SUBJECT:

Edward Ming-Che Lai, M.D.,

Petitioner,

Centers for Medicare & Medicaid Services

DECISION

I decide that the Centers for Medicare & Medicaid Services (CMS, formerly known as the Health Care Financing Administration or HCFA) is not authorized to impose sanctions against Petitioner, Edward Ming-Che Lai, M.D. I do so because I find that Petitioner was not serving as the laboratory director of Polymedic Clinical Laboratory, Inc. (Polymedic) in May 2000 when Polymedic failed to comply with a condition for certification pursuant to regulations that implement the Clinical Laboratory Improvement Amendments of 1988, 42 U.S.C. § 263a (CLIA).

I. Background

This case emanates from sanction determinations that CMS made against Polymedic. The sanctions that CMS imposed against Polymedic include revocation of Polymedic's CLIA certificate. Polymedic has not requested a hearing to contest those sanctions. Petitioner requested a hearing in order to challenge CMS's determination that, as a consequence of being Polymedic's laboratory director, he was precluded from owning, operating, or directing a clinical laboratory for at least two years from the date that Polymedic's CLIA certificate was revoked by CMS. Petitioner has not argued that CMS lacks a basis for revoking Polymedic's CLIA certificate or for imposing other sanctions against it.

The case was assigned to me for a hearing and a decision. I held an in-person hearing in Los Angeles, California on August 2, 2001. The parties each called witnesses to testify. CMS offered and I accepted exhibits consisting of HCFA Ex. 1 - HCFA Ex. 10 (the exhibits each were identified with the acronym "HCFA" and, therefore, I refer to them by that acronym in order to avoid confusion). Petitioner offered and I accepted exhibits consisting of P. Ex. 1 - P. Ex. 3.

II. Undisputed facts and law

The facts and law that I discuss in this section are not disputed.

Polymedic was a clinical laboratory that was located in El Monte, California. It had obtained a CLIA certificate which allowed it to perform clinical tests on patients' specimens. In order to maintain its CLIA certificate, Polymedic was required to comply with CLIA conditions of participation.

The Secretary of the United States Department of Health and Human Services (Secretary) is charged with enforcing the requirements of CLIA. The Secretary published implementing regulations at 42 C.F.R. Part 493 and delegated his CLIA enforcement authority to CMS. CMS assures that clinical laboratories are inspected at regular intervals in order to determine their compliance with CLIA requirements. CMS has the authority to impose remedies (sanctions) against laboratories that are found not to be complying with CLIA requirements. These sanctions may include revocation of a laboratory's CLIA certificate in the circumstance where the laboratory is found not to be complying with one or more CLIA conditions.

On May 5, 2000, examiners employed by the California Department of Health Services, Laboratory Field Services (LFS), acting as agents of CMS, went to Polymedic's business address in order to conduct an inspection. Transcript (Tr.) 29. The examiners found no laboratory operating at that location. They then reviewed the file that the State of California maintained on Polymedic and found nothing which indicated a change of address for the laboratory. However, on May 22, 2000, the laboratory's owner advised LFS that the laboratory's address had changed and that it was now located down the street from its previous location. Tr. 30.

The examiners then went to the new address that had been supplied by the laboratory's owner in order to conduct an inspection of those premises. However, they found no laboratory at this address. Tr. 30 - 31. The inspectors left their business cards at the new address, along with a letter which requested that the laboratory contact them so that they could conduct an inspection. Tr. 31 - 32. They received no response to the letter. Id.

LFS recommended that CMS revoke Polymedic's CLIA certificate. Tr. 33. LFS based its recommendation on Polymedic's failure to comply with the CLIA condition that is stated at 42 C.F.R. § 493.1777 (now recodified at 42 C.F.R. § 493.1773). This section requires a laboratory to make its premises accessible for an inspection and to provide information that is requested of it by examiners.

On October 20, 2000, CMS sent a letter to Polymedic's owner and to Petitioner as director of Polymedic. HCFA Ex. 1. The letter advised them that CMS was imposing sanctions against Polymedic due to Polymedic's violation of CLIA provisions by its failure to permit immediate access for inspection and by its failure to report a change in location. The October 20, 2000 letter described a range of sanctions that CMS intended to impose against Polymedic, including revocation of Polymedic's CLIA certificate.

