United States of America et al v. Bluewave Healthcare Consultants Inc et al

Filing 527

ORDER AND OPINION GRANTING 443 United States' Motion to Exclude Curtis Udell's expert testimony Signed by Honorable Richard M Gergel on 7/11/2017.(sshe, )

IN THE UNITED STATES DISTRICT COURT RECE!VrD Ct ;;,:::x·s OFFICE
DISTRICT OF SOUTH CAROLINA
2011 JUL I 2 I A 1: ij 5
CHARLESTON DIVISION
United States of America, et al.,
Plaintiffs,

ex rel. Scarlett Lutz, et al.,
Plaintiffs-Relators,

v.
Berkeley Heartlab, Inc., et al.,
Defendants.

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Civil Action No. 9:14~~ QQ~3:~~ 1 .un
(Consolidated with 9~ 1i'2dm..i~~if0k~~\
9: 15-cv-2458-RMG)

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ORDER and OPINION

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This matter is before the Court on the United States' motion to exclude Curtis Udell's
expert testimony proffered by BlueWave Healthcare Consultants, Inc., Floyd Calhoun Dent, III,
and Robert Bradford Johnson (collectively, "the BlueWave Defendants"). (Dkt. No. 443.) For
the reasons set forth below, the motion to exclude is granted.

I.

Background
The Government has filed a complaint in intervention against the BlueWave Defendants

and Latonya Mallory alleging violations of the Anti-Kickback Statute ("AKS"), 42 U.S.C. §
1320a-7b(b), and the False Claims Act ("FCA"), 42 U.S.C. § 3729(a). (Dkt. No. 75.) The alleged
FCA violations arise from BlueWave's marketing of laboratory tests for two laboratory
companies, Health Diagnostic Laboratory, Inc. ("HDL") and Singulex, Inc. ("Singulex"),
between 2010 and 2014. The Government has alleged that Defendants violated the FCA when
they engaged in multiple kickback schemes to induce physicians to refer blood samples to HDL
and Singulex for large panels of blood tests, many of which were medically unnecessary. For
example, the Government alleges that Defendants offered and facilitated the payment of
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processing and handling ("P&H") fees to physicians to induce referrals in violation of the AKS
and FCA.
II.

Legal Standard
a. Daubert

Under Rules 104(a) and 702, "the trial judge must ensure that any and all scientific
testimony or evidence admitted is not only relevant, but reliable." Daubert v. Merrell Dow

Pharm., Inc., 509 U.S. 579, 589 (1993). The trial court must ensure that: (1) "the testimony is the
product of reliable principles and methods"; (2) "the expert has reliably applied the principles
and methods to the facts of the case"; and (3) the "testimony is based on sufficient facts or data."
Fed. R. Evid. 702(b) - (d). "This entails a preliminary assessment of whether the reasoning or
methodology underlying the testimony is scientifically valid," Daubert, 509 U.S. at 592-93, and
whether the expert has "faithfully appl[ied] the methodology to facts," Roche v. Lincoln Prop.

Co., 175 F. App'x 597, 602 (4th Cir. 2006). To make this determination, courts consider several
factors including: (1) "whether a theory or technique ... can be (and has been) tested"; (2)
"whether the theory or technique has been subjected to peer review and publication"; (3) the
"known or potential rate of error"; (4) the "existence and maintenance of standards controlling
the technique's operation"; and (5) whether the theory or technique has garnered "general
acceptance." Daubert, 509 U.S. at 593-94; accord United States v. Hassan, 742 F.3d 104, 130
(4th Cir. 2014). However, these factors are neither definitive nor exhaustive, United States v.

Fultz, 591 F. App'x 226, 227 (4th Cir. 2015) (quoting United States v. Crisp, 324 F.3d 261, 266
(4th Cir. 2003)), and "merely illustrate[] the types of factors that will bear on the inquiry,"

Hassan, 742 F.3d at 130 (quoting Crisp, 324 F.3d at 266).
Courts have also considered whether the "expert developed his opinions expressly for the
purposes of testifying," Wehling v. Sandoz Pharms. Corp., 162 F.3d 1158 (4th Cir. 1998), or
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through "research they have conducted independent of the litigation," Daubert v. Merrell Dow

Pharms., Inc., 43 F.3d 1311, 1317 (9th Cir. 1995) (on remand), and whether experts have "failed
to meaningfully account for ... literature at odds with their testimony." McEwen v. Batt. Wash.

