Former Lab CEO Explains Why He Filed Lawsuit

Whistleblower case alleges lab used discounts in effort to win Medicare ‘pull-through’ business

CEO SUMMARY: It may be the first time that a former public laboratory CEO has turned whistleblower. Andrew Baker, formerly Chairman and CEO of Unilab Corporation in the 1990s, filed a qui tam case in federal court last year that centers on the practice of lab companies offering private health plans deeply-discounted lab test pricing in order to win “pull through” lab test referrals, including those of Medicare patients, which will be reimbursed at higher prices. Laboratory Corporation of America is the defendant in this case and denied all the allegations, stating it complies with all laws.

FEDERAL LAW ON LABORATORY BILLING is broken every day, according to Andrew Baker. In a case filed by the former CEO of Unilab Corporation and unsealed in federal court last year, Baker makes an effort to prove this point.

The lawsuit is a whistleblower case against Laboratory Corporation of America. It was filed in New York’s Southern District Court by NPT Associates and was unsealed in September 2011. A plaintiff along with other former medical laboratory industry executives, Baker was the Chairman and CEO of Unilab in Tarzana, California, between 1992 and January 1997. Unilab was acquired by Quest Diagnostics Incorporated in 2003. (Quest is not a party to the NPT Associates suit.) Baker has filed a separate and similar qui tam lawsuit against Quest Diagnostics.

In the federal complaint, NPT alleged that LabCorp violated the federal False Claims Act because the discounted laboratory test prices it offered in 2007 to UnitedHealth Group, Inc., were kick-backs. In January 2007, UnitedHealth made UHC had physicians in its network send all UHC patient lab tests to LabCorp.

LabCorp denies these allegations. The company says that it fully complies with all applicable federal and state laws.

Tests From Network Doctors

In an interview with THE DARK REPORT, Baker alleged that LabCorp is charging UnitedHealth less for lab tests than it charges the federal Medicare program for those same tests and that it is illegal to do so under federal law. “The reason LabCorp charges less in this way is to win the ‘pull through’ Medicare business from those doctors in UnitedHealth’s network who send their lab tests to LabCorp,” stated Baker.

Baker is raising a high-stakes issue for the two national laboratory companies. “Over the past 10 years, Quest Diagnostics and LabCorp have generated a cumulative $14 billion in payments from the Medicare program,” he noted. “During this 10-year period, Quest billed Medicare $8.7 billion and LabCorp billed Medicare $5.4 billion.”

Baker has brought his evidence to the U.S. Department of Justice. “If the government were to prevail in this case and win a ruling that the use of ‘pull through’ contracts with health insurers violates federal anti-kickback law, it could collect a multi-billion dollar sum in fines and penalties from these two companies,” noted Baker.

Seeking a Safe Harbor

“My belief is that these two companies willingly exploited a way of getting business in total willful disregard of a federal law on the books right now,” explained Baker. “In particular, they have disregarded an interpretation of the law about how the law was to be implemented. The law clearly states that all providers must offer to the government (meaning the Medicare and Medicaid programs in the states) the best price possible.

“Back in the early 1990s, when HMOs and managed care plans started working closely with lab companies, they sought a safe harbor,” Baker explained. “The industry asked government health regulators for an interpretation of the Medicare law and they got it. The interpretation said there is nothing wrong with package pricing, capitation, or potentially a discounted price.

“This interpretation included a commentary that the safe harbor was not intended to apply in situations where a provider used discounts purely to get Medicare business without that discount being passed onto Medicare,” he continued. “However, on the basis of this safe harbor language, national lab companies continued to use discounts to win business.

Discounted Lab Test Prices

“The situation we have today is that these two national lab companies have willfully used discounts—sometimes at a price that was less than the marginal cost of performing the test—for no other reason than to get Medicare business,” he said. “To me, that is breaking the law, which is the basis of our lawsuit.

“‘Pull-through’ is a simple scheme,” observed Baker. “It is a marketing practice that essentially uses the higher fee-for-service payments from the Medicare program to offset the financial losses incurred by the discounted prices the lab company gives to the health insurance plan.

“Lab companies offer health plans a very low price for lab tests performed on the plans’ beneficiaries,” he stated. “The health insurer then gives the lab contract access to solicit physicians and win their lab test referrals for the patients covered by these health plans.

“Of course, the physicians tend to use that same lab for all of their patients covered by other health plans—including Medicare,” Baker said. “That additional business is the ‘pull-through’ and the Medicare program is reimbursing these labs at a much higher price per test than what the health insurance plan is paying the same lab for the same test!

Need To Offset Losses

“In this scheme, a lab uses the higher payments from the Medicare patients to offset the losses incurred because it has given the private health plan a cut-rate price that is all-too-often below cost,” noted Baker. “It is important to understand that these lab companies weren’t offering discounts because they were good guys.

“This was Medicare being exploited by knowing, intelligent operators. That’s my view,” he declared. “When you know how this works, you come to believe that no one is innocent.