On October 30, 2000, Petitioner responded to CMS's October 20, 2000 letter. HCFA Ex. 2. Petitioner denied that he was Polymedic's laboratory director. He averred that he was approached by Polymedic's owner in August 1999. He acknowledged having a meeting with Polymedic's owner. At that meeting the owner requested Petitioner to serve as laboratory director of Polymedic. Petitioner acknowledged agreeing verbally to the "general terms" for becoming laboratory director. He also acknowledged signing a form for changing the laboratory's directorship. Id. However, according to Petitioner, his verbal agreement was never finalized in writing and his directorship was never established officially. Id. Petitioner attested that he had no additional contact with Polymedic's owner until December 1999 when the owner called him. He stated that the owner advised him that the laboratory had not received certification from Medicare or MediCal (California's Medicaid program) and that the laboratory would not continue in existence. Petitioner asserted that he had always assumed that his directorship of the laboratory was not finalized because he had not entered into a final agreement to direct Polymedic, had not received any payment from Polymedic, and had not had any follow- up communications with the laboratory's owner until December 1999. Id.

CMS sent an additional letter to Polymedic's owner and to Petitioner on November 16, 2000. HCFA Ex. 3. The letter noted that mail directed to Polymedic had been returned as undeliverable. The letter advised Polymedic's owner and Petitioner that it was a formal notice of imposition of sanctions.

The November 16, 2000 letter asserted that Petitioner had served as director of numerous laboratories and should have known that, by signing on as laboratory director of Polymedic, he was assuming the directorship responsibilities for the laboratory. It asserted further that Petitioner could not relieve himself of his responsibilities as director by failing to fulfill his responsibilities or by not being aware of what was happening at Polymedic. The November 16, 2000 letter confirmed that CMS was imposing the sanctions that had been described in the October 20, 2000 letter. Additionally, it advised Petitioner that 42 C.F.R. § 493.1840(a)(8) prohibits the owner, operator, or laboratory director of a clinical laboratory whose CLIA certificate has been revoked from owning, operating, or directing another laboratory for at least two years from the date of revocation. HCFA Ex. 3 at 1 - 2.

III. Issues, findings of fact and conclusions of law

A. Issues

The issues in this case are whether:

1. Petitioner is entitled to a hearing;

2. Petitioner was the director of Polymedic as of May 2000; and

3. CMS is authorized to impose sanctions against Petitioner.

B. Findings of fact and conclusions of law

I make findings of fact and conclusions of law (Findings) to support my decision in this case. I set forth each Finding as a separate heading. I discuss each Finding in detail.

1. Petitioner, in effect, will be prohibited from owning or operating a clinical laboratory if Petitioner was Polymedic's laboratory director as of the dates when LFS attempted to inspect Polymedic.

The regulations which implement CLIA provide, at 42 C.F.R. § 493.1840(a)(8), that CMS may suspend, limit, or revoke any laboratory's CLIA certificate if CMS finds that the laboratory's owner or operator has:

Within the preceding two-year period, owned or operated a laboratory that had its CLIA certificate revoked.

The regulation does not explicitly prohibit the owner, operator, or laboratory director of a clinical laboratory whose CLIA certificate is revoked from owning, operating, or directing another laboratory within a two year period from the revocation date (CMS argues that a laboratory's director is the "operator" of that laboratory within the meaning of CLIA and implementing regulations and Petitioner does not challenge that position). However, that is the practical effect of the regulation.

If I find that Petitioner was the laboratory director of Polymedic as of the dates in May 2000 when LFS attempted unsuccessfully to inspect Polymedic, then Petitioner effectively would be prohibited from owning or operating another clinical laboratory for at least two years from the date Polymedic's CLIA certificate was revoked. It is unlikely that any laboratory would allow Petitioner to serve as an owner, operator, or director, because his ownership or operation of the laboratory would cause that laboratory's CLIA certificate to be revoked.

