If something sounds too good to be true- it probably is. Tune in as ByrdAdatto partner, and series regular, Jay Reyero joins us to unpack the intriguing fraud schemes inside a Texas hospital. We discuss physician investment opportunities and the importance of form & substance in medical service organizations (MSOs).
Listen to the full episode using the player below, or by visiting one of the links below. Below is the episode’s transcript which has been edited for readability. If you have any questions or would like to learn more, email us at email@example.com.
Intro: [00:00:00] Welcome to Legal 123s with ByrdAdatto. Legal issues simplified through real client stories and real world experiences, creating simplicity in 3, 2, 1.
Brad: Welcome back to another episode of the Legal 123s with ByrdAdatto. I’m your host, Brad Adatto with my co-host Michael Byrd.
Michael: Thanks Brad. As a business and healthcare law firm, we meet a lot of interesting people and learn their amazing stories. As you know, this season we are spicing things up a bit. We’re here to talk about OPP, other people’s problems.
Brad: Now, Michael, for those listening to this season for the very first time, what is OPP? What are we doing here?
Michael: We’re pulling stories, public stories and bringing them in. We’re going to talk about some stories that are well known to the entire world and some that are well known to healthcare lawyers, but they’re not our client stories, then we’re going to give some legal analysis behind them and, [00:01:00] find some hopefully helpful application.
Brad: Makes sense. Well, Michael, before we discuss today’s OPP story and bring on that guy sitting right next to you that everyone can see on our YouTube channel, have you ever heard of this streaming platform called Netflix? Have you heard that one?
Michael: I feel like I’m getting set up, Brad, but, I will indulge for a minute. Yes, Brad, I’ve heard of Netflix.
Brad: Oh, awesome, so, what I’m hearing is you’re in the in crowd and since you’re in the in crowd, one thing you should never ask me to do is to watch Netflix and chill.
Michael: Okay, well, 2009 is calling Brad and they want you to stop stealing their expressions. Since Netflix and Chill goes back about 15 years, I don’t think we can call ourselves in the in crowd.
Brad: Did I just give that away?
Michael: Yeah. You made yourself really old sounding.
Brad: Dam nit. Alright, well, since you have Netflix, are you guilty of ever binging a show.
Michael: Yeah. I mean, [00:02:00] full disclosure, the first show I ever binged was from renting stuff at Blockbuster. I watched The Sopranos and rented the VHS tapes.
Brad: Who is old here?
Brad: For audience members who don’t know, Blockbuster used to be a place where you could rent movies.
Michael: Yes. You would have to drive to a physical store and it wasn’t online.
Brad: Sounds terrible.
Michael: Yes. Yeah, it was. It was crazy. I’m currently binging a TV show on Netflix called, Never Have I Ever, and I was drawn to it because John McEnroe is the narrator.
Brad: So this is about tennis?
Michael: Not really, but you know, anytime there’s a tennis connection
Brad: Fair enough. Alright. Audience members who don’t know, Michael loves tennis. I know several shows that you and I have both watched. Mostly, we have someone, our director of people operations, Chrissy, she often requests that we [00:03:00] watch certain shows, which really is more of a demand. Recently you and I had to binge watch and finish Ozark because I think if we didn’t, Chrissy would’ve quit. I really do. She loved that show. I know you loved it. I loved it. Worth the time.
Michael: I was more afraid for ourselves than her quitting. Fortunately for me, I’m drawn to these kind of dark shows like that, and Ozark definitely met that requirement.
Michael: Yes, I did watch Ozark. You and I finished pretty close to the same time.
Michael: Yeah, it was a good show.
Brad: Yeah, so that kind of brings me to January 20th, 2008. AMC released this TV show that not many people were following about some science teacher in New Mexico. Had decent viewership the first three seasons however, right before the start of the fourth season, Netflix released season one through three and vviewership dramatically increased and jumped so by the point of the [00:04:00] fifth season, the final season finally aired, it was the most watched cable show on American television. Michael, I think you binge watched this show. Wait. What was it called again?
Michael: Yeah, I mean, to be fair, I mean all of my street knowledge about crystal meth comes from the show.
Brad: What was it called?
Michael: Breaking Bad.
