Anthem Blue Cross Lawsuit Accuses Sebastopol Hospital of Fraudulent Billing

Health insurance giant Anthem Blue Cross has filed suit against Sonoma West Medical Center, accusing the Sebastopol hospital of conspiring with an out-of-state medical laboratory in a billing scheme that Anthem claims defrauded it and its members of $16 million.

The lawsuit, filed June 1 in U.S. District Court, alleges that Sonoma West Medical Center knowingly allowed Florida-based Reliance Labs to use it as a drug testing front. Reliance allegedly used the hospital provider’s credentials to bill for testing on urine samples taken from Anthem members who were not local patients and had never visited the Sebastopol facility, according to the lawsuit.

Billing through the hospital allowed the “co-conspirators” — Reliance and Sonoma West Medical Center — to increase insurance payments for each drug test by 100-fold, the lawsuit said.

“With that simple deception, they could transform a $32 claim into a $3,500 claim, because hospitals were paid as a function of their billed charges,” the lawsuit claims.

Sonoma West Medical Center CEO John Peleuses said Wednesday he was surprised to learn that Anthem had filed a lawsuit because the hospital’s attorneys were working with the insurer to enter mediation. In February, Anthem threatened the medical center and its financial supporter, the Palm Drive Health Care District, with legal action over the alleged fraud, demanding that it be repaid.

Peleuses rejected the claim that the hospital was being used as a front to bill for testing it had not performed.

“We’re doing the work and billing for it,” he said. “That’s really the only comment that I have. We’re not scheming with anyone to do anything other than to provide patient care.”

Attorneys for Robins Kaplan LLP, the law firm representing Anthem, referred questions about the lawsuit to Anthem spokeswoman Suzanne Zagata-Meraz. She said Thursday that she could not comment beyond the lawsuit.

The partnership at the center of Anthem’s legal challenge was forged last spring as a way to help the financially strapped Sebastopol hospital.

Florida-based personal injury lawyer Aaron Durall loaned the hospital more than $2 million in much-needed funds. In exchange, the hospital agreed to conduct toxicology testing for Durall’s Reliance Labs.

Durall and Reliance Labs are also named defendants in the lawsuit, which lists as plaintiffs Anthem and affiliates in nine states across the country.

Durall’s spokesman, Kevin Boyd of Boyd Public Relations in Fort Lauderdale, Florida, said his client had “no comment at this time.”

The partnership between Durall and Sonoma West Medical Center made national news in March, after CBS News questioned the legality and propriety of the multimillion-dollar drug-testing venture. CBS alleged that Durall had set up a nationwide network of drug-screening shops inside rural hospitals around the country, cashing in on their generous reimbursement rates.

In last week’s lawsuit, Anthem attorneys say that Durall saw a “potential gold mine” in the cash-strapped Sebastopol hospital. The suit said that 18 months prior to the “conspiracy,” the medical center was billing an average of $118 per test, compared to $3,500 after it partnered with Durall.

“In the 18 months prior to the conspiracy, Sonoma West submitted just 50 claims for urine toxicology testing to Anthem in total,” the lawsuit said. “In the first nine months of the scheme, that number ballooned to more than 15,000 claims — more than 50 claims per day.”

According to the suit, 90 percent of urine samples were collected from patients in Orange County, and the rest were collected from other states. The samples were then sent to Reliance Labs in Florida, where the specimens were divided into two portions.

One portion stayed at Reliance, while the other was flown to Sebastopol, where basic screening was supposedly done. The lawsuit said Reliance “was more than capable of conducting” the basic screening. In the lawsuit, Anthem attorneys called the nearly 5,000 miles traveled by the urine samples an “end-run on Anthem’s professional fee schedule.”

The medical center continued to receive urine specimens from Reliance even after it had been threatened with legal action earlier this year. Peleuses said it received “a small number” of specimens in May and that it had received a box of toxicology specimens on Tuesday, but no more were expected.

“It’s my belief we will not be receiving any more specimens from Reliance at this point,” he said.

Peleuses insisted that the hospital was not being used as a front and that it was billing for tests that it performed.

“Their allegation was that we were not running specimens, which was false,” he said.

The lawsuit was filed in the Central District of California, centered in Los Angeles County. It comes at a time when the hospital district is seeking buyers for the financially troubled facility. Last month, the district put out a request for proposals for the purchase of the hospital.

Immediately following the loss of much of the revenue from its drug testing partnership with Durall, the hospital returned to significant financial losses. According to hospital financial data released last week, the hospital took in $1.35 million in revenue in April with operating expenses of $2.44 million, an operating loss of $1.09 million.

You can reach Staff Writer Martin Espinoza at 707-521-5213 or On Twitter @renofish.


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