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

Filing 603

ORDER AND OPINION denying the motions filed by the BlueWave Defendants and Latonya Mallory to exclude the expert testimony of Kathy McNamara (Dkt. Nos. 448 449 ). AND IT IS SO ORDERED. Signed by Honorable Richard M Gergel on 8/22/2017.(sshe, )

IN THE UNITED ST ATES DISTRICT COURT
DISTRICT OF SOUTH CAROLINA
CHARLESTON DIVISION
United States of America, et al.,
Plaintiffs,

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Plaintiffs-Relators,
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v.
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Berkeley Heartlab, Inc., et al. ,
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Defendants.
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~~~~~~~~~~~~~~~~)

Civil Action No. 9:14-cv-00230-RMG
(Consolidated with 9: 11-cv-1593-RMG and
9:15-cv-2458-RMG)

ex rel. Scarlett Lutz, et al. ,

ORDER and OPINION

This matter is before the Court on a motion by BlueWave Healthcare Consultants, Inc.,
Floyd Calhoun Dent, III, and Robert Bradford Johnson (collectively, "the BlueWave
Defendants") to exclude the United States' proffered expert testimony of Kathleen McNamara.
(Dkt. No. 448.) Defendant Latonya Mallory has filed a motion joining the BlueWave
Defendants' motion to exclude the testimony of Kathleen McNamara. (Dkt. No. 449.) The
United States has filed a response in opposition. (Dkt. No. 471.) For the reasons set forth below,
the motions to exclude are denied.
I.

Background and Relevant Facts
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. (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 2015. The Government has alleged that Defendants violated the FCA when
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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
processing and handling ("P&H") fees to physicians to induce referrals in violation of the AKS
and FCA.
The United States has proffered the expert testimony of Kathleen McNamara regarding
the fair market value and commercial reasonableness of the P&H fees by HDL and Singulex to
physicians or physician practices. Those P&H fees were paid pursuant to written P&H Fee
agreements between the laboratories and physicians or their practices. Blue Wave marketed HDL
and Singulex lab testing services to physicians pursuant to written sales agreements.

II.

Legal Standard - Daubert
Under Rules 104(a) and 702 of the Federal Rules of Evidence, "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. "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
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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
through "research they have conducted independent of the litigation," Daubert v. Merrell Dow

Pharrns., 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. Bait. 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 Gurnrni 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

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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). 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).
III.

Discussion
A.

McNamara's Qualifications

The Blue Wave Defendants argue that McNamara has no experience in the lab industry so
should not be allowed to give an opinion on the Fair Market Value ("FMV") of transactions
executed pursuant to laboratory agreements. (Dkt. No. 448 at 13.) Defendants do not otherwise
challenge McNamara's qualifications to provide FMV and commercial reasonableness opinions,
and the Court finds that McNamara is qualified to provide both based on her comprehensive
qualifications and experience. (Dkt. No. 448-1 at 2-3 , 55-57.) The record shows that McNamara
has been found qualified by other Courts to provide FMV and commercial reasonableness
opinions in the healthcare context, specifically with regard to physician compensation and
services. The Court therefore finds McNamara qualified to provide opinions on the FMV and
commercial reasonableness of payments to physicians and physician practices based on her
knowledge and experience. In this case, that includes payments to physicians made by
laboratories.
B.

McNamara's FMV Analysis

1.

Definition of FMV

The BlueWave Defendants argue that McNamara' s FMV analysis is unreliable primarily
because she used an improper definition of FMV. They argue that McNamara inappropriately
concluded that a FMV analysis cannot take into account the volume or value of referrals because