Brad: Breaking Bad, That’s right. Breaking Bad. By the time the fifth season ended, Breaking Bad, received numerous awards including sixteen Prime Time Emmy Awards, eight Satellite awards, which I believe, audience members, is made up. I’ve never heard of Satellite awards, but alright, anyway, two Golden Global Awards, two Peabody Awards, two Critical Choice Awards, and four Television Critics Association awards. The main actor Brian Cranston, who I actually always knew from Malcolm In The Middle, funny guy, played Walter White. Won the primetime Emmy Award for outstanding leading actor in a drama series four times while Aaron Paul for the same award show won it for a drama [00:05:00] series three times and Anna Gunn, same award, for the drama series, won it twice. Pretty amazing, in 2013 Breaking Bad was entered into the Guinness Book of World record for the most critically acclaimed TV show of all time.
Michael: Wow. Well, it was so intense. It was really good. For the full context for those who don’t know, Breaking Bad is about a character named Walter White, that’s who Brian Cranston played, who was an underpaid, overqualified, and dispirited high school chemistry teacher, who was also struggling with a recent diagnosis of stage three lung cancer and he decides what better than to turn to a life of crime. He partners with a former student to produce and distribute crystal meth. This was done to secure his family’s financial future as he was facing this cancer diagnosis, but the show was all about him navigating [00:06:00] what you might think would happen if you start to produce and distribute crystal meth. Yeah, thanks for personally reminding me. I actually personally like the spinoff, Better Call Saul, even better than that. It’s really an amazing show, but I’m pretty sure I remember that you haven’t actually watched Breaking Bad yet.
Brad: This is true. It’s on the list and unless Chrissy makes me watch it and if she says I have to watch it, audience members, I will binge watch it in one day.
Michael: If you have to do it, just power through the first half of the first season, takes a minute and its super dark. It’s kind of like Ozark where you’re just like, this too much and then I guess you just adapt.
Brad: Okay. Fair enough.
Michael: So, we have here sitting with us, our series regular and our law partner Jay Reyero. Brad, what did Jay do to make you think of Walter White?
Brad: Well, Jay is the complete [00:07:00] opposite of Walter White so this has nothing to do with Jay. It really has to do with taking something that’s legal and using it for criminal purpose.
Michael: So we do a lot of healthcare and Jay does a lot of lab work, so I’m guessing he represented a lab that started making crystal meth.
Brad: Yeah. No, not quite. No.
Michael: Oh, oh.
Brad: Yeah. Walter White, as you said, had chemistry knowledge, struggling teacher, and he goes in this life of crime and producing, distribute crystal meth. Generally speaking, your typical chemistry teacher will not break bad and become a drug Lord, generally speaking of course. Today’s OPP does have a lab, as you mentioned, but it has more to do taking a legal model management service organization and pushing that structure from a compliant to an orange jumpsuit illegal structure.
Michael: Congratulations for connecting crystal meth to an MSO.
Brad: You’re welcome.
Michael: That’s really nice legal model. Before we get into today’s OPP, let’s officially welcome back after a two season absence [00:08:00] our partner and podcast regular Jay Reyero.
Jay: Thanks. Thanks guys. Yeah, so Riley told me about the guest fee and the jar and everything, and I immediately said to my agent, Hey, you’ve gotta work on this cause I’m not playing for that kind of money and fortunately they were able to work something out. Brad, I don’t know if you know, but I almost took my talents to South Beach, but I had a scheduled press conference next week with a hard line Corby Davidson and I said, ByrdAdatto is where I want to be at. I love the fans, this is why I do it so I’m glad we got the deal done. I’m looking forward to this season and just here focused on today’s podcast.
Michael: I think that’s a long winded way of saying he’s not putting money in our payola jar.
Brad: Is that what I just heard?
Brad: What I was trying to figure out was, because I was talking to LeBron about this the other day, we go way back and he was saying that he didn’t think he wanted to play with you, Jay, so I don’t know. Did you talk about that in the hard line [00:09:00] at all?
Jay: Yeah, I’ll get into that maybe at another date. They really wanted me first.
Brad: Yeah, that makes sense.
Jay: LeBron was the backup player.
