How Following “Doctors’ Orders” Provided a Defense in a First Circuit FCA Case

When it comes to False Claims Act (FCA) litigation, clinical laboratories often find themselves in the crosshairs. But the First Circuit’s decision in United States ex rel. Omni Healthcare v. MD Labs offers a strong reminder: following reasonable physician orders can be a powerful defense.

Antecedentes

In this case, a physician organization (Omni Healthcare) — described by the court as a “fraud-hunting relator” — alleged that a laboratory (MD Labs) and other defendants billed for expensive, medically unnecessary polymerase chain reaction (PCR) urinary tract infection (UTI) testing instead of cheaper, traditional culture methods (BUC testing). At the heart of Omni’s case was the assertion that MD Labs knowingly prioritized profit over compliance. 

Between 2017 and 2019, Omni sent MD Labs nearly 600 requisition forms and samples for UTI testing. Unbeknownst to MD Labs, the owner of Omni (Dr. Deligdish) instructed the medical assistants to order only the more sophisticated and costly PCR UTI testing from MD Labs, even if the provider had requested the BUC test — in part to, in Dr. Deligdish’s own words, “beef up a Medicare fraud case against MD Labs.” MD Labs provided the PCR tests ordered by Omni, because that was what was ordered. (In discovery, MD Labs admitted it believed the PCR test was superior and a medically necessary and efficacious method of detecting a UTI; however, it ran the tests as ordered.) Then, Omni turned around and sued MD Labs for fraud under the FCA, arguing that because PCR tests are far more expensive yet supposedly confer no greater benefit than BUC tests, the PCR tests were medically unnecessary, and, by following Omni’s orders, MD Labs submitted false claims to Medicare. 

The district court did not agree. The district court granted MD Labs’ motion for summary judgment based on scienter or “knowledge.” The FCA’s scienter standard is not about what an “objective” person might think; it focuses on what the defendant actually believed at the time it submitted a claim. MD Labs argued it believed in the medical necessity of the tests Omni ordered, and followed physician orders it had no reason to believe were placed for any reason other than to detect UTIs.

The district court found MD Labs did not have scienter: not only did MD Labs genuinely believe PCR testing was better than BUC for diagnosing UTIs, but Omni’s own clinical providers specifically ordered the PCR tests. Omni failed to present any convincing evidence that MD Labs actually knew the tests were not needed, leaving no real dispute for trial. The District Court granted MD Labs summary judgment on this scienter issue, and Omni appealed. The First Circuit affirmed, finding Omni came up short in showing MD Labs knowingly submitted false claims.

First Circuit Court of Appeals’ “Diagnosis” 

The First Circuit opinion boils down to this: labs do not and cannot treat patients or make medical necessity determinations, and — absent information showing the orders were unnecessary — labs do not need to second-guess physician orders to avoid submitting false claims.

While Omni argued that MD Labs “recognized and ignored the risk of PCR UTI testing being medically unnecessary,” MD Labs responded it was not MD Labs’ affirmative obligation to make medical necessity determinations. Rather, it is the ordering provider’s responsibility to ensure the tests ordered are medically necessary. The First Circuit agreed. According to United States ex rel. Groat v. Boston Heart Diagnostics Corp., 296 F. Supp. 3d 155, 158 (D.D.C. 2017), the First Circuit agreed with and adopted, “a laboratory cannot and is not required to determine medical necessity, but rather is permitted to rely on the ordering physician’s determination that the laboratory tests billed to Medicare are medically necessary.” 

The court noted the dangerous consequences of Omni’s position: “Should laboratories start second-guessing a doctor’s orders, delaying care to double-check the doctor’s work (however that might get accomplished), or even providing different, less-expensive care than the doctor ordered just to avoid FC liability?” The court added it is not “’natural, ordinary [or] reasonable’ to put labs on the hook for doctors’ professional decisions.  . . .” 

Importantly, the decision does not hold that labs are immune from FCA liability; they still have a legal duty to ensure they do not submit claims for medically unnecessary tests. In general, a provider’s order serves as strong evidence of medical necessity, so long as the lab believes the test is indeed reasonable. The First Circuit here upheld the District Court’s ruling that none of the evidence presented by Omni explained why MD Labs could not rely on Omni’s orders for its patients’ PCR testing to show that such tests were medically necessary for FCA purposes.

This case underscores other precedent: in FCA suits targeting labs, a physician’s order is strong evidence of medical necessity. Relators will need more than speculation or generalized guidance to prove scienter and prevail on behalf of the government.  

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