Med. Ctr. Inc., 404 F. App'x 789, 791 (4th Cir. 2010).
Rule 702 also requires courts "to verify that expert testimony is 'based on sufficient facts
or data."' EEOC v. Freeman, 778 F.3d 463, 472 (4th Cir. 2015) (quoting Fed. R. Evid. 702(b)).
Thus, "trial judges may evaluate the data offered to support an expert's bottom-line opinions to
determine if that data provides adequate support to mark the expert's testimony as reliable." Id.
The court may exclude an opinion if "there is simply too great an analytical gap between the data
and the opinion offered." Id. "The proponent of the [expert] testimony must establish its
admissibility by a preponderance of proof." Cooper v. Smith & Nephew, Inc., 259 F.3d 194, 199
(4th Cir. 2001).
The Court is mindful that the Daubert inquiry involves "two guiding, and sometimes
competing, principles." Westberry v. Gislaved Gummi AB, 178 F.3d 257, 261 (4th Cir. 1999).
"On the one hand, . . . Rule 702 was intended to liberalize the introduction of relevant expert
evidence," id., and "the trial court's role as a gatekeeper is not intended to serve as a replacement
for the adversary system." United States v. Stanley, 533 F. App'x 325, 327 (4th Cir. 2013),
(citing Fed. R. Evid. 702 advisory committee's note), cert. denied, 134 S. Ct. 1002 (2014). On
the other hand, "[b ]ecause expert witnesses have the potential to be both powerful and quite
misleading,' it is crucial that the district court conduct a careful analysis into the reliability of the
expert's proposed opinion." Fultz, 591 F. App'x at 227 (quoting Cooper, 259 F.3d at 199).
b. Fair Market Value

Both parties have relied on the definition for fair market value included in the Stark
Regulations. Fair market value is defined therein as
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[V]alue in arm's-length transactions, consistent with the general market value.
"General market value" means the price that an asset would bring as the result of
bona fide bargaining between well-informed buyers and sellers who are not
otherwise in a position to generate business for the other party, or the
compensation that would be included in a service agreement as the result of bona
fide bargaining between well-informed parties to the agreement who are not
otherwise in a position to generate business for the other party, on the date of
acquisition of the asset or at the time of the service agreement. Usually, the fair
market price is the price at which bona fide sales have been consummated for
assets of like type, quality, and quantity in a particular market at the time of
acquisition, or the compensation that has been included in bona fide service
agreements with comparable terms at the time of the agreement, where the price
or compensation has not been determined in any manner that takes into account
the volume or value of anticipated or actual referrals.
42 C.F.R. § 411.351; see also US. ex rel. Drakeford v. Tuomey Healthcare Sys., Inc., 675 F.3d
394, 398 n.7 (4th Cir. 2012). While there is "no rule of thumb that will suffice for all situations,"
The Centers for Medicare & Medicaid Services ("CMS") has indicated that it "intend[s] to
accept any method [to determine FMV] that is commercially reasonable and provides [the
agency] with evidence that the compensation is comparable to what is ordinarily paid . . . by
parties in arm's length transactions who are not in a position to refer to one another." Medicare

and Medicaid Programs; Physicians' Referrals to Health Care Entities With Which They Have
Financial Relationships, 66 F. R. 856-01, 944, 2001 WL 7418 (Jan. 4, 2001); Renal Physicians
Ass'n v. Dep't of Health & Human Servs., 422 F. Supp. 2d 75, 77-78, 84 (D.D.C. 2006), aff'd
sub. nom. Renal Physicians Ass 'n v. US. Dep 't of Health & Human Servs., 489 F.3d 1267 (D.C.
Cir. 2007); US. ex rel. Singh v. Bradford Reg'l Med. Ctr., 752 F. Supp. 2d 602, 629-30 (W.D.
Pa. 2010).

III.

