Dallas Laboratory, Owners, and Investors Pay $24M to Resolve COVID-19 Testing Fraud Allegations

Magnolia Diagnostics, a clinical laboratory based in Dallas, Texas, and its owners, John Bains and Kelly Bains, have agreed to pay the United States $19.2 million to resolve allegations that they violated the False Claims Act by billing Medicare for medically unnecessary respiratory pathogen panel testing performed on seniors receiving COVID-19 tests. Magnolia investors will pay an additional $4.8 million to resolve common law claims for unjust enrichment and payment by mistake and claims under the Federal Debt Collection Procedures Act, arising from distributions they received from Magnolia.

"The Justice Department is committed to protecting taxpayer-funded programs and holding accountable those who exploit them," said Assistant Attorney General Brett A. Shumate of the Justice Department's Civil Division. "We will pursue not only companies that submit false claims and the owners who direct the misconduct, but also investors who receive and retain its financial benefits - especially when vulnerable Americans are exploited for profit."

"My office is committed to tackling healthcare fraud through the use of all available tools, both through criminal prosecutions and, as here, civil investigations. Too many of our healthcare dollars are lost to fraud, waste, and abuse, but civil settlements like this one help recover valuable healthcare dollars for the American taxpayer," said U.S. Attorney Ryan Raybould for the Northern District of Texas. "Thank you to my attorneys in partnership with Main Justice in focusing our efforts to recover healthcare dollars. We will continue to use all available tools in this important fight."

"Protecting seniors and safeguarding Medicare are core to our mission," said Acting Deputy Inspector General for Investigations Scott J. Lampert of the U.S. Department of Health and Human Services Office of Inspector General. "As alleged, Magnolia Diagnostics showed reckless disregard for medical necessity, beneficiary well-being, and the law - all to boost its profits during a national public health emergency. Today's resolution reflects our determination to uncover this kind of misconduct and hold accountable those who put greed above patient care."

The United States alleges that, beginning in April 2020, John Bains and Kelly Bains, acting through Magnolia, devised a strategy to generate significant revenue by requiring senior living communities seeking COVID-19 testing to also obtain expensive respiratory pathogen panels (RPPs). To implement this protocol, Magnolia used prepopulated requisition forms that selected RPP testing and associated diagnosis codes before any individualized clinical assessment occurred. Magnolia allegedly treated provider signatures on those forms as blanket or standing orders authorizing RPPs for all seniors across entire communities or chains of communities, and then used those purported authorizations to perform RPPs on specimens collected during community-wide COVID-19 testing.

The United States further alleges that Magnolia performed RPPs for some communities without a purported standing order, and continued performing RPPs after providers and communities demanded COVID-19-only testing, questioned the panel's medical necessity or clinical value, or stated that they had not authorized RPPs. At times, John Bains allegedly threatened to withhold COVID-19 testing from communities that asked not to receive RPPs. In at least two instances, John Bains allegedly altered a provider-signed requisition form to expand the apparent scope of the provider's authorization beyond the facility identified on the original form, and then used those altered forms as standing orders to support RPP testing for residents across multiple facilities not covered by the original form.

Magnolia also allegedly froze and stored thousands of respiratory specimens, sometimes for weeks or months, before thawing and testing them. Magnolia thereby generated RPP results after they could no longer inform timely treatment, isolation, or infection-control decisions. The United States alleges that, between April 1, 2020, and Sept. 30, 2021, Magnolia, John Bains, and Kelly Bains knowingly submitted, or caused the submission of, false claims to Medicare for thousands of RPPs that lacked medical necessity.

The resolution obtained in this matter was the result of a coordinated effort between the Justice Department's Civil Division, Commercial Litigation Branch, Fraud Section and the U.S. Attorney's Office for the Northern District of Texas, in conjunction with the U.S. Department of Health and Human Services, Office of Inspector General.

The investigation and resolution of this matter illustrate the government's emphasis on combating healthcare fraud. One of the most powerful tools in this effort is the FCA. Tips and complaints from all sources about potential fraud, waste, abuse, and mismanagement can be reported to the Department of Health and Human Services at www.oig.hhs.gov/fraud/report-fraud/Links to other government and non-government sites will typically appear with the "external link" icon to indicate that you are leaving the Department of Justice website when you click the link. or 800-HHS-TIPS (800-447-8477).

This year, the Trump Administration launched the Task Force to Eliminate Fraud and the National Fraud Enforcement Division to enhance the Administration's war on fraud, waste, and abuse in federal programs. When unscrupulous actors exploit these programs for their own financial gain, they defraud the government, harm the people these programs are designed to aid and protect, and undermine American businesses that play by the rules. The Civil Division's False Claims Act enforcement plays a critical role in combatting such fraudulent schemes, recovering billions of dollars for the American taxpayers, and holding wrongdoers accountable. False Claims Act matters will continue to be on the forefront of the battle against fraud, and the Civil Division's False Claims work will support and advance the mission of the Task Force to Eliminate Fraud and the National Fraud Enforcement Division.

The matter was handled by Associate Deputy Attorney General Paul Perkins, Fraud Section Trial Attorney Asha Natarajan, and Assistant U.S. Attorney Brian Stoltz for the Northern District of Texas.

The claims resolved by the settlements are allegations only and there has been no determination of liability.

Note: Read the Settlement with Magnolia Diagnostics, John Bains, and Kelly Bains here.

Read the Settlement with Magnolia Diagnostics Investors here.