2. Petitioner is entitled to a hearing.

CMS asserts that Petitioner has no standing to contest any prohibition against his owning, operating, or directing a laboratory, as a collateral consequence of the revocation of Polymedic's CLIA certificate. CMS argues that regulations which confer hearing rights in cases involving CLIA enforcement actions give those rights to laboratories and not to individuals. See, e.g., 42 C.F.R. § 493.1844. CMS argues further that the fact that there may be collateral consequences for a laboratory's owner, operator, or laboratory director resulting from imposition of sanctions against a laboratory does not mean that these individuals have appeal rights. CMS post-hearing brief at 12.

It is true that the regulations only grant hearings to laboratories who are affected by sanctions and do not explicitly confer hearing rights on laboratory owners, operators, and directors. However, although the regulations may be silent on the subject, CLIA is not. CLIA provides expressly that the Secretary may suspend, revoke, or limit a laboratory's CLIA certificate only after giving "reasonable notice and opportunity for hearing to the owner or operator of the laboratory . . . . " 42 U.S.C. § 263a(i)(1) (emphasis added).

Consistent with that statutory requirement, administrative law judges have held that CLIA provides a laboratory owner, operator, or director with a right to a hearing to contest the consequences of revocation of the laboratory's CLIA certificate. RNA Laboratories, Inc., and Ter-Zakarian Medical Clinic, DAB CR829, at 5 (2001); Carlos A. Cervera, M.D., Docket No. C-99-797, Ruling Denying HCFA's Motion to Dismiss and Granting Extension of Time for Submission of Readiness Reports, December 21, 1999; Allstate Medical Laboratory, Inc., Docket No. C-99-309, Ruling, October 6, 1999; Eugene R. Pocock, M.D., DAB CR 527 (1998). These rulings and decisions were cited favorably by an appellate panel of the Departmental Appeals Board in Sentinal Medical Laboratories, Inc., DAB No. 1762, at n.6 (2001), which observed that CMS "wisely" opted not to argue before the Board that an owner or operator of a laboratory had no right to a hearing to challenge a sanctions determination made against the laboratory. I follow these rulings and decisions and hold that Petitioner has a right to a hearing to challenge the effect that revocation of Polymedic's CLIA certificate may have on him.

3. Petitioner was not serving as director of Polymedic as of May 2000.

CMS makes two allegations in this case. The first allegation, which is not challenged by Petitioner, is that Polymedic violated a CLIA condition in May 2000 when the examiners attempted unsuccessfully to inspect Polymedic, thereby justifying CMS's determination to revoke Polymedic's CLIA certificate. The second allegation, which Petitioner does challenge, is that he was serving as Polymedic's laboratory director, or at least had agreed to be Polymedic's laboratory director, at the time of the May 2000 inspection attempts. CMS argues that, based on prima facie evidence addressing these two allegations, Petitioner is precluded, as Polymedic's laboratory director, from owning or operating another laboratory for the two year period that begins with CMS's revocation of Polymedic's CLIA certificate.

I do not find CMS's arguments as to its second allegation to be persuasive, because the preponderance of the evidence supports the conclusion that Petitioner was not performing any duties as Polymedic's laboratory director in May 2000 and had not agreed to serve as laboratory director as of that date. The evidence shows that Petitioner informally agreed to become Polymedic's laboratory director in late August or early September 1999. He acted as Polymedic's director when he executed a CLIA certificate application on Polymedic's behalf in September 1999. But, thereafter, he assumed none of the director's responsibilities and exercised none of the director's authority. He entered into no agreement with Polymedic to provide continued service to Polymedic as its laboratory director. Polymedic failed to offer a contract to Petitioner or to negotiate the terms of compensation with him. And, Petitioner and Polymedic's owner came to a clear understanding in December 1999 that Petitioner would have no further dealings with Polymedic.

