CEO SUMMARY: Recent events in California, triggered by a lab whistleblower lawsuit filed in 2005 and unsealed in 2009, provide the latest example of how these lawsuits and related government enforcement actions can cause fundamental changes in the pricing and marketing practices that labs and other providers can use while staying within the laws that govern Medicare and Medicaid programs. The lab industry may want to pay attention to certain other lawsuits winding their way through state and federal courts.
IN THE PAST 25 YEARS, how many times has a whistleblower lawsuit triggered a major government enforcement action and caused an important change in the way every clinical laboratory and pathology group practice across the nation conducts business?
The answer is “More times than you think!” The question is not an idle one at this time, as events in California now demonstrate. There are trials and/or possible settlements yet to come with the other laboratory defendants in the Hunter Laboratories LLC/Chris Riedel whistle-blower case. And it doesn’t stop in California.
Both Laboratory Corporation of America and Quest Diagnostics Incorporated have publicly stated that they have received subpoenas from as many as six other states in recent years. These subpoenas are believed to involve how medical laboratory test claims were priced to the respective state Medicaid programs. Not much attention has been given to these subpoenas and, since they remain sealed, it is unclear where, if anywhere, they might lead.
And there are other legal actions underway in various federal and state courts that involve laboratory companies. These cases sometimes center upon legal issues that, depending on how the case is resolved, can establish new legal precedents that could require a response by all laboratories in the United States. Some of these ongoing lawsuits are unsealed to the public and others are not.
For example, in this issue of THE DARK REPORT, you will learn about a lawsuit winding its way in a federal court in New York. Two unions—the Teamsters and the United Food and Commercial Workers (UFCW)—have filed a nationwide class action suit against Quest Diagnostics and Nichols Institute Diagnostics (NID). Both defendants deny the allegations in this lawsuit and have moved to dismiss it. (See pages 7-10.)
Claim of Racketeering
One of the 10 causes of action alleged by plaintiffs in this case is that the defendants violated the federal RICO (Racketeer Influenced and Corrupt Organizations Act) law because of how they manufactured, marketed, and sold certain diagnostic test kits.
If this class action lawsuit involving diagnostic laboratory test kits was to be resolved in a way that created new legal precedents, the outcome could require both clinical laboratories and in vitro (IVD) diagnostics manufacturers to recognize these new legal factors in how they develop, market, and/or use such diagnostic test kits.
A lack of publicity about a class action lawsuit like the one filed by the Teamsters and UFCW against Quest and NID, should not necessarily be interpreted to mean that the plaintiffs have a weak case. Take the example of the Hunter Labs/Riedel whistle- blower case in California. After news coverage in 2009 of its unsealing and the related press conference by the California Attorney General, the case was given little attention and “respect” even after lab industry attorneys read the details of the plaintiff’s claims. That lack of attention is no longer true.
Lab Execs Pay Attention
Across the Golden State, this Hunter Labs/Riedel whistleblower case now has the full attention of lab executives and their attorneys. That is due to the news, in May, that the California Attorney General (AG) settled with one laboratory defendant and collected almost one-quarter billion dollars as part of that settlement.
The message that was sent by this quarter-billion dollar settlement between the California AG and Quest Diagnostics (whose executives denied all the allegations of the AG in the settlement agreement) is that compliance changes are coming that will impact all laboratories operating in the state. (See TDR, June 13, 2011.)
Four defendant laboratories remain in the Hunter Labs/Riedel lawsuit, including LabCorp. All have denied any wrongdoing. Knowledgeable observers in California expect that, if these defendants resolve their respective cases rather than go to trial, the California Attorney General and the California Department of Health Care Services (DHCS) will proceed to enforce state laws pertaining to Medicaid compliance in a radically different manner than before the Hunter Labs/Riedel lawsuit was filed.
Assuming this happens in California. It will be the latest example of how a lab industry lawsuit causes the government to enforce existing state and federal laws in a different manner than before the whistle-blower lawsuit was filed. But this story does not end in California.
Other State AGs Watching
There should be no doubt that the Attorneys Generals in the six other states where a whistleblower Medicaid price lawsuit is believed to be underway are closely watching the progress of the Hunter Labs/Riedel whistleblower lawsuit.
It is one reason why lab administrators and pathologists working in Florida, Georgia, Massachusetts, Michigan, Nevada, and Virginia, will want to stay current with any public information that surfaces about the progress of any whistleblower lawsuits in their respective states. These lawsuits allege that the discounted lab test prices labs give to some providers—without extending the comparable low price for those tests to the Medicaid program—violate each states’ Medicaid laws.
Back to the opening point of this intelligence briefing: on more than one occasion in the past 25 years, the prosecution and resolution of these lawsuits established legal precedents that unleashed far-reaching changes. Just as California seems to be in the midst of changing its enforcement stance relative to low prices for lab tests that it interprets violates its state law on pricing to Medi-Cal, similar changes in enforcement policies could happen in these six other states, relative to the Medicaid law in each of their states.
First Lab Whistleblower
Those readers of THE DARK REPORT with long memories will recall the whistle-blower lawsuit filed by C. Jack Dowden against National Health Laboratories, Inc., (NHL) back in 1990. After two years of investigation by the federal government, a settlement was announced at the end of 1992.
