Quest Diagnostics Settles Medi-Cal Qui Tam Case

Press releases issued by both parties indicate it was a toe-to-toe legal slugfest to get a settlement

CEO SUMMARY: On May 19, the California Attorney General announced a $241 million agreement with Quest Diagnostics Incorporated that represents the largest settlement in the history of California’s False Claims Act. At issue in this whistle- blower lawsuit were allegations that Quest Diagnostics, along with multiple other defendant lab companies, had overcharged Medi-Cal, which is California’s Medicaid program. In its public statements, Quest Diagnostics, denied any wrongdoing.

SAYING IT IS THE LARGEST RECOVERY in the history of California’s False Claims Act, on May 20, California Attorney General Kamala D. Harris trumpeted news that Quest Diagnostics Incorporated would pay $241 million in a settlement over what the state alleged were illegal overcharges to Medi-Cal, the state’s medical program for the poor.

One day earlier, Quest Diagnostics had issued a press release about the settlement stating that: “In the lawsuit, the plaintiffs alleged, among other things, that the company did not comply with California’s ‘comparable charge’ regulations, resulting in overpayments for laboratory testing services by Medi-Cal, California’s Medicaid program.”

The Quest press release then addressed the allegations, declaring that:

“Our laboratory testing services for Medi-Cal were priced appropriately, and we deny all allegations in the complaint,” said Michael E. Prevoznik, Senior Vice President and General Counsel of Quest Diagnostics. “Quest Diagnostics operates with the highest standards of integrity and fairness. California’s interpretation of the Medi-Cal ‘comparable charge’ regulations created uncertainty and resulted in an intolerable business environment for us. This agreement allows us to put the lawsuit behind us and provides for an orderly process for resolving any remaining interpretation issues. We also intend to pursue other avenues, including legislative action, to ensure clear regulatory standards in California for the clinical laboratory industry.”

That feisty statement indicates how Quest Diagnostics drew the battle lines in its legal defense. also, it indicates that the nation’s largest laboratory testing company may be prepared to push the state legislature to take legislative action and revise or rewrite the existing statutes which lie at the heart of this legal dispute.

‘Dueling Press Releases’

In fact, the press releases issued by both parties to the settlement agreement demonstrate that there are two widely-divergent views on the matter.

In her press release, Harris stated that, “In a time of shrinking budgets, this historic settlement affirms that Medi-Cal exists to help the state’s neediest families rather than to illicitly line private pockets. Medi-Cal providers and others who try to cheat the state through false claims and illegal kickbacks should know that my office is watching and will prosecute.”

Attorney General’s View

Harris’ press release also described the attorney general’s view about the case, which read as follows:

The settlement with Quest is the result of a lawsuit filed under court seal in 2005 by a whistleblower and referred to the Attorney General’s office. The lawsuit alleged that Quest systematically overcharged the state’s Medi-Cal program for more than 15 years and gave illegal kickbacks in the form of discounted or free testing to doctors, hospitals and clinics that referred Medi-Cal patients and other business to the labs.

California law states that “no provider shall charge [Medi-Cal] for any service more than would have been charged for the same service to other purchasers of comparable services under comparable circumstance.” Yet, Quest charged Medi-Cal up to six times as much as it charged some other customers for the same tests. For example, Quest charged Medi-Cal $8.59 to perform a complete blood count test, while it charged some of its other customers $1.43.

California law also prohibits Medi- Cal providers from soliciting and receiving “any kickback, bribe, or rebate, directly or indirectly, overtly or covertly, in cash or in valuable consideration of any kind [in] return for the referral, or promised referral, of any individual for the furnishing of any service” paid for by Medi-Cal.

An investigation revealed that Quest systematically offered doctors, hospitals and clinics low prices for lab tests in return for referrals to Quest of patients, including Medi-Cal patients. Quest then charged Medi-Cal a higher price to make up the difference—resulting in the loss of millions of dollars to the Medi-Cal program.

A review of the 21-page settlement agreement shows that, within 20 business days of May 20, Quest Diagnostics must make these payments: $171 million to the state of California, $69.89 million to the attorney for the whistleblower, Hunter Laboratories, LLC, of Campbell, California, and Chris Reidel. Quest Diagnostics must also pay reasonable fees and costs for the attorneys representing Hunter Laboratories and Chris Riedel, although the settlement agreement said the exact amount of this payment is under dispute.

