A large damage award serves as a significant reminder to file an appearance in a False Claims Act (FCA) case.

In late August of 2022, the Government filed suit against AZ Diabetic and the owner, Hisham Zaghal (Zaghal), in the Eastern District of Virginia, alleging violations under the False Claims Act (FCA), stemming from over $600,000 in reimbursement claims related to prescriptions that AZ Diabetic illegally purchased. After AZ Diabetic failed to file an appearance, the Government moved for default judgment, which was entered by the Court. As a result, AZ Diabetic was liable for just over $12 million in civil penalties and treble damages under the FCA for violations of the Anti-Kickback Statute (AKS).

Under the FCA, penalties constitute three times the amount of damages awarded to the government, in addition to penalties for each false claim.  Here, the Court awarded the Government $1,836,987.48 in damages and $10,199,567 based on the minimum civil penalty for each of the 923 claims submitted to Medicare for a total of $12,036,554.48.

The Government’s Motion for Default Judgment was denied as to Zaghal because he retained counsel and filed an appearance. What remains a mystery is why he did not retain counsel and file an appearance for his company. Ultimately, Zaghal reached a separate settlement with the Government. He agreed to pay $10,000 and forgo $57,690.12 that was held in escrow by the Department of Health and Human Services (HHS) for the suspension of payments to AZ Diabetic for his alleged involvement in the kickback scheme. Additionally, he accepted a three-year voluntary exclusion from Medicare and other federal healthcare programs.

The large damage award and civil monetary penalties, as well as Zaghal’s settlement, arose from a kickback scheme in which AZ Diabetic purchased prescriptions, patient referrals, and qualified leads from RealTime Consulting & Marketing, Inc. Quality RX Solutions (“RealTime”). RealTime is an intermediate call center connecting Medicare patients to durable medical equipment (DME) suppliers, like AZ Diabetic. In this case, RealTime purchased Medicare patients’ contact information from companies that targeted Medicare beneficiaries and contacted the patients to gauge interest in medical braces. If a patient was interested, Realtime would obtain a medical brace prescription from the patient’s primary care physician in order to turn around and sell it to AZ Diabetic.

The improper remuneration resulted from AZ Diabetic paying a fee to Realtime for each prescription, which increased for more expensive DME. AZ Diabetic would then seek Medicare reimbursement for each prescription, and if coverage was denied, Realtime would replace the prescription with a new prescription where AZ Diabetic could again seek reimbursement. Though this scheme, AZ Diabetic received $234,978.93 from Medicare for equipment it sold based on prescriptions it bought from RealTime. In January 2020, RealTime’s owner, Nathan LaParl, pled guilty to receiving kickbacks.

Additionally, AZ Diabetic also purchased DME prescriptions from LPI Media Group (LPI), owned by Steven Churchill (“Churchill”). In 2017, Realtime began selling qualified leads to LPI. LPI then obtained prescriptions from the leads by paying telemedicine doctors. AZ Diabetic purchased those prescriptions from LPI for a flat fee per prescription. Consequently, AZ Diabetic sought reimbursement based on those prescriptions, which resulted in Medicare paying AZ Diabetic $377,350.23. Churchill was indicted in 2020 for healthcare fraud, mail fraud, wire fraud, and money laundering for his involvement in a fraudulent mail order pharmacy that submitted claims to Medicare for prescriptions that did not exist. He also sold some of those prescriptions to DME suppliers, such as AZ Diabetic.  Churchill’s case is still pending.

This case serves as another reminder to healthcare providers and medical equipment suppliers that healthcare fraud is costly, and the damages and penalties are steep. Any arrangements involving referrals should comply with the AKS and associated safe harbors. DME suppliers should seek trusted counsel to review referral arrangements, assess and implement compliance programs, and mitigate compliance risk. Further, in the face of government investigations, DME suppliers should retain counsel to ensure amongst other considerations, that all applicable deadlines are adhered to.

The authors wish to thank Kasia Crain for her help in preparing this alert. She is not licensed to practice law.