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Both the legality and propriety of a multimillion-dollar drug-testing venture between Sonoma West Medical Center in Sebastopol and a medical laboratory company in Florida are being further questioned following a CBS News investigation televised nationally earlier this week.

The news report alleged the Reliance Laboratory Testing, headed by its principal partner, Aaron Durall, set up a nationwide network of drug-screening shops inside rural hospitals around the country, cashing in on rural hospital reimbursement rates as much as 10 times the rate charged by regular lab companies.

Since last summer, when the partnership between Sonoma West Medical Center, or SWMC, and Durall was forged, the struggling hospital’s new drug-screening program generated a net profit of $31 million, according to hospital officials. Reliance’s share of that sum was $21 million, said John Peleuses, SWMC’s CEO and president.

In interviews, Peleuses and SWMC’s chief nursing officer and COO Barbara Vogelsang, have defended the legality of the screening program, insisting that all drug screening and billing are proper and that revenue from the lab program has allowed the hospital to remain open.

But Jim Horn, a board member with the Palm Drive Health Care District, said the CBS News investigation raises serious concerns about the drug-screening program. The district owns the hospital and provides financial support.

Horn has questioned the deal for months.

“I want the district to conduct a full review of the legality and propriety,” Horn said. “Because even if something is legal it may not be proper for us to be billing insurance companies 10 times what the same service would cost an independent lab.”

In February, the hospital stopped doing drug-screening for Durall. Although hospital officials insist they’ve done nothing improper, the end of screenings followed health insurance giant Anthem Blue Cross’ claim that the hospital and health care district were participating in a business fraud scheme that had resulted in more than $13.5 million in improper payments to the medical center. In a Feb. 9 letter to both the district and medical center, Anthem threatened legal action and demanded the money be repaid.

The hospital partnered with Durall Capital Holdings and Reliance last summer as a way of generating much needed revenue. In exchange for more than $2 million, the hospital agreed to conduct drug screenings for Durall, using part of the money to buy equipment.

Horn said a unwritten “verbal agreement” between hospital officials and Durall established that Reliance would get half of local drug screening revenue, as well as payment for billing services and monthly management fees. In total, Reliance received about two thirds of the revenue the hospital generated through its toxicology program, he said. The hospital’s share during the period between July and February, was about $10 million, or about $1.25 million a month — a significant sum for a hospital that costs $2 million a month to operate.

“For eight months, the toxicology program has basically given us the funds to cover our operating expenses each month ... payroll, paying down (accounts payable). We still owe a lot of people a lot of money, but we’ve paid that down,” said Vogelsang.

Horn said from what he has been told about the diagnostics program, Reliance receives urine samples from drug rehab or detox centers, halves each sample and sends one portion to the medical center in Sebastopol. The hospital then conducts a preliminary screening that determines the presence of drugs and other substances, but not the exact identity of the substance.

Horn said that after the hospital identified samples that screened positive, Reliance conducted “confirmation tests” on its half of the sample. But he pointed out that the hospital bills insurance companies for both its own and Reliance’s tests using the hospital’s higher reimbursement rate.

“Why are we including Reliance’s tests on our bill, and why are we billing that at SWMC’s rate rather than Reliance’s rates?” he said.

According to CBS News, Durall’s lab made $67 million through a similar arrangement with Campbellton-Graceville Hospital, a rural facility in Graceville, Florida. The report said Durall and some health care executives were using financially strapped hospitals like Sonoma West Medical Center to cash in on their generous reimbursement rates. The higher rates granted to rural “critical access hospitals” are meant to make such facilities more competitive and financially stable.

In a federal bankruptcy document filed last year, the Graceville hospital and its creditors referred to the arrangement with Reliance as a “large fraudulent scheme stretching across more than 20 critical access hospitals around the county.”

Durall declined to be interviewed by phone, but a statement attributed to him and Reliance was emailed to The Press Democrat on Wednesday afternoon by his spokesman, Kevin Boyd of Boyd Public Relation in Fort Lauderdale, Florida. Durall said in the statement that all lab billing associated with the Sebastopol hospital has been “properly conducted in accordance with all local, regional and federal regulations and laws.”

“In fact, the involvement of Mr. Durall has greatly helped the medical center stay open and continue to provide crucial medical care to that community,” the statement said.

Durall also denied charges of impropriety raised by the CBS report and said his operations adhere to all appropriate state and federal rules and provide all the necessary documentation required by “stringent laws and regulations.”

“Negotiations regarding contracts for laboratory billing and reimbursement of laboratory testing can be complex, and it is not particularly unusual for such agreements to sometimes lead to civil court for resolution of disputes,” the statement said.

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

EDITOR'S NOTE: A previous version of this story incorrectly described a revenue-sharing agreement between Sonoma West Medical Center and Reliance Laboratory Testing.

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