Turning Up the Heat in California

FOR THE PAST TWO DECADES, CALIFORNIA HAS BEEN A PACE SETTER in healthcare and the clinical laboratory industry. Events in recent weeks seem to indicate that California will continue to move ahead of other regions in developments that influence the clinical laboratory industry.

First, there is the impending birth of a new laboratory company in Southern California. A group of lab executives and professional investors have signed agreements to buy two Southern California commercial laboratory companies. Both sales are expected to close by the end of the month. What makes these two acquisitions interesting is that the buyers have the type of experience that makes it likely they will use these two laboratory acquisitions as a platform to build a national business in specialty, molecular, and esoteric testing.

The second development is the service of subpoenas to Laboratory Corporation of America and Quest Diagnostics Incorporated by the California Attorney General. The subpoenas request documents and records involving Medicaid billing in the state for periods dating three to ten years ago. Whatever the motive behind these subpoenas, it raises the risk that healthcare regulators in California may establish some type of new legal precedent that has negative consequences for the entire laboratory industry. That’s because state legislation and state court rulings in California tend to encourage other states to follow the same legal theories.

Remember, it was in California that the first laboratory whistleblower filed a qui tam suit against National Health Laboratories (NHL). That whistleblower was C. Jack Dowden. When the U.S. Attorney announced a settlement with NHL in December 1992, it included a $111 million fine and restitution, along with a guilty plea to two criminal counts and prison time for then-NHL CEO Robert E. Draper. The outcome of that legal action was the national enforcement effort which the federal Department of Justice (DOJ) dubbed “Lab Scam.” By the time the worst was over in 1998, every major commercial laboratory company had paid fines and restitution totaling more than $1 billion.

Seen from that background, the subpoenas issued by California’s Attorney General last month have the potential to trigger new legal theories about Medicaid billing that may prove harmful to the entire lab industry.


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