Brad: Yeah. For audience members who don’t know, Jay’s crazy competitive, so I’d actually like to see that game between Jay and LeBron. Michael, I think now that we got Jay here, let’s really jump into today’s OPP story. You know this, Jay, this grabbed our attention a while back because it involved a Texas based hospital that you and I had come across about a decade ago. Do you want to start with, at least giving the audience members, who are these players involved?
Jay: Yeah, I think actually Brad as a little nod to Michael here, I think a little context is going to be good for the audience.
Jay: This case is actually pretty massive. I mean, it has a lot of different regulatory aspects to it. It involves both federal anti-kickback and federal stark law issues. It’s so big, we probably could spend an entire season kind of breaking it down in its parts. It involves Medicare, Medicaid, Tricare, fairly funded [00:10:00] programs, commercial insurance. It involves a bunch of common laboratory fraud schemes that have been out in the industry and pretty prevalent throughout the years. It has so many parties and relationships that I think actually would probably benefit from some kind of summary and relationship tree like you see with Game of Thrones.
Jay: But because it’s so big, I think what we really want to do today is focus on one aspect of the fraud scheme. That’ll probably really resonate with the listeners.
Michael: Anytime you use the word scheme multiple times when you’re describing it, it’s probably going to get pretty nefarious and confusing fast. I’m glad you’re kind of keeping it focused, keeping it nice and simple. Sounds like a good plan.
Brad: Yeah, there’s a lot of context there, Jay.
Jay: Well, you know my context man next to me.
Brad: Yes, that’s true. Good point.
Jay: Alright so I think what’s really fascinating is that this really began back in 2016 with a qui tam lawsuit against the laboratory and its practices that talked about a lot of different kickback [00:11:00] issues.
Brad: Okay, let’s pause. Yeah, audience members are probably trying to figure out, Jay a very fancy Latin word, qui tam, which, if remember correctly, it means to bring in the name of the king, which really it means whistleblower audience members. A lot of times you’ll hear of whistleblowers, but there’s a federal rule out there that they talk about qui tams, but you bring something on behalf of the government when you see the government is being wronged and you, the whistleblower can eventually maybe share in the wealth if proven wrong, that someone did something wrong to the government.
Michael: If you hear the word whistleblower, that’s also usually not good.
Brad: Yeah. Fair.
Jay: It means you made someone mad.
Jay: Yeah, exactly. Some of the things that they were talking about this lab doing, paying docs, the processing and handling fees for their specimens, a certain type of kickback.
Jay: Paying them high consulting fees above fair market value, paying them fees to [00:12:00] participate on an advisory board that actually didn’t exist, you know, that mystery advisory board position. They were also waiving patient copays and deductibles, which is a big, big no-no and pretty common in the industry with these types of schemes. They were also paying independent contractor salespeople for commissions for the referrals to the laboratories.
Brad: Yeah. Let’s pause. If this was a red flag season I don’t know if Jay would be able to keep talking. There have been so many dings. Oh my gosh.
Michael: If they had to print the list of what you don’t do, Jay, just check them all.
Brad: So far, the opening bullet point, do not ever do this, ding, ding, ding down, straight down.
Jay: Yeah and so as you can imagine, again, because this was a qui tam, so in April of this year, 2022, the government intervened so as Brad said, the government has an opportunity to jump into a qui tam lawsuit, and the government did intervene. They [00:13:00] added a wealth of claims. They added a bunch of defendants that included both laboratory and hospital executives and some marketing and recruiters and so this is all civil litigation now that we’re talking about.
Brad: Yeah and audience members understand something, when a whistleblower files a suit and the government decides not to participate, it actually tends to be for the benefit of the defendants because they have to go fight this thing by themselves and they don’t have the full force of the government behind them. They can still move forward, but they’re now having to prove it up. When the government steps in with the whistleblower, it’s actually bad news because now the government has the full force of the federal government backing them up, so they get to bring the FBI in, the Department of Justice in, all their analysis is being brought in and being paid for by the federal government unlike when it’s a whistleblower by themselves.