Relevant Facts
a. CPT Code 99000
Medicare applies the Medicare Physician Fee Schedule ("MPFS") to determine

reimbursement for physicians' services. The MPFS uses a standardized coding system called the

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Current Procedural Terminology ("CPT") that identifies each service and the appropriate
reimbursement for that service. The CPT codes are published annually by the American Medical
Association.
CPT Code 99000 is the code used by physicians to capture the processing and handling
services completed by the physician's office to prepare a specimen for transport to a laboratory
(i.e., centrifuging, separating serum, labeling specimens, packing specimens, or filling out
forms). Code 99000 is an adjunct code, meaning that it cannot be reported independently but
must be reported in conjunction with a code for one of the basic services rendered to the patient.
During the relevant period, 2009 through 2014, Code 99000 was "bundled" with the physician
reimbursement code for Evaluation and Management ("E&M") services. The E&M code covers
the costs associated with a patient's visit to an office and evaluation by a physician.
For example, during an office visit with a patient, a physician may identify the need for a
blood panel, collect a blood sample from the patient, and prepare that sample for transport to a
laboratory. That physician would bill Medicare for reimbursement using the E&M code for an
office visit. Although the physician would also record Code 99000 to account for the preparation
of the blood sample, Medicare would not separately reimburse him or her for those P&H services
because it considers the P&H costs to be "subsumed by the payment for the services to which
they are incident." 1
b. Curtis Udell's Fair Market Value Opinion

The Government alleges that Defendants offered and facilitated the payment of P&H fees
to physicians to induce referrals in violation of the AKS and FCA. The P&H fees - which
purportedly covered physicians' processing, handling and shipping of blood specimens for
CMS Fee Schedule Administration and Coding Requirements available at
https ://www.ems.gov/Re gulations-and-Guidance/Guidance/Manuals/downloads/elm 104c23. pdf.

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laboratory diagnostic testing - were paid pursuant to written P&H fee agreements between HDL
and Singulex (hereinafter "the laboratories") and the physicians or their practices. Pursuant to
written sales agreements with the two labs, Blue Wave marketed the laboratories' testing services
to physicians.
The United States has proffered Kathy McNamara to provide an expert opinion about the
Fair Market Value (FMV) of those P&H fees. The BlueWave Defendants have proffered Curtis
Udell's expert testimony in response to McNamara's report. Udell relied on a "charge-based
methodology" to develop his opinion that the P&H fees paid by the laboratories were consistent
with the FMV of these services. 2 (Dkt. No. 443-1.) He concluded that HD L's payments for P&H
services were "in-line" with the "national physician charge values billed for venous collection
and P&H services"; "payment data for venous collection code CPT 36410"; and "physician's
expectation for payment - as expressed as a billed line item." (Dkt. No. 443-1 at 4.) The
Government argues that a charge-based methodology cannot produce a reliable conclusion about
the FMV of the P&H services. This Court agrees. Udell's testimony is inadmissible because it is
not the product of a reliable methodology and is not based on sufficient facts or data.
The BlueWave Defendants defend Udell's charge-based methodology on two primary
grounds. First, they argue that there is no default rule for calculating FMV and there is "nothing
in the statute, regulation, or rulemaking requires FMV calculations to be based on "transactions,"
rather than simply charges, costs, or price." (Dkt. No. 475 at 6.) Second, they argue that the
Government has actually endorsed Udell's charge-based methodology.

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Udell acknowledged that he incorrectly included the term "commercial reasonableness" in his
report and that his analysis is a FMV analysis. (Dkt. No. 443-2 at 10-11.)

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IV.

Discussion
a. A Charge-Based Methodology is Not a Reliable Approach to Determining the
FMV of Physician Services

While there is no default rule for calculating FMV, the lack of a one-size-fits-all rule does
not mean that anything goes. The BlueWave defendants claim that the Court should allow
Udell's testimony because no Court has rejected a charge-based methodology for determining
FMV in the FCA context.
To begin, it is no secret that the sticker prices of services listed in physician bills and
hospital chargemasters are totally unmoored from the reality of arm's-length transactions
actually taking place in the marketplace. What's The Cost?: Proposals To Provide Consumers
With Better Information About Healthcare Service Costs, before the Committee On Energy And
Commerce House Of Representatives, 109th Cong. (2006) (Statement of Dr. Gerald F.
Anderson, Johns Hopkins, Bloomberg School Of Public Health, Health Policy And
Management) ("List prices are established by the hospitals and physicians without any market
constraints. Too often list prices have no relationship to the prices that are actually being paid by
insurers."); George A. Nation III, Determining the Fair and Reasonable Value of Medical
Services: The Affordable Care Act, Government Insurers, Private Insurers and Uninsured
Patients, 65 Baylor L. Rev. 425, 429-430 (2013) ("[C]hargemaster or list prices ... are grossly
inflated because they are set to be discounted rather than paid. . . . [T]hey certainly do not
represent the usual price actually paid for the listed goods and services.").
But the Court need not rely on this widely reported phenomenon. Experts from both
parties have conceded that insurers and Medicare do not pay physician charges, and physicians
do not expect to receive their charges. The Government has offered an in-depth explanation from