“When a lab company sells lab tests below cost, it does so specifically for the purpose of getting access to other specimens, including Medicare, that will be reimbursed at higher prices,” commented Baker. “After gaining access to a physician’s practice because of its exclusive con- tract with the private health plan, the lab knows it must ‘pull-through’ patients in the Medicare program to financially offset the losses generated by the discounted lab test prices it is contracted to deliver to the private health insurance companies.”

Asked why the U.S. Department of Justice has been reluctant to bring enforcement actions against labs that used discount lab test pricing to win business and gain the “pull through,” Baker could not explain the lack of federal action by regulators. “As to our qui tam complaint and why we have not enjoyed a positive reaction in Washington, I’m perplexed,” he commented.

Abuse Of Health Program

“At the same time, there is also a degree of conservatism and caution that doesn’t quite embrace the issue,” said Baker. “Why wouldn’t the federal government pursue this case? This is a situation where an important government program is being abused, and the amount is significant, totaling billions of dollars annually!

“I have been told that some lawyers in the Justice Department think it is a difficult case,” he noted. “What is interesting is that the people who think this case is difficult are not the decision makers. Every legal case has its challenges for both plaintiffs and defendants.

“But you could also view a case like this with an aggressive attitude where you say, ‘Our government program is clearly being taken advantage of and we have every reason to be able to prove it.’ If you don’t take that more aggressive attitude, then you have an abrogation of responsibility. That’s the way I see it.

“Plus, I believe that if you’re paying the bill, you are allowed to ask any question you like at any time,” he added. “That’s how it works in business. That’s how it should work here.

“Further, many in the lab testing industry know that it is whistleblowers who tend to show government prosecutors the road map to prosecute both criminal and civil violations of Medicare and Medicaid laws,” Baker said.

Baker’s Experience with ‘Pull Through’ Started During California’s Heydey of HMOs and IPAs

ANDREW BAKER’S THOROUGH UNDERSTANDING of the “pull through” issue goes back to the days when he was CEO of Unilab Corporation.

“In September 1992, I was named Chairman and CEO of Unilab after I bought it from Corning’s MetPath subsidiary,” he said. “At that time, I discovered that, in California where Unilab was located, the ‘pull through’ practice was in place. Some lab companies were using deep discounts to win business.

“I disliked this practice, and after studying it, I decided to stop it,” he recalled. “In fact, I sent termination notices for contracts Unilab had with the health insurance companies and told them that we would no longer do these transactions. We followed the steps outlined in the contracts and gave notice that we were ending this arrangement.

“After that, the board of directors fired me in 1996 from my job as Unilab CEO,” Baker said. “The board didn’t like what I had done and the revenue numbers at Unilab weren’t improving. Around that time, we issued a bond and the bond holders started asking questions. I became a scapegoat.

Discount Pricing Continued

“The discounting practice continued in a half-hearted way until a new owner of Unilab was found and the company was sold to Kelso & Company,” he continued. “The new owners disregarded my belief about how this practice was illegal. Instead, they whole-heartedly went back to it. And that practice of using deeply-discounted lab test prices to obtain new contracts with HMOs, managed care plans, and IPAs (independent physician associations) led to the company doing extremely well.

“When I sold my ownership stake in the company, I sold for $5.85 per share,” he said. “But three years later, Kelso sold Unilab to Quest for $26.50 per share. That was quite a difference in three years and I wanted to know why. I suspected that it was due to this practice of using discounted lab test prices to win new business and capture additional market share.

“I talked with people I still knew there” noted Baker. “I learned that they had blatantly pushed this discount program to health insurance companies, private Medicare health plans, and IPAs.

California Qui Tam Case

“This marketing practice led to a whistleblower case that was filed in California under a similar state law governing the prices providers must extend to Medi-Cal, the state’s Medicaid program,” he recalled. “That whistleblower case is similar to our lawsuit. It involved the use, by certain lab companies, of deep discounted pricing for lab test services to private payers as a way to gain access to the fee-for-service payments from the Medi-Cal program.”

Both Quest and LabCorp paid settlements in that whistleblower case last year. In its settlement with California Attorney General, Quest agreed to pay $241 million last spring. When LabCorp settled with the California Attorney General last summer, it paid $49.5 million. In both settlement agreements, Quest and LabCorp denied all the allegations of the qui tam lawsuit, including that their pricing practices were improper. (See TDRs, June 13, 2011 and September 26, 2011.)

“When I was in California, there were clinics or programs that managed patients for a fee, and I believe these clinics or programs were billing illegally,” Baker said. “You could argue that these clinics had nothing to do with lab testing but, in fact, they sent lab specimens to the commercial labs that offer them deeply-discounted prices—and there was an element of impropriety to it. These labs would offer the clinics a deeply discounted price on the lab tests so that the clinic made a profit from its global fee and the labs got the ‘pull through’ work. In fact, the ‘pull through’ work was mainly the fee-for-service Medi-Cal patients. The labs actually made out very well.”


Two Lab Firms Collected $14 Billion in 10 Years

OVER THE PAST 10 YEARS, the nation’s two largest lab companies were reimbursed a total of $14 billion by the Medicare program. Were Andrew Baker’s allegations in his whistleblower lawsuit to be upheld by the court, the federal government could consider some or all of these claims to be “false claims” under Medicare False Claims laws.

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