Jay: Yep and so this was the civil litigation and so actually the civil litigation as of today is [00:14:00] stayed or paused because in July of 2022, the Department of Justice indicted 36 defendants on criminal charges all across the United States and this is before more than 1.2 billion in alleged fraudulent schemes so that stayed the civil litigation. The reason that the indictments came when they did was because by that point in time 33 Texas doctors had settled in some form or fashion related to the fraud allegations.
Michael: Wow. Alright. Well, so who are the players involved in this sorted story with lots of schemes?
Jay: Right, so at the center of everything, kind of where everything kind of really revolves around is the Rockdale Hospital. It’s otherwise known as Little River Healthcare. It’s a small critical access hospital system here in Rockdale, Texas.
Michael: Little River just sounds so sweet and innocent and just kind of nice small town but I [00:15:00] guess not. So you did just say something that’s another vocabulary. Brad, what is a critical access hospital?
Brad: What’s funny, in your answer, you kind of already answered this, but, Critical Access Hospital is a specially designated area that the Centers for Medicare Medicaid Services. A lot of times you’ll hear CMS. We’ll name certain small hospitals located in a really cool little nice area, like Little River, are known as underserved rural areas and it allows a critical access hospital to get more favorable reimbursements from the federal government, typically Medicare. So you’re right on Michael, almost with your, sounds like a lot.
Michael: Sounds like good branding by Little River.
Jay: That’s important so let’s keep that in mind. That’s going to be an important part of the story, that favorable reimbursement. We also have two laboratories, Boston Heart Diagnostic Corporations, and True Health Diagnostics.
Michael: So you said we’re only going to focus on one part of the fraud scheme today, so let’s get into those allegations.
Jay: Yeah so, [00:16:00] at its base, Little River, the hospital was billing for lab tests under its tax ID number.
Brad: Okay. Okay.
Jay: The problem was Little River didn’t actually have the capability to perform the lab test. They were kind of missing some key components, like the personnel and the equipment.
Brad: You know, this OPP just moved from bad to worse, to maybe more worse. I don’t know if that’s a real word, but I think without a law degree, someone might guess that charging for fees for services to the federal government for things that you actually don’t have the people or the equipment for it, that’s probably a major bad bobo. Right?
Michael: At least frowned upon.
Brad: Okay. Thank you.
Jay: So this is where Boston Heart comes in, right? So Boston Heart, an Operational Lab, it can actually perform the test and so what Little River and Boston Heart decided was to partner together to basically white label the test. So Little River gets the test and it would send off the specimens to Boston Heart. Boston Heart would perform the test and Little River would pay it a fee to perform that test. Then Little River would [00:17:00] actually bill the test using its tax ID number as if it had performed it.
Michael: So in normal business, this is just good old fashioned outsourcing, but, in healthcare, it can make a difference and this is where the critical access hospital piece plays a big part.
Jay: Exactly, so because Little River got that favorable reimbursement treatment, it’s going to receive the higher reimbursement for the test when it’s billing it under its tax ID number rather than if Boston Heart had billed for it. What we’re talking about, we’re talking about triple the amount of what Boston Heart could have gotten. As you can imagine, this now allows Little River to bill and get the favorable reimbursement, pay Boston Heart, a nice, attractive, sweetheart fee there per test, but that’s still going to create enough of a spread and it becomes a win-win for both of them.
Brad: Yeah, and as Jay and Michael said, a lot of times you see people outsource certain projects and services so we know that this could be [00:18:00] done for certain services, but what was the problem in this particular case?
Jay: Yeah, so going back to that whole critical access hospital designation so the whole purpose around that is to give the favorable treatment for purposes of Little Rivers patients, both inpatient and outpatient.
Brad: You mean, not Boston?
Jay: Right. Not Boston, not anywhere. While Little River was billing for these tests as if they were their outpatients, these patients were not Little river patients. Many lived hundreds of miles away and actually had never even heard of Little River.
Michael: So, whose patients were these?
Jay: So these were the patients of providers that were referring ’em from all over the state. Nearly all of these providers had no admitting privileges to Little River. They’d never practiced at Little River. They had never even really visited Little Rivers Hospital.
Michael: Well, that doesn’t sound right. Why would these providers order from Little River?
Brad: Money. Money. Money. Money. Money. [00:19:00]
Michael: Brad. Brad. I thought we talked about this. This is not karaoke.
