Labscam: Rogue Laboratory Testing At Center Of Addiction Treatment Scandal

–‘Sober homes’ in Florida are just the tip of the iceberg.

A massive scandal involving fraudulent addiction treatment centers and rogue laboratories has recently surfaced. Several recent news reports have focused on the scandal’s epicenter in Florida, but industry observers say that the scandal is the tip of an iceberg of corruption, abuse, and fraud in the healthcare system.

Two major news investigations focused on Palm Beach County in Florida. According to the New York Times, “thousands of young addicts have come to Florida seeking treatment in an area that has long been hailed as a lifeline for substance abusers. But what many of these addicts find here today is a crippled and dangerous system, fueled in the past three years by insurance fraud, abuse, minimal oversight and lax laws. The result in Palm Beach County has been the rapid proliferation of troubled treatment centers, labs and group homes where unknowing addicts, exploited for insurance money, fall deeper into addiction.”

At the core of the scheme are “corrupt sober house owner[s]” who accept bonuses from drug treatment centers for referring addicts to their outpatient programs:

“Crooked treatment centers partner with ‘body brokers’ and operators of so-called ‘sober homes’ to find patients with good health insurance,” according to NBC News. “Brokers and sober home owners offer those trying to get clean free rent and grocery store gift cards, cigarettes and manicures in exchange for going to a specific treatment center, which pays kickbacks for every client.”

“Once they’ve reeled patients in, these treatment centers bill their insurance tens of thousands of dollars for often questionable counseling, costly and potentially unnecessary drug screens, and exotic laboratory tests. Some treatment centers not only overlook drug use — they encourage it. To Florida’s worst operators, relapse doesn’t mean failure. It means profit.”

The Times story notes in passing the role of laboratories in the overall story: “To increase profits, many treatment centers and labs overbill insurance companies for unnecessary tests, including of urine, blood and DNA. Some have billed insurance companies thousands of dollars for a urine test screen. Patients often unnecessarily undergo multiple urine tests a week.”

The NBC story provided more details about the laboratory angle. Parents whose children were being treated under their insurance “didn’t realize the scope of the problem, because no one ever came to collect. Treatment centers routinely, and illegally, waive co-pays and deductibles, according to prosecutors, telling patients and parents insurance covers everything.”

According to NBC, “the real dollars didn’t come from sitting kids down for treatment. It was in getting them to pee in a cup.”

“Treatment centers and labs rack up sky-high bills, sometimes collecting only a fraction of the money charged for a $5,000 urine test or a $1,800 counseling session. What they don’t get paid, they write off…”

As the NBC story notes, “random drug screens have long been a key piece of recovery. Treatment centers and sober homes used to depend on dipstick tests, the kind anyone can do, which can run as low as $5 apiece. If staffers got what they thought was a false result, they’d send it over to a lab for ‘confirmatory’ tests to make sure the results were right.”

But the treatment centers and sober homes couldn’t profit from a $5 test. Instead, they “realized laboratories could become the financial fuel of the rehab industry.”

“They made deals with labs, or started up their own, so they could take a slice of every test billed. Particularly lucrative were young people from out of state… because their insurance could be charged at sky-high out-of-network rates…. Doctors at treatment centers would put in ‘standing orders’ for near-daily drug screens, along with genetic and allergy tests that could run thousands of dollars.” In many cases, “to maximize profits,” samples were retested or patients were double-tested.

One concerned parent managed to track down bills which she had never seen but which had been sent to her insurance company.

“‘I didn’t know you saw your therapist every single day’,” one mother asked her daughter, who said that it was not the case. Then she asked her daughter, “‘Are they doing drug tests every day too? I have a bill here for $10,600’. And she goes, ‘Mom, I’ve’ — and these were her words — ‘I’ve peed in a cup twice this week’.”

A Closer Look at the Labscam

The news stories don’t fully explore the larger context of the laboratory tests. They dont’ make clear that the Florida case is not the first scandal involving laboratory companies. The abuses in the Florida case are only the latest example of a history and pattern of abuse and fraud stemming from laboratory companies.

The Florida case bears marked similarities to the Health Diagnostic Laboratory case, which I have been reporting for the past 2 years. The Florida and HDL scandals share two essential elements: The first is kickbacks to healthcare providers for ordering expensive and unnecessary tests. The second is not billing patients or not holding them responsible for lab tests not reimbursed by insurance. This second element ensures that patients have little motivation to complain to their insurance companies or Medicare when tests are not reimbursed. Both elements are generally illegal.

The Times and NBC reports don’t give any specific details about the laboratories involved in the Florida scandal. No one has reported the names of the laboratory companies. Lab industry veterans speculate that the Florida schemes were put together by salesmen or independent consultants who work closely with laboratory companies which specialize in these sort of scams. In some cases they set up small, ostensibly independent labs in hospitals or physician offices and bill through these small labs, though the true provider is the lab company. But the company’s name never appears on the claim, thus hindering attempts by insurance companies or the government to identify the source of the fraud.