Under CLIA, a laboratory director has the principal responsibility for management and operation of a clinical laboratory. 42 C.F.R. § 493.1407. Whether an individual actually is a laboratory's director is a question of fact. An individual may be deemed to be a laboratory's director under two circumstances. First, the individual may be a laboratory's director if he or she is performing the duties of the laboratory director. Second, the individual may be a laboratory's director if that individual has agreed to perform the duties of the laboratory director whether or not he or she is actually performing them. Under the second test, an individual may meet the definition of "laboratory director" even if he or she is derelict in fulfilling the laboratory director's obligations if he or she has agreed to serve as laboratory director.

The evidence that CMS relies on to establish that Petitioner was Polymedic's laboratory director in May 2000 consists of the three documents that Petitioner executed on September 22, 1999, and which constitute Polymedic's CLIA certificate application. HCFA Ex. 3. These documents unambiguously state that Petitioner was Polymedic's laboratory director as of that date. Id. These documents support the conclusion that Petitioner had agreed to be Polymedic's laboratory director as of September 22, 1999 and that he was performing the director's duties on that date.

It is reasonable to infer from these documents, absent evidence to the contrary, that Petitioner continued to be Polymedic's laboratory director after that date. I would conclude that Petitioner had agreed to serve as Polymedic's laboratory director and was, in fact, performing the director's duties, if these documents comprised the only evidence in this case concerning Petitioner's relationship with Polymedic.

However, the inference that Petitioner was the director in May 2000 is rebuttable. I find that Petitioner rebutted that inference persuasively with his credible testimony at the hearing. Tr. 138 - 179.

I conclude, based on Petitioner's credible testimony, that Petitioner was not performing any of the duties of laboratory director in May 2000. The only action that Petitioner ever took as Polymedic's laboratory director was to execute the CLIA certificate application documents in September 1999. Petitioner has established, persuasively, that he did nothing for Polymedic thereafter. Indeed, Petitioner never visited Polymedic's facilities except for one brief visit in late August or early September 1999. I conclude also that Petitioner did not agree to serve as Polymedic's laboratory director after September 1999. He entered into neither an oral nor a written agreement with Polymedic to continue serving as its laboratory director.

Petitioner testified persuasively that his relationship with Polymedic consisted only of the following: a brief visit to the laboratory in late August or early September 1999, which included a meeting with the laboratory's owner; a telephone conversation with Polymedic's owner that took place shortly after Petitioner's visit to the laboratory; a subsequent face-to-face meeting with Polymedic's owner in September 1999, at which he signed the documents that are in evidence as HCFA Ex. 3; and, a telephone conversation with the laboratory's owner in December 1999, in which the laboratory's owner informed him that she would have to cease her effort to operate the laboratory due to the laboratory's inability to receive certification from Medicare and MediCal. Tr. at 145 - 151. Petitioner's credible testimony is that he never spoke again with the laboratory's owner after the December 1999 telephone conversation. Id. at 154. I note that the testimony that Petitioner gave at the hearing is consistent with the statement he submitted to CMS at the end of October 2000. HCFA Ex. 2.

The thrust of Petitioner's testimony, which I find to be credible, is that he may have agreed in principle to become Polymedic's laboratory director, but that he never finalized that agreement. Petitioner never entered into a written agreement with Polymedic to become its laboratory director, never agreed orally to continue serving as its director after signing the CLIA certificate application form, never agreed with Polymedic as to his compensation, never visited the laboratory after late August or early September 1999, and never received any compensation from Polymedic. Petitioner performed none of the duties that are performed by a laboratory director aside from executing Polymedic's application for a CLIA certificate and associated documents. He assumed, based on his December 1999 conversation with Polymedic's owner, that whatever relationship he had established with the laboratory had ended. Id. at 150 - 154.

Petitioner's execution of a CLIA certificate application on behalf of Polymedic in September 1999 establishes that, for at least a very brief period of time, Petitioner acted in the capacity of Polymedic's laboratory director. He explicitly represented himself to be the laboratory director on the application. HCFA Ex. 3. However, there is no evidence in this case that he engaged in any actions as laboratory director subsequent to his signing the application. Petitioner's testimony satisfies me that, whatever he may have represented himself to be on the CLIA certificate application, he did not come to a meeting of the minds with Polymedic's owner to serve as Polymedic's laboratory director, nor did he perform any of the duties of laboratory director for Polymedic aside from signing the CLIA application form. Furthermore, even if Petitioner could have been considered to be Polymedic's laboratory director in the autumn of 1999, that relationship ceased definitively with Petitioner's December 1999 telephone conversation with Polymedic's owner. At that time, she told him that the laboratory would be closed and he assumed, naturally, that any discussions concerning assuming the directorship were over.