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she (1) relied on the FMV definition in the Stark provisions, 42 U.S.C . § 1395nn, governing
physician self-referral for Medicare and Medicaid Patients even though the Government has not
pleaded a Stark violation (Dkt. No. 448 at 5); (2) claimed to rely on the valuations standards of
the American Society of Appraisers' Business Valuation Standards and the American Institute of
Certified Public Accountants ' Standards for Valuation Services, even though neither of these
standards explicitly requires exclusion of the volume or value of referrals from FMV
calculations; (3) inappropriately relied on a provision of the personal services safe harbor
provision of the AKS even though defendants did not plead reliance on a safe harbor and
compliance with a safe harbor is not mandatory for compliance with the AKS (Dkt. No 448 at 6);
(4) inappropriately relied on the 1992 Thornton advisory opinion letter which does not "mandate
the exclusion of consideration of referrals" (Dkt. No. 448 at 6); (5) inappropriately relied on
administrative guidance from the Office of Inspector General (Dkt. No. 448 at 7); and (6)
inappropriately relied on the June 25, 214 Special Fraud Alert issued by the Office of Inspector
General of the Department of Health and Humans Services that was not available to Defendants
during the time they paid P&H fees .
The Blue Wave Defendants argue that McNamara's definition of FMV, which excludes
consideration of the value or volume of referrals, creates "absurd results. " (Dkt. No. 448 at 9-10.)
The Defendants seem to have conflated two separate issues. McNamara explained in her
deposition that she concluded the business arrangement between the laboratories and physicians
was designed to "take into account" the value and volume of referrals because the number of
referrals impacted the amount of compensation.
McNamara did not include the value or volume of referrals in her calculation of the FMV
of P&H fees in the marketplace because doing so would defeat the purpose of an analysis

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designed to determine whether payments to physicians in this case were higher than the FMV for
the services actually performed and so may have disguised remuneration intended to induce
referrals 1, a practice that is illegal under the AKS. See United States ex rel. Kosenske v. Carlisle

HMA, Inc., 554 F.3d 88, 97 (3d Cir. 2009) (" [W]here one party is in a position to generate
business for the other, negotiated agreements between such parties are often designed to disguise
the payment of non-fair-market-value compensation."); United States v. Rogan, 459 F. Supp. 2d
692, 716 (N.D. Ill. 2006). In AKS cases, the fact finder may infer that payments were intended to
be kickbacks based on evidence that the recipient was grossly overpaid for any legitimate
services he provided).
The BlueWave Defendants provide no support for their argument that a FMV analysis
should include the value or volume of referrals besides citing the lack of explicit statutory
language excluding consideration of these factors. The two cases defendants rely on do not
support their conclusion. (Dkt. No. 448 at 8.) First, neither case supports the consideration of the
value or volume of referrals in a FMV analysis. As the Government noted, both cases rely on

United States ex rel. Obert-Hong v. Advocate Health Care, 211 F. Supp. 2d 1045 (N.D. Ill.
2002), regarding the appropriate FMV standard in AKS cases. Obert-Hong directly contradicts
Defendants' argument: "We note that fair market value here may differ from traditional
economic valuation formulae. Normally, we would expect the acquisition price to account for
potential revenues from future referrals . Because the Anti-Kickback Act prohibits any
inducement for those referrals, however, they must be excluded from any calculation of fair
value here. " 211 F. Supp. 2d at 1049 n.2 . As the Court has explained in previous orders, there is

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The AKS "does not criminalize referrals for services paid for by Medicare or Medicaid-it
criminalizes knowing and willful acceptance of remuneration in return for such referrals." US.
ex rel. Jamison v. McKesson Corp., 900 F. Supp. 2d 683, 697 (N.D. Miss. 2012).

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no one-size-fits-all approach to performing an FMV analysis, but the Court finds McNamara's
cost-based approach that excludes the volume and value ofreferrals to be reliable in this case.

2.

Cost Approach to FMV Analysis

The Blue Wave Defendants argue that McNamara ignored a market approach and income
approach to FMV and critically ignored comparable lab-to-lab P&H fee agreements in her FMV
analysis (Dkt. No. 448 at 12.) Defendants do not dispute that the cost approach to FMV is
widely accepted, and Defendants' own literature refers to the cost approach as an accepted
methodology. (Dkt. No. 448-17 at 10; 448-18 at 20.) Further, Defendants do not argue that a
reliable FMV analysis requires the use of two or three separate methodologies or that the market
or income approach would be more reliable in the context of this case. For her part, McNamara
explained why she concluded that why the market and income approach were not appropriate in
this case. (Dkt. No. 448-1at18, 39.) For these reasons, the Court finds that McNamara' s reliance
on the cost-based approach to be a reliable methodology.

3.