While reporting on the HDL case I received numerous comments and messages from patients, healthcare providers, and others about their experiences. One patient, for instance, wrote to say that she “had a routine urine sample and they billed at $17,452.43 and my insurance paid $11,629,32. Now they are trying to say I owe $2,332,62. Utter and complete garbage. I did reach out to my doctors office and they are saying I am not responsible for the balance due.”

Industry Veterans Explain The Scam

One benefits manager told me that he was not at all surprised by these stories because he has been seeing these claims for some time. “It’s all just one big shell game. I hate to paint a broad brush but virtually every place that’s out-of-network is bad news,” he wrote me.

As an example he told me about a case he had handled recently: “I had a 21 year old last year, he was in and out of 4 different places, plus all the drug testing. Typical story, 21 year old heroin addict on Mom & Dad’s plan until he’s 26…. He’d go into one and a month into it, he’d start using again and would disappear until he showed up at the next one. I started denying all his claims for records…. Hundreds of thousands of dollars of charges either to his deductible or denied as over usual, customary, and reasonable and of course, never heard a peep from him (although to be fair, he was homeless) but more telling, not one of these providers ever appealed or said boo about it to us. They had no intention of ever collecting that money from him.”

The story illustrates the fact that the laboratory companies are not billing patients for services denied reimbursement. Because the companies bill for so many tests for enormous sums of money, they are able to rake in enormous profits simply on the basis of the successful or partially successful reimbursements that they receive.

And there’s complete silence on the patient side as well. “Whether they’re denied or allowed to deductible, do you know how many outraged calls I get from Claimants about having to pay these exorbitant amounts? Zilch. Zero. Nada.” This benefits manager has seen this pattern before: “It’s just HDL all over again.”

“This is an epidemic,” said one former laboratory executive who left the industry when these scams became ubiquitous. “The players in this scheme, ‘distributors’ as they’re called, are typically clueless opportunists or former toxicology sales reps who otherwise have no interest or background in healthcare. They set up investment series and get doctors to buy-in to them. The specimens are routed from the doctor’s offices to labs that have partnered with the distributor, the labs then pay commissions to these ‘distributor groups’ as marketers who share a negotiated percentage of the revenue with the physicians in the series.”

The former executive elaborated on the scheme:

“There are dozens, possibly hundreds, of these distributors around the country, also called management services organizations (MSOs). They deal in compound pharmacy, toxicology, blood testing, and they’re now expanding into things they literally have no understanding of – e.g. pharmacogenetics.

These practices have appalling results and we should be lobbying our payors to put this behavior to an end. Some of these results include:

  • Laboratories billing under ludicrous fee schedules charging thousands of dollars, gross charges as high as $11,000, for a toxicology screen and confirmation that probably costs about $100 to perform
  • Creation of economic incentives for physicians to order unnecessary testing, ‘over-utilization’, in order to drive revenue for themselves and their practice
  • Those same incentives, and this is difficult to prove, but is in-line with second order thinking: Drive physicians to over-prescribe addictive painkillers, creating more opportunities to order these tests.”


The last item, the lab executive believes, may help explain some important portion of the opioid epidemic. “A scary thought to think that our doctors may have forsaken their patients in order to line their pockets,” he said.

The Rest of the Iceberg

Even though, as NBC reported, the Florida addiction treatment “business” model now exceeds $1 billion a year, it is likely that this represents only the tip of a larger iceberg. Toxicology testing appears to be an enormous new market for lab scammmers.

Eva Gunasekera, a former federal prosecutor who is now a lawyer at Finch McCranie, which specializes in False Claims Act whistleblower cases, pointed to the deeper underlying structural problems that make this scandal possible. “It appears that the underlying fraud is happening at the operational level at these facilities and the labs are piling-on as ‘happy’ sub-recipients of the Medicaid dollars. Unfortunately, while it appears that labs have also excessively billed for lab services not rendered (or perhaps unnecessary services)—and are complicit in the alleged fraud—it is not at all clear that the focus of these criminal investigations was on the labs or the clinicians who ordered or billed for the lab work.”

First, said Gunasekera, we need to learn more about “how these ‘sober home’ operators are able to get the necessary certifications.” Second, she asked, “who and what is incentivizing clinicians (physicians, counselors, chiropractors, nurses, etc.) to order unnecessary lab tests and services, or ones that are never rendered to the patients who are victims of the scheme. I suspect there are far more players in this alleged scheme” than have been reported in the news stories. “I presume there must be some do-gooders who are willing to expose what is going on inside the industry,” she concluded.

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  1. I walk into a hospital for a small splinter in my finger, and an hour later the bill is $2000. Medical costs are among the highest in the world. Typical.

    I agree much of medicine is full of scams.

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