Petitioner directs several laboratories other than Polymedic. He testified persuasively that his relationship with all of the other laboratories that he directs is memorialized in written contracts and that his normal practice is to request that he be compensated for his services once he begins performing the duties of laboratory director. Tr. at 152. It is fair to conclude that Petitioner never requested a written director's agreement or compensation from Polymedic because he did not consider himself to be Polymedic's director.

CMS produced a record of reimbursement claims submitted by Polymedic which establishes that the laboratory filed claims for services for several months after September 1999. HCFA Ex. 7. But, the fact that Polymedic may have claimed reimbursement for services after Petitioner's late August or September 1999 meeting with Polymedic's owner does not mean that these services were provided or claimed under Petitioner's direction. There is nothing about the claims records produced by CMS which supports a finding that those claims were made at Petitioner's direction. The records document only that claims were made. See id.

CMS argues that a laboratory director who fails to notify CMS when he or she ceases serving as director continues to be responsible for the laboratory's compliance with CLIA conditions. Under this theory, Petitioner should be deemed to be Polymedic's laboratory director even though he had not agreed to serve as Polymedic's director after September 1999 and even though he performed none of the director's duties after September 1999. I do not find this argument to be persuasive. There is no language in either CLIA or implementing regulations which provides that a laboratory director retains the legal responsibilities of director after he or she has severed all ties with the laboratory if he or she does not give notice to CMS. Consequently, a failure by Petitioner to apprize LFS that he was not serving as Polymedic's laboratory director did not mean, as a matter of law, that Petitioner continued to serve as the laboratory director.

There is a requirement in the regulations that a laboratory must give notice to CMS, within 30 days of the occurrence of events which include a change of the laboratory's director. 42 C.F.R. § 493.51(a)(4). Polymedic failed to comply with this requirement when, after notifying CMS on September 22, 1999 that Petitioner had become its director, it failed to notify CMS that its relationship with Petitioner had been terminated. However, the regulation does not impose a separate duty on a laboratory director to notify CMS when he or she terminates a relationship with a laboratory. Presumably, CMS could revoke a laboratory's CLIA certificate for failing to comply with the requirements of 42 C.F.R. § 493.51(a)(4). But, that revocation would not prevent collaterally the laboratory's former director from owning or operating another laboratory because the former director was not the laboratory's director at the time that the laboratory contravened the regulation's notification requirements.

Moreover, failure to give notice of a change of director was not the basis for CMS's determination to impose sanctions against Polymedic or Petitioner. CMS advised Polymedic and Petitioner, in both its October 20, 2000 and in its November 16, 2000 notices, that the basis for CMS's action was Petitioner's failure to comply with 42 C.F.R. § 493.1777 (now recodified at 42 C.F.R. § 493.1773).

I am not persuaded that it may be inferred by Petitioner's failure to notify CMS timely that he no longer was the director of Polymedic that either he had agreed to be Polymedic's laboratory director or was serving as the laboratory director as of May 2000. That is not a reasonable inference to make given the other facts of this case. It was unwise for Petitioner not to have notified CMS that he would not be serving as Polymedic's laboratory director as soon as it became apparent to him that he would not be serving in that position. This case would never have arisen had he done so. But, the weight of the evidence in this case strongly supports the conclusion that Petitioner was not serving as Polymedic's laboratory director in May 2000, regardless of his failure to give notification that he would not be serving in that position.

4. CMS is without authority to impose sanctions against Petitioner.

The preponderance of the evidence shows that Petitioner was not serving as Polymedic's laboratory director in May 2000. Therefore, no basis exists for CMS to impose sanctions against Petitioner as the laboratory director of a laboratory whose CLIA certificate has been revoked.

Steven T. Kessel

Administrative Law Judge