Figures used in FMV Analysis

To determine the FMV of P&H services, the record shows that McNamara took into account
(1) the time needed to perform P&H tasks; (2) the type of personnel who perform P&H tasks; (3) the
labor cost associated with the P&H tasks, including wages and benefits; (4) the office space needed
to perform P&H tasks; and (5) the equipment and supplies needed to perform P&H tasks . (Dkt. No.
448-1 at 21 - 22.) McNamara explained in detail the foundation for the figures she used in her
analysis. (Id. at 21 - 38.) The BlueWave defendants do not dispute that McNamara executed the cost
approach properly. They disagree only with the figures McNamara used to represent the cost of
office space, cost of labor, and centrifuge time.

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a. Office Space
The Blue Wave Defendants argue that McNamara's use of 20 square feet to represent the
office space necessary to perform phlebotomy/venipuncture services was subjective and so
should be excluded. McNamara explained in her report what equipment was needed to perform
these services and why she though 20 square feet was sufficient to house the equipment and
personnel. The time/motion study that HDL commissioned from Exponent estimated that 100
square feet would be needed, but the author of the report acknowledged that only a portion of
this space would be needed to perform P&H services. (Dkt. No. 471-5 at 52.) For these reasons,
the dispute over McNamara's use of 20 square feet is not grounds for exclusion of her testimony.
b. Labor
The BlueWave Defendants claims that McNamara arbitrarily used the 75th percentile of
hourly wage rates in her calculation of the cost of labor for phlebotomists and medical assistants
and arbitrarily made the decision to divided labor time equally among registered nurses, licensed
practical nurses, medical assistants, and phlebotomists. (Dkt. No. 448 at 13-4.) The record shows
that the Exponent analysis Defendants rely on used an average hourly rate based on data from the
U.S. Bureau of Labor Statistics. (Dkt. No. 547-4 at 9.) McNamara's use of the 75th percentile
instead of the mean inures to defendants' benefit because the Government attests (and
Defendants did not contest) that the mean hourly rate would have been lower than the 75th
percentile.
McNamara also explained her reasons for dividing up time equally among medical
assistants, licensed practical nurses, registered nurses, and phlebotomists. (Dkt. No. 448-1 at 2324.) McNamara's opinion that a FMV analysis based on labor costs of personnel paid more than
medical assistants and phlebotomists would improperly inflate P&H costs was supported by
evidence in the record that HDL and Singulex would provide phlebotomists (not higher paid
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personnel) when asked to provide personnel to collect, process, and handle blood specimens.
(Dkt. No. 471at15.) McNamara also accounted for the costs of hiring higher-paid personnel in
her more conservative scenario as compared to her more likely scenario (Dkt. No. 448-1 at 4 7),
and to the extend Defendants disagree with her weighting of the various types of personnel
(although they have provided no factual basis for disputing her method), they may do so on cross
examination.
c. Centrifuge Time
The BlueWave Defendants note that McNamara allocated zero minutes for centrifuging
time while Mallory assigned 15 minutes to the same task. That Mallory came to a different
conclusion about the time assigned to centrifuging does not render McNamara's analysis
unreliable. McNamara explained that she assigned zero minutes to centrifuging to avoid double
counting labor time and costs because personnel perform other tasks while the centrifuge is
running. (Dkt. No. 448-1at27.) The author of the Exponent time-motion study commissioned by
HDL conceded in her deposition that this would likely be appropriate to avoid double-counting.
(Dkt. No. 471-5 at 42.)
C.

McNamara's Commercial Reasonableness Opinion

The BlueWave Defendants argue that a commercial reasonableness opm10n is not
relevant to this case because commercial reasonableness is not a requirement under the AKS
statute. (Dkt. No. 448 at 15). The Government argues that evidence that the P&H fee
arrangements were not commercially reasonable absent the value of referrals is relevant to (1)
Defendant's intent that the fees be used to induce future referrals; (2) rebutting Defendants'
claim that they had valid business reasons for entering the P&H arrangements; and (3) rebutting
Defendant's advice of counsel defense because the defense relies on letters from counsel that
discuss the personal services safe harbor and commercial reasonableness requirement.
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The Court agrees with the Government. The United States may rely on requirements of
the personal services save harbor where Defendants have asserted as a defense the good faith
reliance on advice of counsel when that advice indicated that the fees paid to physicians in this
case were FMV, commercially reasonable, and in compliance with the personal service safe
harbor. To qualify under the safe harbor provision, the compensation for services must "not [be]
determined in a manner that takes into account the volume or value of any referrals or business
otherwise generated between the parties." 42 C.F.R. § 1001.952(d)(5); See United States v.

