Modernizing Medicine: Lab Steering, EHR Donations and Referral Payments

In the ModMed settlement, Modernizing Medicine agreed to pay $45 million to resolve False Claims Act allegations of laboratory kickbacks, improper EHR donations, paid recommendations and false federal incentive claims. The government alleged that the software vendor took money from a laboratory to steer orders its way, and paid customers and industry influencers to bring more practices into its own business. If you worked on the interfaces, partner contracts or sales programs, you would recognize these decisions.

The Department of Justice announced the settlement on November 1, 2022. ModMed, based in Boca Raton, Florida, sold Electronic Medical Assistant, known as EMA, a cloud-based record system used in specialty practices including dermatology, gastroenterology and ophthalmology. A former vice president of product management brought the whistleblower case.

What Is the EHR Incentive Program?

The historical Medicare and Medicaid EHR Incentive Programs paid eligible health care providers to adopt and meaningfully use certified electronic health records. Under the HITECH Act, the government helped fund the purchase and implementation of systems that providers would use in their practices. Providers seeking payments had to confirm that their software was certified and that they met the program’s requirements.

The money behind those purchasing decisions was substantial. The Centers for Medicare & Medicaid Services’ September 2018 payment report recorded about $38.4 billion in program payments through that month. A vendor selling eligible software was selling access to a publicly subsidized purchase as well as a clinical tool.

The payment connection continues under successor programs. CMS explains that its Medicare Promoting Interoperability Program continues for eligible hospitals, while similar requirements for clinicians moved into the Merit-based Incentive Payment System. Both tie payment adjustments to the use of certified electronic health records.

In the ModMed allegations, the federal payment connection ran through both the clinical orders and the software purchase. The government said the commercial arrangements generated false pathology claims and false incentive claims. It separately alleged that EMA’s handling of required medical vocabularies caused inaccurate incentive submissions. Those are different paths to the government’s money, and the product details explain each one.

Laboratory Kickbacks Through an Exclusive Interface

The government alleged that Miraca Life Sciences paid ModMed to make its laboratory the favored destination for pathology orders inside EMA. The government’s complaint describes an agreement signed in September 2013 that combined useful clinical features, exclusivity and payments tied to laboratory business.

The complaint describes how EMA’s enhanced order interface let physicians send clinical history and photographs along with specimens directed to Miraca. The enhanced results interface brought findings directly back into EMA and prepopulated laboratory results, action and plan.

That is a real workflow advantage. The complaint itself describes the features as saving physicians time and money and improving accuracy and patient safety. Its allegation was that ModMed reserved those advantages for the paying laboratory. Physicians sending orders elsewhere could not use the enhanced features.

What the Laboratory Paid For

According to the complaint, Miraca agreed to pay $250,000 for development of the enhanced interfaces. The contract prohibited ModMed from making the features available for other pathology laboratories, with exclusivity continuing for at least 180 days after notice ending it.

The alleged financial incentive went beyond development costs. Miraca also agreed to pay a fee for each specimen sent by an EMA user, with the rate increasing as the practice sent a greater share of its specimens to Miraca. The agreement included a monthly minimum of $20,000, and a provision requiring negotiations to match a competing laboratory’s higher transaction fee.

The complaint quoted an employee’s account of what that arrangement meant for ModMed:

The government alleged that ModMed paired regional sales managers with Miraca counterparts, shared physician order-volume information and worked jointly to win laboratory business. It also alleged that competing laboratories complained about the exclusive arrangement. ModMed instructed employees to describe the company as “lab agnostic,” according to the complaint.

We find that description hard to square with an agreement reserving better features for the laboratory paying for them. The alleged advantage was built into the product a physician used to place the order. Competing laboratories had to win that business while, the government alleged, the software withheld the same tools from them.

The complaint also connected the arrangement to Medicare billing. It alleged that ModMed users’ claims for Miraca laboratory services increased 233% between September 2013 and September 2016. The allegation followed the order from the interface into the federal payment system, which is why the contract and the clinical workflow belong in the same case.

EHR Donations That Allegedly Bought Customers for Both Companies

The government alleged that ModMed and Miraca used software donations to win two kinds of customer at once. In the government’s account, the physician practice received help buying EMA, ModMed gained a software customer, and Miraca expected the practice’s pathology business.

According to the complaint, from January 2010 through December 2013, Miraca based donation decisions on the expected value of the recipient’s referrals. Its sales force projected the volume and value of laboratory orders, and management used that return-on-investment calculation to decide who received a donation and how much. ModMed allegedly supplied sales leads and provider information to help both companies identify targets.

The complaint makes the coordination concrete. A ModMed sales manager shared a spreadsheet of nearly 150 prospective clients with Miraca and encouraged the laboratory to sell practices on the combined offer. In another exchange, a ModMed salesperson expected a smaller donation for a small practice because it had little specimen volume. The government’s allegation was that the lab’s expected return drove the subsidy.

A target list identifies the practices. A donation calculation identifies the expected laboratory business. The software sale shows what ModMed stood to gain. Together, those records explain why the government treated the programs as a joint commercial effort.

The complaint also alleged that ModMed executives understood the donation restrictions. In internal emails, they discussed why a donation could not depend on referrals or demand a return favor. Yet, in the government’s account of an exchange about a particular practice, Miraca said it required the practice to send laboratory cases before it would invest in a donation. A product sale, a subsidy and the first laboratory orders were being discussed together.