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Kathleen McNamara as to why physicians set their fees higher than the Medicare fee schedule that is - higher than what they actually expect to receive in reimbursement from Medicare.
Pursuant to statute, and subject to exceptions not applicable here, Medicare
payments for physicians' services are (and were during the relevant period) the
lesser of the Medicare Physician Fee Schedule (MPFS) amount and the
physician's actual charge for the service. Thus, if MPFS establishes a payment of
$100 for a service, a physician who charges $150 or $15,000 for the service
would receive at most $100 from Medicare for the service. In my experience,
most other insurance payors also pay the lesser of their fee schedule for physician
services and the physician's actual charge.
As a result, prudent physician practices set their charges higher than expected fee
schedule payments. For this reason, it has been my experience that physician
practices often set their charges at 200%-500% of the MPFS amounts.

(Dkt. No. 443-3 at 3.) Although Udell insists in his report that physician charges represent
physicians' expectations of payment (Dkt. No. 443-1 at 7), he agreed with McNamara's analysis
when he stated, during his deposition, that physicians set their charges higher than both Medicare
and private insurers will actually pay. (Dkt. No. 443-2 at 15.)
First, Udell acknowledged that physicians submit their retail charges to Medicare with
the knowledge that Medicare is not allowed to pay them any amount above the Medicare fee
schedule. (Dkt. No. 443-2 at 24.) Udell explained that physicians may nudge their fees even
higher than necessary to clear the current Medicare fee schedule rate because: (1) physicians "are
not going to set their fee at the Medicare rate because then they would be billing at a rate that
was below what somebody else may pay, so they want one fee schedule that they can apply to
everybody" (Dkt. No. 443-2 at 23); and (2) "because the Medicare fee schedule changes every
year" and for physicians to change their fees to match an increase in the fee schedule, they
"would have to get their staff to make those changes January 1 and who wants to work
December 31st, nobody." (Dkt. No. 443-2 at 18.)

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With regard to private insurers, Udell explained that physicians "don't want to leave
money on the table" so set their charges deliberately above what they expect an insurance
company is willing to pay (Dkt. No. 443-2 at 16), but "typically" sign contracts with private
insurers in which they agree to accept a fee that is lower than their charge. (Dkt. No. 443-2 at
23.) Finally, Udell acknowledged that his own practice is paid only about 68% of the fees it
charges. (Dkt. No. 443-2 at 24.) He agreed that "as a consultant, if you go into a physician
practice and they are getting 100% of their charges you know something is wrong" and that his
"ultimate recommendation" in that case would be for the practice to raise its fees. (Dkt. No. 4432 at 16.)
Udell takes issue with McNamara's characterization of physician fee-setting as
"arbitrary" (Dkt. No. 443-2 at 18) when, according to him, "a great deal of effort ... science ...
and thought processing ... goes into developing these fee schedules." (Dkt. No. 443-2 at 18.) The
Court agrees that physician fee-setting may not be totally arbitrary, but Udell's explanations
bolster the sole conclusion that physicians deliberately set their fees higher than the amount they
either expect to receive and do in fact receive to ensure that no money is left on the table.
Having conceded that physicians generally do not receive their full charges when
transacting with Medicare or private insurers, Udell's insistence that physician charges represent
their expectation of payment rings hollow. He even notes that there is a "difference between the
expectation of payment and then the reality of payment." (Dkt. No. 443-2 at 23.) In a case
involving the determination of hypothetical license damages, the Ninth Circuit explained that a
fair market value analysis must be grounded in evidence that reflects actual transactions, noting
that to determine the fair market value, "we do not ask what the owner would like to have
charged if unconstrained by reality, but what a willing owner actually would have charged after

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negotiation with a buyer." Oracle Corp. v. SAP AG, 765 F.3d 1081, 1088 (9th Cir. 2014); see

also Colomar v. Mercy Hosp., Inc., 461 F. Supp. 2d 1265, 1272 (S.D. Fla. 2006) ("the reality is
that the rates hospitals charge for services do not always accurately reflect the value of the
services, especially when the hospital routinely accepts much less for them.")
Finally, although Defendants insist that no court has found that a charge-based
methodology is improper, many courts actually have considered whether an unpaid hospital bi113
is admissible as evidence of the market value of physician services, often in the damages context.
These courts have uniformly acknowledged that physicians' billed charges do not necessarily
reflect the market value of physician services. See Aetna Life Ins. Co. v. Huntingdon Valley

