Skip to main content

Execs guilty in drug-test kickback scheme

November 14, 2012

The crisis at Massachusetts-based Calloway Laboratories, a crisis highlighted by news of a state Medicaid fraud investigation in July 2010, a $20 million state settlement in March, and the lab’s acquisition by Boston-based private equity firm Ampersand in September, may now be passing with the October 22 guilty pleas of two departed Calloway Labs senior executives.  

With its acquisition by Ampersand set to close before yearend, Calloway Labs may at last “turn the page” on its recent troubles, but nationally, questions about the sometimes dubious ethics involved in the growing business of urine drug testing remain.

Unnecessary tests get AG’s attention

Patients who need drug tests are big business. So big, in fact, that the labs that test their urine for drugs are doing everything they can to maximize the profits. But in Massachusetts, Attorney General Martha Coakley has spent years investigating clinical laboratories that are bilking MassHealth – the state’s Medicaid program – for unncessary drug tests, which are done because people with access to patients—including some addiction treatment providers and sober home operators—take bribes in exchange for sending those patients to a particular laboratory.

In the spring of 2012, Calloway Laboratories paid $20 million to settle charges that it defrauded the state Medicaid program by, among other things, overcharging for drug screens. The scheme involved bribing sober living homes to have clients screened unnecessarily. The company did not admit guilt and said it was a result of “outdated practices.”

On October 22, three  defendants pleaded guilty to the Medicaid kickback scheme, in which they used “straw companies” and overcharged the state’s Medicaid program for urine screens. The three—Arthur Levitan,Calloway Labs' former chief executive officer, Patrick Cavanaugh, its former chief operating officer,  and William Maragioglio, a former sober house employee—pleaded guilty to engaging in the kickback scheme in which sober houses and a medical office illegally obtained urine drug screening business that was paid for by the state’s Medicaid program. "This pervasive kickback scheme cost the Medicaid program and taxpayers millions of dollars,” Coakley said when the pleas were entered. “With this resolution, these individuals will be barred from working in the public health sector again. The corresponding settlement returned $20 million back taxpayers, one of the largest Medicaid restitution amounts in the Commonwealth’s history.”

Superior Court Judge Kathe Tuttman sentenced each of the defendants to four years of probation, and none of them can be involved in any Massachusetts healthcare program or any Medicaid or Medicare program except as a patient. Calloway has severed relationships with these former officers as part of the agreement.

How the kickbacks worked

According to Coakley, Calloway set up straw companies – JAC Resources, Inc. and MJK & Associates, LLC, between 2005 and 2007. Levitan, Cavanaugh, and sober home employee Maragioglio paid bribes through these companies and a corresponding bank account to induce sober homes to order drug screens from Calloway. (The bribes are called kickbacks because the money for the bribes came from the drug tests that MassHealth paid Calloway to perform.) The lab then made inappropriate payments to Maragioglio, former owner and manager of New England Transitions, and to Kelli Ann Cavanaugh, the sister of Patrick Cavanaugh and a former manager of New England Transitions, a group of sober houses, Coakley explained.

“These allegations point to a scheme that is a blatant abuse of taxpayer dollars through the Commonwealth’s Medicaid program, which provides vital services to children, low-income families and people with disabilities, and others in need of quality, affordable health care,” said Massachusetts Medicaid Director Julian Harris, M.D. in March, when the settlement with Calloway was reached. “We are thankful to Attorney General Coakley and her staff for securing a $20 million payment.  We will continue to actively partner with the Attorney General to prevent fraud, so that we can protect the people who depend on Medicaid services and the taxpayers who support our programs.”

The agreement was the seventh settlement resulting from the industry-wide investigation by Coakley’s Medicaid Fraud Division in to urine drug tests billed to the state Medicaid program. So far, the state has recovered $30 million in restitution.

Another “intricate scheme” to be tried soon

In a similar case, Punyamurtula Kishore, M.D. and three other defendants will go on trial in February for allegedly bilking MassHealth of almost $3.8 million, in what Coakley’s office calls an “intricate scheme” involving drug testing, sober homes, and his Preventive Medicine Associates (PMA).

According to Coakley, Kishore used various bribes or kickbacks to persuade sober house owners to require residents to submit urine tests at least three times per week. The tests were performed by PMA’s office laboratories, then billed to MassHealth, which pays $100 to $200 for such screens. Also charged in the case were Carl Smith, manager of New Horizon House, John Coughlin, president of Gianna’s House, and Thomas Leonard, part owner and manager of Marshall House—all for receiving kickbacks.

"Medicaid Fraud cases involve the theft of taxpayer dollars and undermine the integrity of our health care system," said Coakley when she announced the arrest of Kishore a year ago. "In this case, we allege that Dr. Kishore orchestrated a complex kickback scheme to funnel drug screen business to his laboratories and then bill MassHealth for those services. Our investigation continues into his practices."

NAATP:  Providers warned to “err on the side of caution”

In Florida, drug testing has reportedly been a source of revenue for treatment programs. That may change. The crackdown on pill mills has resulted a stricter law – signed in May – which brings the state into alignment with the federal Stark law, which bans kickbacks in the Medicare program. Now, kickbacks will result in $5,000 fines.

Michael Walsh, CEO of the National Association of Addiction Treatment Providers (NAATP), a trade group representing many major addiction treatment organizations (Calloway Labs remains a member), said the drug-testing issue “came out of nowhere.” He said that treatment centers are confused about what is legal and what isn’t – for example, if there is no payer involved and the patient is paying for the treatment (and the test) – is there fraud? “I think this is a huge issue,” Walsh told Behavioral Healthcare Magazine. “There is a line, and the best advice is, don’t go near that line.” Many companies want to do drug testing and approach treatment providers about it, he said.  His advice: “Err on the side of caution.”

And from the other side of the country: David Lisonbee, president and CEO of Twin Town Treatment Centers, a multisite, intensive outpatient addiction treatment program based in Los Alamitos, California, says that some labs “have seized the opportunity to bill, baby, bill.” It’s easy, he said, for “excessive, superfluous services” to creep into in businesses like addiction treatment, where the economics have remained largely unmanaged, he told Behavioral Healthcare Magazine.

The fact that some laboratories appear to be taking advantage of self-pay and fee-for-service is a “call out for managed care to step in with all-inclusives or caps on per-episode payments,” he said. Should this happen, players who are currently acting unethically are to blame. “The path to managed care is paved with the opportunistic ventures of the entrepreneur, and with fraud,” said Lisonbee, whose organization is not a NAATP member. “Only when financial risk is shared with the provider can healthcare economics become efficient and accountable.”

Back to Top