What Law Prohibits Payments for Patient Referrals?

The Anti-Kickback Statute prohibits knowingly paying or offering money or other value to induce referrals, orders or recommendations involving items or services covered by federal healthcare programs. The ModMed donation allegations concerned the use of software subsidies to obtain laboratory referrals.

The HHS Office of Inspector General’s December 2013 final rule then removed laboratories from the protected donor category effective March 27, 2014. The rule described complaints about laboratories conditioning donations on referrals and imposing referral quotas.

The laboratory had its own resolution. In January 2019, Miraca, by then known as Inform Diagnostics, agreed to pay $63.5 million over allegations involving EHR subsidies and free or discounted technology consulting for referring physicians. The later ModMed settlement addressed the vendor’s alleged role, including its work with the same laboratory.

Paid Referrals and Carefully Chosen References

The government alleged that ModMed also paid existing customers to recruit new EMA users. These were payments going out of the vendor to help sell its software, alongside the laboratory payments coming in.

The complaint describes a referral program that rewarded successful introductions. Earlier versions offered licensing credits or gift cards. In 2016, a referring provider could receive a $200 service credit when a prospect completed a demonstration and a $1,500 credit when the prospect signed a contract. The government alleged that the payments depended on the referral’s success, without a requirement that the referring practice spend a particular amount of time or resources.

The complaint also alleged that ModMed paid customers to host site visits and take reference calls. According to the complaint, the usual site-visit payment was $500. What makes the reference program especially revealing is how ModMed allegedly selected the practices a prospective buyer would hear from:

The complaint further alleged that ModMed removed a practice from the reference list after a prospect visited it and chose another vendor. We see a sales pitch dressed as a peer recommendation in that account. Happy customers on the phone. Unhappy customers in the database.

The same issue appeared in the separate CareCloud case. The government alleged that CareCloud’s paid reference agreements prohibited participants from giving prospective customers negative information about its EHR products. Prospects allegedly learned neither about that restriction nor about the payment arrangement. The government also alleged that the kickbacks caused false claims under the Merit-based Incentive Payment System. The parallel is the information reaching the buyer: the company paying for the reference also shaped what the buyer could hear.

An Endorsement With a Share of Subscription Fees

The ModMed complaint also describes payments to a dermatology billing expert for endorsements, newsletters, webinars and other promotion. Under an extended agreement, the expert would give EMA an exclusive endorsement, while ModMed would pay a fee equal to 5 percent of first-year monthly subscription fees from the expert’s customers.

The government alleged that compensation followed the amount of business generated rather than the value of the marketing work. Over the relationship, ModMed allegedly paid the expert approximately $930,000. An endorsement from someone trusted in a specialty could bring new practices into the product, and the alleged agreement gave that endorser a financial interest in the resulting subscriptions.

RxNorm and SNOMED CT in the False-Claims Allegations

The certification allegation concerned EMA’s ability to use required medical vocabularies, separate from the payments for referrals. RxNorm supplies standardized names for clinical drugs, while SNOMED CT supplies standardized clinical terminology. Certified software had to use those vocabularies for certain transactions.

The government alleged that, from April 2014 through July 2017, EMA did not always allow users to conduct transactions using those vocabularies. The Justice Department’s settlement announcement said ModMed knew about the limitation and caused users to submit inaccurate information when seeking incentive payments.

The practical connection is straightforward. A provider seeking payment relied on the product’s certification and reported its use to the government. The allegation tied a capability inside the software to the accuracy of that report. For a product or quality-assurance employee, the important comparison is between the promised capability, the version operating in the practice and the data supporting the provider’s claim.

What If I Have Information About Fraudulent EHR Purchases or Programs?

Our whistleblower experts can work with you on what the product, payment or sales records reveal. In this case, the person who brought the qui tam case had risen from product director to vice president of product management. That role put the case’s product questions squarely within an insider’s professional expertise.

The government joined part of the case. The Justice Department’s Civil Division, Commercial Litigation Branch, Fraud Section, and the U.S. Attorney’s Office for the District of Vermont handled the resolution. The FBI and HHS’s Office of Counsel to the Inspector General provided investigative assistance.

The complaint shows why useful evidence can sit in different departments. A partnership contract describes the exclusivity and payment formula. Interface specifications explain the clinical advantages reserved for a laboratory. Sales spreadsheets connect targeted practices to expected orders, while referral credits and reference lists show how the alleged referral payments worked and which voices prospective customers heard.

On the certification side, the question concerns what the software could do during the period covered by a provider’s incentive submission and what the vendor knew about any limitation. An insider may understand one part of that connection particularly well. We work with that knowledge to connect the commercial decisions, the product’s behavior and the federal payments at issue.

How Much of a Settlement Does a Whistleblower Get?

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. In the ModMed resolution, the Justice Department announced that the former product executive would receive approximately $9 million.

You Know How the Product and the Deal Fit Together

If you know why a laboratory got the better interface, who paid for a recommendation or what a certified product could actually do, talk with our whistleblower experts about your EHR fraud case. We shape what you know into your strongest EHR whistleblower case, find EHR fraud whistleblower lawyers who understand these cases, and stay beside you throughout the process.