National Health pled guilty to two charges of submitting false claims to government health insurance programs. It paid a $1 million fine and its CEO, Robert E. Draper, was sentenced to jail time and a $500,000 fine. NHL also agreed to refund $111 million to Medicaid, Medicare and the Civilian Health and Medical Program.
That whistleblower lawsuit was the start of almost a full decade of enforcement actions against the laboratory testing industry. Officials at the Department of Justice (DOJ) dubbed their ongoing effort with the name “Operation Labscam.” They eventually harvested about $1 billion in fines and amounts paid back to Medicare and other federal health programs.
In hindsight, it can be recognized that the Dowden whistleblower case against NHL marked a change in how federal healthcare officials viewed certain common lab industry sales practices. This included the unbundling of test panels when billing government and private payers. “Inducing physicians to order medically-unnecessary laboratory tests” became a target for federal enforcement.
The NHL whistleblower case demonstrates why one whistleblower lawsuit can radically alter how federal or state health program officials interpret laws and regulate a widely-accepted laboratory industry practice. The following example had a similar effect in changing the compliance activities of all clinical laboratories across the United States.
This notable laboratory whistleblower lawsuit involved SmithKline Beecham Clinical Laboratories, Inc. (SBCL). Filed in 1993 by Robert Merena, an employee in SBCL’s billing department, the case was settled in 1998. SBCL agreed to pay $325 million to resolve the case. Merena spent another three years in acrimonious litigation with the Department of Justice (DOJ) before he received a relator’s award of $26 million.
As they worked to settle this lawsuit, federal healthcare regulators decided to enact a requirement that every laboratory that was licensed as a Medicare or Medicaid provider would need to institute a compliance program. That requirement was a first for the lab test industry.
Lab Compliance Programs
Since that time, laboratories have devoted considerable time and resources to stay in compliance with this requirement. The need for every laboratory to maintain a conforming laboratory compliance program also created a new legal exposure for laboratory administrators, pathologists, and managers. These lab leaders can be personally liable whenever government health program investigators determine that they did not maintain an internal laboratory compliance program that met the standards defined by law.
As demonstrated by the examples provided in this intelligence briefing, laboraory whistleblower lawsuits can bring a definite change in how federal or state healthcare regulators enforce existing statutes. C. Jack Dowden’s whistleblower lawsuit against NHL started what evolved into the DOJ’s Operation Labscam to stop the practice of “lab test unbundling” and “inducing doctors to order medically-unnecessary tests.”
Rob Merena’s whistleblower lawsuit against SBCL led directly to new federal regulations requiring every laboratory serving the Medicare and Medicaid program to institute a formal laboratory compliance program.
Changes In California
Now we are watching the Hunter Lab/Riedel whistleblower lawsuit initially brought against seven laboratory companies in California change how the state’s Medi-Cal officials enforce long-standing laws on “comparable pricing” when billing the Medi-Cal program. Is it possible that some of the other six states where similar whistleblower lawsuits are believed to be active could lead to a similar change in enforcement of their respective state laws on “comparable pricing” in cases of deeply-discounted lab test prices given to favored lab customers—but not to the Medicaid program?
At the same time, are there other lawsuits out there—whistleblowers, class actions, and the like—with the potential to trigger a substantial change in the operational and/or sales and marketing practices of clinical laboratories? In the example of the class action lawsuit that pits the Teamsters and the UFCW against Quest Diagnostics and Nichols Institute Diagnostics, the plaintiffs are potentially raising interesting legal issues associated with the manufacture, regulatory compliance, clinical performance, and marketing.
Labscam Resulted in Several Guilty Pleas From Clinical Lab Companies During 1990s
WHEN NATIONAL HEALTH LABORATORIES and its CEO each pled guilty to a criminal felony in 1992, it was the start of a series of prosecutions by the Department of Justice (DOJ) against medical laboratory companies.
Over the next decade, several of these prosecutions similarly resulted in guilty pleas or convictions in criminal cases against laboratory testing companies.
For example, the DOJ’s Operation Labscam targeted Damon Clinical Laboratories, Inc., which was based in Boston, Massachusetts. It was served subpoenas in 1993 by the DOJ. In 1996, (following Damon’s acquisition by Corning Clinical Laboratories, Inc., in 1993). Damon pled guilty to conspiracy to defraud the Medicare program. The criminal fine was $35.3 million and restitution totaled $83.7 million. Damon was permanently excluded from the Medicare program.
The interesting aspect to the Damon case is that the U.S. Attorney filed criminal charges against at least two Damon executives. Joseph E. Isola, who had been Damon’s CEO, entered a nolo plea and was given three years probation.
William Thurston, formerly a Senior Vice President at Damon, entered an innocent plea and went to trial. Following a jury trial, he was convicted and was initially sentenced to imprisonment for three months and supervised release of 24 months.
In 1996, another Labscam prosecution resulted in the San Diego regional laboratory of Allied Clinical Laboratories, Inc., pleading guilty to submitting a false claim to Medicare and the California Medicaid program. It was fined $5 million and excluded from participating in federal health programs. Allied had been acquired by Laboratory Corporation of America in 1994.