Third-Party Diagnostic Service Provider Found Engaging in Billing Fraud

Medical billing fraud occurs when a healthcare provider submits invoices to federal healthcare reimbursement programs, such as Medicare or Medicaid, for services either never rendered or for more costly services than those actually rendered. Sometimes, as in the case described below, a medical facility outsources part of its processes to a third-party facility who then submits its own invoices for services rendered. These invoices must be accurate reflections of healthcare offered or the facility could face liability.

The case below also highlights the pitfalls that can occur when healthcare facilities offer discounts to patients while simultaneously billing Medicare and Medicaid for the full amount.

Background Facts of United States et. al. v. Kan-Di-Ki LLC

This case involves a number of parties and a somewhat complex factual background. Kan-Di-Ki, LLC, an entity doing business as Diagnostic Labs, offers inpatient, outpatient, radiology and mobile health services. Skilled Nursing Facilities, curiously not added as a defendant, operates a number of nursing homes in the Southern California area and was routinely referring patients to Diagnostic Labs for various services. The relators in this case are former Diagnostic Labs employees who commenced a qui tam lawsuit under the False Claims Act, and were eventually joined by the Department of Justice after a joint investigation by the U.S. Attorney’s Office for the Central District of California, the Justice Department’s Civil Division, Commercial Litigation Branch and the Department of Health and Human Services’ Office of the Inspector General.

Diagnostic Labs Caught Engaging in Unlawful Kickback Schemes

The False Claims Act expressly forbids referral fees and kickback schemes within the context of medical services to be reimbursed by federal healthcare programs. In this case, Diagnostic was found to be exploiting Medicare’s billing system which treats reimbursement differently depending upon whether the service was inpatient or outpatient. Inpatient services, or those requiring admittance and at least one night’s overnight stay, are reimbursed at a flat rate depending upon the patient’s diagnosis – a rate not taking into account the amount of nursing care or services rendered for the patient. Outpatient services, which are medical procedures not requiring an overnight stay, are billed individually, or in an a la carte manner. This difference makes it far more lucrative to treat a patient for several outpatient services as opposed to one inpatient stay.

Therein lies the opportunity for entities like Diagnostic to set up a fraudulent scheme to maximize profits while bilking the Medicare system out of taxpayer dollars.

 In its allegations, the DOJ revealed that Diagnostic offered Skilled Nursing Systems discounted rates on its inpatient services (remember, they get paid the same amount regardless of work performed) in exchange for referrals for outpatient services. In other words, Skilled Nursing Systems received a kickback from Diagnostic and was therefore able to maximize profits on inpatient procedures while Diagnostic was able to unlawfully gain revenue on outpatient clients.

 It is unclear why Skilled Nursing Services was not named as a defendant in this case, as the language in the Medicare and Medicaid Patient Protection Act expressly states:

(1) whoever knowingly and willfully solicits or receives any remuneration (including any kickback, bribe or rebate) directly or indirectly, overtly or covertly, in cash or in kind –

(A) in return for referring an individual to a person for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in part under [Medicare] or a State health care program, or

(B) in return for purchasing, leasing, ordering, or arranging for or recommending purchasing, leasing, or ordering any good, facility, service, or item for which payment may be made in whole or in part under [Medicare] or a State health care program,

 shall be guilty of a felony and upon conviction thereof, shall be fined not more than $25,000 or imprisoned for not more than five years, or both.


The Department of Justice did not take lightly Diagnostic’s attempt to defraud U.S. and California taxpayers out of funds reserved for the treatment of elderly and low-income individuals. As a result, Diagnostic was ordered to pay $17.5 million to the federal and state governments. The relators in this case received an award of $3,755,500 as their share of the recovery.

Contact Us to Learn More

Do you need a Whistleblower Lawyer or want to know more information about Qui Tam Law and your rights under the False Claims Act?

There are three easy ways to contact our firm for a free, confidential evaluation with one of our whistleblower attorneys:

  1. Fill out the contact form on this page.
  2. Email
  3. Call (888) 647-9292
By | 2018-10-04T15:42:26+00:00 October 1st, 2013|Healthcare Fraud|