Dallas Lab Pays $24 Million to Settle Alleged Medicare COVID-19 Testing Fraud Scheme

Key Takeaways

• $24 Million Settlement: Magnolia Diagnostics, its owners, and investors agreed to pay a combined $24 million to resolve federal allegations stemming from medically unnecessary respiratory pathogen panel testing billed to Medicare.
• Testing Protocol Challenged: The Justice Department alleged the laboratory required senior living communities seeking COVID-19 testing to also receive expensive respiratory pathogen panel tests regardless of individualized clinical need.
• Broad Billing Allegations: Prosecutors alleged Magnolia continued performing respiratory pathogen panel testing despite objections from providers and communities, and in some instances without valid standing orders.
• Pandemic-Era Medicare Claims: The government alleges Magnolia knowingly submitted, or caused the submission of, false Medicare claims for thousands of medically unnecessary respiratory pathogen panel tests between April 2020 and September 2021.

Deep Dive

Dallas-based Magnolia Diagnostics, its owners, and a group of investors have agreed to pay the United States $24 million to resolve allegations that the laboratory billed Medicare for thousands of medically unnecessary respiratory pathogen panel (RPP) tests performed on seniors undergoing COVID-19 testing. Of that total, Magnolia and its owners will pay $19.2 million to resolve allegations under the False Claims Act, while investors will pay a further $4.8 million to resolve civil claims for unjust enrichment, payment by mistake, and claims under the Federal Debt Collection Procedures Act arising from distributions they received from the company.

The settlement resolves allegations only. There has been no determination of liability. The government's account of what happened turns on a question that became especially important during the first months of the pandemic: who decides what medical care is actually necessary?

According to the Justice Department, Magnolia answered that question before patients were ever assessed. Beginning in April 2020, the laboratory allegedly distributed prepopulated requisition forms that already selected respiratory pathogen panel testing and included associated diagnosis codes before any individualized clinical evaluation had occurred. Provider signatures on those forms were then allegedly treated as standing authorizations covering every resident in entire facilities (or, in some cases, entire chains of senior living communities) whose specimens were collected during large-scale COVID-19 testing.

Federal prosecutors say the practice did not stop there. Magnolia allegedly continued performing respiratory pathogen panel testing even after some healthcare providers and senior living communities requested COVID-19-only testing, questioned whether the additional panels were medically necessary or clinically useful, or stated that they had never authorized the broader testing in the first place. The government also alleges the laboratory performed panel testing for some communities without any purported standing order at all.

Among the more striking allegations is that one of Magnolia's owners threatened to withhold COVID-19 testing from facilities that declined the additional respiratory panels. Prosecutors further allege that, on at least two occasions, provider-signed requisition forms were altered to expand the apparent scope of authorization beyond the facility identified on the original document, allowing those forms to be used as purported standing orders for residents at multiple other facilities.

The Justice Department also alleges that Magnolia froze and stored thousands of respiratory specimens, sometimes for weeks or even months, before thawing and testing them. By the time results were generated, prosecutors contend, they could no longer meaningfully inform treatment decisions, patient isolation, or infection-control measures. Between April 1, 2020, and Sept. 30, 2021, the government alleges Magnolia knowingly submitted, or caused the submission of, false Medicare claims for thousands of respiratory pathogen panel tests that lacked medical necessity.

In announcing the settlement, U.S. Attorney Ryan Raybould said civil enforcement remains an important tool for recovering taxpayer funds lost to healthcare fraud. Assistant Attorney General Brett A. Shumate said the Justice Department would continue pursuing not only companies that submit false claims but also owners who direct the alleged misconduct and investors who retain its financial benefits. Acting Deputy Inspector General for Investigations Scott J. Lampert of the Department of Health and Human Services Office of Inspector General said the resolution reflects the government's determination to protect Medicare beneficiaries and hold accountable those alleged to have placed profit ahead of patient care during a national public health emergency.

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