California’s Legal Challenge to Discount Pricing

PROBABLY NO TOPIC IN THE LAB TESTING INDUSTRY generates more controversy than discounted pricing for physicians, managed care companies, and IPAs (independent physician associations). Almost every pathologist and laboratory executive decries the corrosive effects of below-cost pricing.

Yet, many of these same lab executives quietly continue to solicit new clients by dangling deeply-discounted—and often money-losing—prices to physicians and health insurers. Competing labs recognize that often the prices are at marginal cost—which means that the lab doesn’t recoup its fully loaded cost of performing the test. Sometimes a lab company will even offer prices that are less than the lab’s marginal cost to perform the test.

The only way the lab can offer these money-losing prices is because it “pulls through” enough Medicare and other fee-for-service specimens to offset the losses incurred for testing the discount-priced tests. Typically it is national lab companies or investor-owned labs which are most willing to play this price game.

Local labs, hospital lab outreach programs, and pathology groups continuously grumble about these business practices. Among these laboratory professionals, price discounting—particularly if the lab test price is less than the offering lab’s marginal cost to perform the test—is seen as a form of inducement or kickback. The lab gives the discount for one part of the client’s test referrals, and gains access to the Medicare and other fee-for-service specimens in exchange.

At the federal level, there has never been enforcement action that draws a clear boundary as to where a deeply-discounted lab test price falls on the wrong side of the law. That allows a number of laboratory companies to operate in the grey area, while labs with conservative compliance policies lose a competitive edge in the market. I point all this out because the deeply-discounted lab test pricing game might soon get a new set of rules in California.

Last year, Attorney General Jerry Brown unsealed the whistleblower lawsuit that alleges seven lab companies in California defrauded the Medi-Cal program. Now there is news that one laboratory has signed a settlement, and two others may have also settled. Brown argues that California state law requires a lab to bill Medi-Cal at the same lowest price for a test that the lab offers its other clients. If Brown gets the other four to six labs to settle and agree to bill Medi-Cal in this manner, then he may disrupt a long-standing lab industry practice in California. For that reason, the progress of this whistleblower suit bears watching.