Clinical Laboratories Win Key Defense in False Claims Act Cases

In a landmark decision, the First Circuit Court of Appeals has established new precedent that significantly strengthens the position of clinical laboratories facing False Claims Act (FCA) allegations. The ruling in United States ex rel. OMNI Healthcare, Inc. v. MD Spine Solutions LLC clarifies that laboratories can generally rely on physician orders to establish medical necessity without being required to independently evaluate clinical judgments.

The court’s decision creates what amounts to a “safe harbor” for laboratories that process tests ordered by physicians, shifting the burden to whistleblowers to prove that labs knowingly processed improper orders.

“This ruling recognizes the reality of how healthcare delivery works,” said healthcare attorney Amanda Patterson, who was not involved in the case. “Laboratories aren’t meant to second-guess physician decisions about what tests patients need.”

The case stemmed from a qui tam action brought by Omni Healthcare against MD Spine Solutions (MD Labs), an independent clinical laboratory. Omni had ordered hundreds of PCR-based urinary tract infection tests from MD Labs for Medicare patients, with Medicare reimbursing many of these tests.

What made the case particularly unusual was that Omni’s owner had specifically instructed staff to exclusively order the more expensive PCR tests, even when providers had requested traditional bacterial urine culture tests. According to court documents, this was done with the admitted purpose of “beefing up” a False Claims Act case.

After ordering these tests, Omni then filed a qui tam lawsuit alleging MD Labs knowingly submitted claims for medically unnecessary tests in violation of Medicare’s “reasonable and necessary” requirement. The district court granted summary judgment for MD Labs, finding Omni failed to show that MD Labs knowingly submitted false claims, a decision the First Circuit has now affirmed.

The First Circuit’s ruling establishes several important principles for laboratories:

First, the court held that clinical laboratories may generally rely on a physician’s order to establish that a test meets Medicare’s “reasonable and necessary” standard. Citing the Medicare statutory framework and HHS guidance, the court explained that “a laboratory cannot and is not required to determine medical necessity” and is “permitted to rely on the ordering physician’s determination that the laboratory tests are medically necessary.”

Second, the court established that a physician’s order creates a “safe harbor” regarding medical necessity claims. Once a laboratory demonstrates it acted according to a physician’s order, the burden shifts to the whistleblower to produce evidence undermining the lab’s reliance on that order. This might include evidence that the laboratory knew the order was improper or had induced the physician to order unnecessary tests.

Third, the court reaffirmed that FCA liability depends on the defendant’s subjective knowledge when the claim was submitted, not on post-submission assessments of medical necessity or objective reasonableness. This aligns with the Supreme Court’s guidance in United States ex rel. Schutte v. SuperValu.

The decision carries significant implications for clinical laboratories, which have been frequent targets of FCA litigation. The testing industry processes billions of samples annually, with laboratories largely dependent on physician orders to determine which tests to run. This ruling provides a clearer framework for how laboratories can defend themselves against allegations of submitting claims for medically unnecessary services.

“This doesn’t give labs a blank check,” cautioned healthcare compliance consultant Michael Robertson. “They still need robust compliance programs and must be alert to red flags like unusually high volumes of specific tests or inconsistent requisition forms.”

The ruling may influence cases beyond the First Circuit, as it addresses a question that has been inconsistently handled across jurisdictions. For laboratories operating nationwide, the decision offers a persuasive framework that could be adopted by other circuits.

Industry analysts note that clinical laboratories perform critical diagnostic functions but typically operate on thin margins. The clarification provided by this ruling may help legitimate laboratories focus on their core mission without the constant threat of FCA liability for simply processing physician-ordered tests.

The case represents a significant victory for the laboratory industry while still preserving the government’s ability to pursue cases where laboratories knowingly participate in fraud schemes or deliberately ignore obvious signs that physician orders are improper.