TEVA Pharms. USA, Inc. , Civ. A. No. 13-3702, 2016 WL 750720, at *18 (S .D.N.Y. Feb. 22,
2016) (finding that allegations supported inference that payments were "not consistent with fair
market value" because physicians received payments only if they generated sufficient referrals);

United States ex rel. Singh v. Bradford Med. Reg '! Med. Ctr., 752 F. Supp. 2d 602, 634 (W.D.
Pa. 2010) (" [T]he compensation received by the doctors from [defendant] is not fair market
value because it was determined in a manner that takes into account the volume or value of
referrals.").
The BlueWave Defendants also argue that McNamara' s commercial reasonableness
analysis is deficient because she did not consider labs similar to HDL and Singulex and
physicians who perform services similar in scope to the physicians who allegedly received
kickbacks in this case. (Dkt. No . 448 at 16-17.) A commercial reasonableness analysis does not
require the Government's expert witness to do more than determine whether a transaction for a
specific service would be commercially reasonable between any type of laboratory and any type
of physician. The Defendants have not given any reason why a general practitioner ordering a
test would find it commercially reasonable to pay a laboratory more for a test than, for example,
a cardiovascular specialist.

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D.

Information Under Seal

The BlueWave Defendants claim that it is "patently unfair" that they have not been able
to "fully explore McNamara's past Government work experience," including Medicare and
Medicaid fraud cases she has worked on that are under seal. Defendants claim this is a basis for
excluding McNamara as a recalcitrant witness. (Dkt. No. 448 at 21.) Defendants have cited no
reason they believe information about McNamara' s work on these other cases would be relevant
to this case, and the Government asserts that McNamara has not relied on any work from those
cases in the present case. That these cases remain under seal is not evidence of McNamara' s
recalcitrance.

E.

Legal Conclusions

The BlueWave Defendants claim that McNamara proffers legal conclusions and
interpretations throughout her report, listing several representative examples of her legal
conclusions regarding intent. (Dkt. No. 488 at 18-20.) As explained in the Court's order
excluding the BlueWave' s expert Daniel Mulholland, expert testimony about the correct
interpretation of legal standards and the ultimate issue of Defendants' scienter or intent is
inadmissible. In any event, the Government has represented that it does not intend to have
McNamara espouse any legal conclusions or interpretations at trial. (Dkt. No. 471 at 20.)
Defendants also object to McNamara' s proffered testimony regarding the "facts involving
HDL and Singulex paying P&H fees prior to the time they obtained FMV analyses." (Dkt. No.
448 at 20.) While McNamara conceded that an FMV valuation need not be obtained prior to
entering into a service agreement, the Government asserts that these facts are relevant to her
opinion that Defendants procured FMV analyses in order to justify or validate their practices

after the fact. (Dkt. No. 448-1 at 18-21.) McNamara says this information is relevant because if a
valuator is instructed that its task is to support the client's compensation practices, as the
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Government alleged Mallory instructed Exponent to do, the valuator must take steps to
independently validate the data and assumptions provided by the client. The Government argues
that McNamara should be able to explain why she was cautious about relying on Defendants'
data or assumptions, particularly if she is cross-examined about her reasons for rejecting certain
data that she found unreliable.
The Court will not allow the Government to elicit testimony from McNamara about the
timing of Defendants' procurement of an FMV analysis because that information is not relevant
to her commercial reasonableness or FMV opinion (both of which this Court has found are based
on McNamara' s qualifications and experience) and has the potential to mislead the jury about the
legal requirements for obtaining a FMV analysis, and, in turn, lead to improper testimony about
Defendants' scienter and intent. However, if Defendants attempt during cross-examination to
show that McNamara' s failure to use the same data Defendants used is indicative of some
improper intent, bias, or animus on her part, McNamara will be allowed to testify that the timing
of the FMV analysis procured by defendants was relevant to her decision not to consider those
figures.

IV.

Conclusion

For the reasons set forth above, the motions filed by the BlueWave Defendants and
Latonya Mallory to exclude the expert testimony of Kathy McNamara (Dkt. Nos. 448, 449) are
denied .
AND IT IS SO ORDERED.

United States District Court Judge
August ~"l-, 2017
Charleston, South Carolina

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