Brad: Wasn’t that awesome singing?
Michael: No, no, no. We have a deal. It’s in our contract.
Michael: You need to put money in the payola jar. Okay, let’s skip, Brad off of the scene. Brad, Jay, how did they accomplish this?
Jay: Through MSOs.
Michael: Are you talking about Mmanagement sservices organizations? The same ones that we talk about relatively often in our prior podcast episodes and in our MSO field guide.
Jay: Kind of. So while it uses the same name, the actual purpose and execution behind it were completely different. These MSOs really at the end of the day were nothing but investment vehicles for the referring providers and they were created by the recruiters, the marketers, and these recruiters would sell these healthcare providers on this opportunity to share in the profits that they were generating when they were sending these referrals to Little River. If a provider [00:20:00] said, Yeah, I’m interested, they would be presented with this investment document to purchase ownership in the MSO and it’s some relatively low cost, like a thousand dollars per percentage ownership. Participation in the MSO would then result in some disproportionately large return on investment. We’re talking, some of these docs were getting more than a thousand percent returns in many cases and in fact, what they actually started doing was that when the providers would give their investment check, the MSOs would kind of hold it for a couple of months and not cash it and by that point, they were owners, they were getting distributions, and those distributions were so excessive that the distributions that they had been paid actually covered more than the amount that their check was so they really were never out of pocket with anything. Unsurprisingly, what has been allegedly uncovered is that the provider didn’t practice anywhere near Little River. They didn’t have admitting privileges. They’d never referred anything to Little [00:21:00] River, but as soon as they became a participant in the MSO, they started sending their referrals to Little River.
Brad: Wow, there’s a lot of red flags. I could’ve just been going crazy there with dings, but I didn’t. First off audience members, if you didn’t catch on, bad. Secondarily to that is I know we’ve talked about this in other episodes, but for audience members who don’t know, a mmanagement service organization is an entity whose whole purpose is to provide management, administrative and support services to other businesses. In the healthcare context, MSOs perform these services to many different type of healthcare entities and in this case, the MSO provides certain types of services. The word is obviously in the name management services so Jay, important element here, what services were the MSOs providing?
Jay: The password is none. There are no administrative or management services. They didn’t even have resources or assets. The only revenue [00:22:00] the MSOs were generating was the share and revenue based on the referrals from all the participants within that MSO so there were none. You know, I mentioned earlier, true health. True Health was a competitor of Boston Heart and in Texas they were finding out that they were losing a lot of business to Boston Heart and this whole scheme so True Health decided to get into it and create their own MSOs and do exactly what Boston Heart was doing with Little River and became partners with Little River so that’s how true True Health actually got involved in all of this.
Michael: So, Little River’s not so quaint, I guess, is what we’re learning from this crazy story. Let’s pause. There’s a lot that we just covered and let’s go into commercial and on the other side let’s talk a little bit about the issues raised and come up with a little application.
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Brad: Welcome back to Legal 123s with ByrdAdatto. I’m your host Brad Adatto with my co-host Michael Byrd. We’re still here with today’s guests and regular contributor, Jay Reyero. Michael, now this season’s theme is OPP and Jay just dropped a whopper of a story on us, and as Jay said, there’s a lot to unpack, but for this episode, let’s really focus on MSOs and what are some of the things that you took away?
Michael: Well, first and foremost the MSO was really just a vehicle to cover up a lot of [00:24:00] bad things they were doing. The MSO has a place in healthcare as we’ve talked about multiple times, but if fundamentally behind it all, you’re doing these check the box on things you don’t do in healthcare deals, you can’t dress it up and make it look pretty with an MSO. I’m pretty sure that’s not what you experienced during your first job when you worked for an MSO.
