessity of the urine drug testing. Id. at 46; Doc # 1-4.

         Allstate further alleges that Defendants added diagnosis codes to falsely support their bills for urine drug testing. Almost every patient at issue in the Complaint was diagnosed by the referring provider with “chronic pain due to trauma” or another pain diagnosis, identified by the standard diagnosis codes ICD-9 or ICD-10. However, Total Toxicology submitted bills to Allstate that included v58.69, a diagnosis code that indicates a patient was diagnosed with long-term (current) use of other medications, and Z79.899, a diagnosis code that indicates a patient was diagnosed with other long-term (current) drug therapy. (Doc # 1, Pg ID 48) Although a diagnosis can only be determined by a patient's treating physician, Defendants allegedly added false diagnoses for patients they never treated, solely because they believed the additional diagnoses would increase the likelihood that Allstate would pay their claims. Id. at 49. Exhibit 25 attached to the Complaint lists over 70 instances when Total Toxicology allegedly submitted bills to Allstate containing false v58.69 or Z79.899 diagnoses. (Doc # 1-28) The Complaint also details several exemplar claims, and Allstate attaches supporting documentation for each exemplar claim.

         Allstate alleges that Defendants engaged in two additional fraudulent billing practices. According to the Complaint, Defendants knowingly, intentionally, and routinely added billing codes that were encompassed by other more inclusive codes already billed (specifically adding CPT codes 83986 and 84311 for the same date of service as CPT code 81003, an inclusive code that already covered codes 83986 and 84311). Id. at 58-59. In addition, although Defendants perform only one procedure on each specimen they receive, Defendants knowingly and intentionally billed for multiple units of code G6056 per procedure, which by definition can only be billed once per procedure. Id. at 60. The Complaint lists 6 instances of billing multiple units of this code. Id. at 61.

         II. ANALYSIS

         A. Standard of Review

         Rule 12(b)(6) of the Federal Rules of Civil Procedure provides for a motion to dismiss for failure to state a claim upon which relief can be granted. Fed.R.Civ.P. 12(b)(6). This type of motion tests the legal sufficiency of the plaintiff's complaint. Davey v. Tomlinson, 627 F.Supp. 1458, 1463 (E.D. Mich. 1986). When reviewing a motion to dismiss under Rule 12(b)(6), a court must “construe the complaint in the light most favorable to the plaintiff, accept its allegations as true, and draw all reasonable inferences in favor of the plaintiff.” Directv Inc. v. Treesh, 487 F.3d 471, 476 (6th Cir. 2007). A court, however, need not accept as true legal conclusions or unwarranted factual inferences.” Id. (quoting Gregory v. Shelby Cnty., 220 F.3d 443, 446 (6th Cir. 2000)). “[L]egal conclusions masquerading as factual allegations will not suffice.” Edison v. State of Tenn. Dep't of Children's Servs., 510 F.3d 631, 634 (6th Cir. 2007). As the Supreme Court has explained, “a plaintiff's obligation to provide the ‘grounds' of his ‘entitle[ment] to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do. Factual allegations must be enough to raise a right to relief above the speculative level… .” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007) (citations omitted); see LULAC v. Bresdesen, 500 F.3d 523, 527 (6th Cir. 2007). To survive dismissal, the plaintiff must offer sufficient factual allegations to make the asserted claim plausible on its face. Ashcroft v. Iqbal, 556 U.S. 662, 663 (2009). “A claim has facial plausibility when the pleaded factual content allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. The court primarily considers the allegations in the complaint, although matters of public record, orders, items appearing in the record of the case, and exhibits attached to the complaint may also be taken into account. Amini v. Oberlin Coll., 259 F.3d 493, 502 (6th Cir. 2001).

         B. RICO Claims

         Allstate alleges violations under RICO, 18 U.S.C. §§ 1962(c) and (d). These sections provide as follows.

(c) It shall be unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a ...

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