Surgery Ctr., 129 F. Supp. 3d 160, 174 (E.D. Penn. 2015) (Chargemaster or price list "rates are
not 'actual charges' that providers intend to collect in full from insurers and members; they are
(usually) the inflated 'sticker prices' for providers' services that the insurer itself then trims to set
the allowed amount) (internal citations omitted); Howell v. Hamilton Meats & Provisions, Inc.,
257 P.3d 1130, 1144 (2011) ("[A] medical care provider's billed price for particular services is
not necessarily representative of either the cost of providing those services or their market
value."); Corenbaum v. Lampkin, 215 Cal. App. 4th 1308, 1330-31 (2013) (relying on Howell
and concluding "that the full amount billed by medical providers for past medical services is not
relevant to the value of the services. . . [and] Because the full amount billed for past medical
services provided to plaintiffs is not relevant to the value of those services, we believe that the
full amount billed for those past medical services can provide no reasonable basis for an expert
opinion on the value of future medical services"); Ochoa v. Dorado, 228 Cal. App. 4th 120, 135

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As defendants have provided no evidence that the charges they relied on were ever actually
paid by an individual, a private insurer, or the government, the Court finds it proper to treat the
physician charges as unpaid medical bills.

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(2014) ("[T]he full amount billed, but unpaid, for past medical services is not relevant to the
reasonable value of the services provided."); Johnson v. Trans-Carriers, Inc., 2017 WL 28004 at
*2 (D.C.Tenn. 2017) ("The non-discounted charges were not reasonable because they did not
reflect the rate for services in the actual marketplace: few insurers pay the hospital's listed, full
charge."); Nassau Anesthesia Assocs. PC v. Chin, 924 N.Y.S.2d 252, 254 (N.Y. Dist. Ct. 2011)
("Since hospitals and related providers rarely receive payment based upon their 'published rates,'
those rates cannot be deemed determinative in assessing the value of the services."); Temple
Univ. Hosp., Inc. v. Healthcare Mgmt. Alternatives, Inc., 832 A.2d 501, 510 (Pa. Super. Ct.
2003) ("If the Hospital recovers its published rates in only one to three percent of its cases, those
rates clearly do not reflect the amount that members of the community ordinarily pay for medical
services.").
b. HHS Has Not Endorsed Udell's Charge-Based Methodology for Determining
the FMV of Physician Services

Relying on a single sentence in the Federal Register that follows the guidance on FMV
determinations outlined in the legal standards section of this order, the Blue Wave Defendants
claim that the Government has endorsed Udell's charge-based methodology. The sentence they
rely on reads: "there may be cases in which finding a commercially reasonable representation of
fair market value (or general market value) could be as simple as consulting a price list."
Medicare and Medicaid Programs; Physicians' Referrals to Health Care Entities With Which
They Have Financial Relationships, 66 FR 856-01, 944, 2001 WL 7418 (Jan. 4, 2001).
First, there is no evidence that that physician charges Udell relied on reflect the "price" of
P&H services, that is, the money expected or required as payment for something. As discussed
above, although Udell insists over and over in his deposition that physician charges reflect their
expectation of payment, his factual concessions point to the opposite conclusion: that physicians

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set their charges higher than the actual payments they expect to receive from Medicare or private
msurers.
Second, taken in context with the rest of the Department's guidance about FMV
determinations, it is clear that HHS did not intend to suggest that an arbitrary list of figures,
totally divorced from the reality of actual transactions, could form the basis of a FMV analysis.
For a price list alone to support a FMV determination, it would have to, in some way, reflect the
price at which arm's-length transactions are consummated. In any event, the HHS guidance
suggests only that there may be cases in which consulting a price list is sufficient to assess FMV,
and for all the reasons just discussed, this is certainly not one of those cases.
V.

Conclusion

For the reasons set forth above, the Government's motion to exclude the expert testimony
of Curtis Udell (Dkt. No. 443) is GRANTED.
AND IT IS SO ORDERED.

Richard Mark Gerg 1
United States District Court Judge
July _JL, 2017
Charleston, South Carolina

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