Brad: Yeah. You know, and that’s the thing, Jay and I have been on enough calls where people are like, Oh, I hear MSOs illegal. Well, MSOs on its face are not illegal. My first job out of law school was an in-house council for a management service organization. We managed labs, doctor’s offices. I mean, there’s a lot of aspects to that service. There’s services that were a part of that, both administrative and support service and so it’s important to understand that this is a compliment a management service organization’s not a professional entity. Often the case those who don’t know is it could be a [00:25:00] limited liability company or it could be a corporation, often owned by non-physicians. It can be owned by physicians and we can dive into that, but the whole purpose of it is to compliment the healthcare providers so that because they need these services, they want to have someone come in and manage ‘em. They want someone to come in and provide the services that they want to concentrate on the patient side, the medical side, and they want the MSO to help come concentrate on the business side. For those who don’t under know, management service organizations, they enter into a contract called the Management Service Agreement and MSA that details out all the services that you should be providing. We’ve said this many times in many other episodes, well, that’s going to be the form, the between the entities. You have a management service organization. They have a contract called MSA in which they’re managing that lab or hospital or professional entity. The form and the substance have to [00:26:00] match and in this case, as Jay was unpacking the story for us, we could hear the fact that, well, they may have had one of the best written management service agreements of all times, but they didn’t seem to add up together because there was really no substance really behind those MSOs since they provided, I think you said, no services?
Jay: That was the password.
Brad: No, that was the password.
Jay: Yeah and I think one of the things that’s kind of lost on people is going to the form of substances, the intent of the parties matter so if you come in with bad intent, no matter what you do, no matter what you slap on, it’s always going to be an issue. I mean, the government’s going to find out about that. I mean, this all started because of a qui tam, which someone internally who knew where all the skeletons were able to kind of bring it to light. Even if we have bonafide investment documents, even if we have, you’ll see a lot of times the government loves to use Sham as the descriptor or towards medical or [00:27:00] consulting agreements with MSOs, these are all legitimate arrangements and the government has created a pathway to allow those to exist in legitimate arrangements. When people use those legitimate arrangements to try to cover up the illegal intent behind it for the parties, the government’s going to find that and they’ve been pretty vocal about the fact it doesn’t matter if your form looks a hundred percent compliant, it goes to the intent of the parties, especially with the federal government’s broad interpretations of the rules. The intent really does matter and so no matter what, you’re never going to get away from that if the intent from the very beginning is illegal.
Brad: Yeah and as a medical provider, if you’re listening to this, look, you don’t have to be a regulatory expert like Jay to help spot some of these things. Often if you think it’s too good to be true, it probably is and so, for instance, Jay started off with saying if you’re investing a thousand dollars, a percentage point, and you’re getting[00:28:00] 5 to 10 to 1000% return on that investment, just pause and wonder, is this a real deal that anyone else would get in the real world if I was not referring to this facility, and often the time the case would be, no it really is too good to be true, and I probably should pause and call Jay before I move forward. Michael, what are some of your final thoughts here?
Michael: Well, it occurred to me as I was listening to y’all that actually the principal character in Ozark was Marty Bird, no relation, different spelling, and Walter White in Breaking Bad and in both of those fake shows, they actually did it better than Little River. I mean, a big common theme on both shows is Hey, we’ve got drug cartel things happening and they launder drug money through legitimate organizations and so you have a caretaker business that actually has real people running it and they actually [00:29:00] do real services or in Breaking bad there’s a chicken business where people can actually go in and buy actual food. Here there’s no equipment, no people involved and so it’s worse than a movie, I guess.
Brad: Fair. All fair points, Michael. Well, Jay, thanks again for being with us today.
Jay: Absolutely. I’m glad to be back and looking forward to the next episode.
Brad: Yeah, no doubt. Well, audience members, we will have Jay join us again this season, so I know that y’all been missing him, but guess what? Next Wednesday’s show we will discuss an OPP story for a doctor that danced her way into trouble.
Michael: No singing.
Outro: Thanks again for joining us today, and remember, if you like this episode, please subscribe. Make sure to give us a five star rating and share with your friends. You can also sign up for the ByrdAdatto Newsletter by going to our website at ByrdAdatto.com. ByrdAdatto is providing this podcast as a public service. This podcast is for educational purposes only. This podcast does not constitute legal advice, nor [00:30:00] does it establish an attorney client relationship. Reference to any specific product or entity does not constitute an endorsement or recommendation by ByrdAdatto. The views expressed by guests are their own, and their appearance on the program does not imply an endorsement of them or any entity they represent. Please consult with an attorney on your legal issues.