Also, the settlement requires Quest Diagnostics to report information to assist the state in determining Quest’s future compliance with Medi-Cal’s pricing rules. Under the terms of the settlement, Quest must decide by august 31 whether to charge what California calls a Transitional Rate of 85% of Medi-Cal’s fee schedule for claims dating through July 31, 2012. Or, Quest could decide to send written “Exception Reports” to the state every quarter until Nov. 1, 2013, for certain tests. Quest Diagnostics also must designate a compliance officer at Quest who would ensure that Quest complies with the terms of the settlement agreement.

Resolution to Lawsuit

This agreement resolves the qui tam case against Quest Diagnostics. In its May 19 press release, the company wrote:

The company agreed to the settlement to resolve claims pertaining to the ‘comparable charge’ allegations. The company also agreed to reporting obligations regarding its pricing for a limited time period and, in lieu of such obligations for a transitional period, to provide Medi-Cal with a discount until the end of July 2012. The company received a full release of all the claims alleged in the lawsuit.

For its part, the California attorney general stated that similar cases are pending against four other clinical lab defendants, including Laboratory Corporation of America. A trial in the LabCorp case is scheduled for early next year. Like Quest, the other labs also deny the suit’s allegations.

Also in the press release, the attorney general noted that, in 2005, when Hunter Laboratories and Riedel filed the qui tam action under seal, they stated in the legal filings that they could not compete in a significant segment of the marketplace when major medical laboratories offered lower rates for laboratory tests to doctors, hospitals, and clinics than they charged the Medi-Cal program.

Can Bill For Medi-Cal Testing

In addition to stipulating how Quest Diagnostics must bill DHCS for serving Medi-Cal patients going forward, the settlement explained that Quest Diagnostics can now bill DHCS for the months when it continued to provide lab testing services to Medi-Cal but had not billed DHCS.

On September 28, 2010, Quest and DHCS had a “Stipulation and Settlement agreement Between the California Department of Health Care Services and Quest Diagnostics Incorporated” in which Quest Diagnostics agreed not to bill DHCS for testing services for Medi-Cal patients, pending resolution of the whistleblower lawsuit and related issues. Suspension of billing for a government health program by a publicly traded clinical laboratory is a rare event.

In its financial report for fourth quarter 2010, Quest Diagnostics disclosed that, as of December 31, 2010, its unpaid balance with the Medi-Cal program was $25 million. This represented the unbilled claims for laboratory testing services performed on behalf of Med-Cal patients since the start of the temporary billing suspension earlier in 2010.

Billing Suspension Ends

To the $25 million from 2010 that went unbilled by Quest Diagnostics, there will also be added the amount that was unbilled for the first five months of 2011. With the end of this billing suspension, Quest Diagnostics may collect as much as $50 million from the Medi-Cal program for these claims.

As shown here, the “dueling press releases” issued by the California Attorney General and Quest Diagnostics over the same matter indicate that each party views this case from very different perspectives. This could be a sign that each party is prepared to strenuously defend their respective interpretations of 51501(a) and related state and federal laws.

Quest Diagnostics Denies “Liability and Wrongdoing”

IN THE “SETTLEMENT AGREEMENT AND RELEASE” negotiated between the California Attorney General and attorneys for Quest Diagnostics Incorporated, the nation’s largest laboratory testing company was direct in denying all the allegations made in the whistleblower lawsuit originally filed by Hunter Laboratories and Chris Reidel back in 2005.

This language can be found in Section II-D, where it is stated that:

The Quest Defendants specifically deny any and all liability and wrongdoing. The Quest Defendants contend that:

(a) their billing practices were at all times in material compliance with Section 51501(a), industry practice, and all other applicable laws and regulations,

(b) several of the Quest Defendants specifically advised DHCS’ predecessor agency of their interpretation of Section 51501(a) both in writing and in oral discussions starting in the late 1990s,

(c) their interpretation and application of Section 51501(a) was correct.

It is Quest’s position that the Settlement Amount described in III-A below represents a compromise settlement under 51501(a). The Quest Defendants further contend that their conduct was at all times lawful and in compliance with applicable statutory and regulatory requirements, regulatory safe harbors, and the requirements of their Medi-Cal Provider Agreements.

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