AG Jerry Brown Settles With Westcliff Med Labs

First look at the settlement agreement reveals how the AG may want labs to price tests to Medi-Cal

CEO SUMMARY: In California, Attorney General Jerry Brown is making progress in the whistleblower lawsuit alleging that seven lab companies in California violated state law by not giving Medi-Cal, the state’s Medicaid program, the same lowest lab test prices they extend to physicians, managed care plans, and IPAs. Westcliff Medical Laboratories, Inc., is the first of the seven defendants to publicly acknowledge that it finalized a settlement agreement with the State of California.

WHEN IT FILED ITS CHAPTER 11 BANKRUPTCY ACTION, Westcliff Medical Laboratories, Inc., of Santa Ana, California, disclosed that it had settled the outstanding whistleblower lawsuit against it involving claims that it defrauded Medi-Cal, California’s Medicaid program. Seven lab companies were named in the original qui tam lawsuit that was filed under seal in 2005 by Hunter Laboratories, Inc., of Campbell, California, and its owner Chris Riedel. The lawsuit alleges that the seven labs violated California’s False Claims Act in how they billed the Medi-Cal program.

Jerry Brown Joins Lawsuit

California Attorney General Jerry Brown announced the qui tam lawsuit in April 2009 and unsealed the case at that time. Brown has stated that he believes the seven medical laboratory companies named as defendants in the lawsuit “have siphoned off hundreds of millions of dollars from programs intended for the most vulnerable California families.” (See TDR, April 6, 2009.)

Although the Westcliff settlement with the California Attorney General is the only one which has been made public, THE DARK REPORT has learned that possibly two more laboratories named in the lawsuit have signed settlement agreements with the State of California. If true, it indicates that Attorney General Jerry Brown may hold stronger legal cards than previously thought.

Despite the legal precedents of several court cases in California during the past 20 years that ruled in favor of a laboratory company giving certain customers lower prices for lab tests than it did to the Medi-Cal program, Brown has apparently brought three of the seven laboratory companies to the table and negotiated a settlement agreement with them.

This has to be unsettling to the remaining four laboratories, which include Quest Diagnostics Incorporated and Laboratory Corporation of America. The political and social landscape may favor Brown’s effort to pursue a maximum settlement with the remaining defendants in this qui tam case.

Jerry Brown’s interest in this lawsuit comes at a time when his cash-strapped state is desperate for the funds needed to maintain essential state services, including the Medi-Cal program. This gives the government attorneys prosecuting the case strong motivation.

That is why news of the first settlements between the State of California and some of the defendants is a significant development. Brown has decided to challenge the widespread lab industry practice of extending deeply-discounted prices to physicians, managed care companies, independent physician associations (IPAs), and group purchasing organizations (GPOs).

State Enforcement Action

As the AG of a large state, Brown’s action is without precedent in recent years, since most enforcement actions have come at the federal level. These federal actions have not done much to change the status quo for the common practice of deeply-discounted lab test pricing.

That may change if Attorney General Brown prevails in his effort to pursue this whistleblower case in court or resolve it with settlement agreements between California and each of the other laboratory companies named as defendants in the lawsuit. The hint of how Brown intends to challenge the wide-spread practice of California labs extending discounted prices to customers that are less than the Medi-Cal fee schedule can be found in the settlement agreement made public by Biolabs, Inc., the owner of Westcliff Medical Laboratories.

The settlement agreement first establishes the point that “This Settlement Agreement is neither an admission of liability by Westcliff nor a concession by California or Qui Tam Plaintiffs that their claims are not well-founded. Westcliff expressly denies any such liability.”

Later in the Westcliff settlement agreement, Attorney General Brown reveals his strategy to permanently change existing lab test price discounting practices in California. He is structuring the compliance requirements in a manner that is favorable to the Medi-Cal program and meets his interpretation of existing state law covering the pricing of health services by providers to other providers and to the Medi-Cal program.

Brown’s strategy is simple. His settlement agreement doesn’t prevent Westcliff from charging the lowest price it wants to any customer. It requires Westcliff to give Medi-Cal the very lowest price for that test that it charges to any client. Effectively, this positions Medi-Cal to be billed at the very lowest price that the lab company is offering to any of its customers.

To audit compliance, Westcliff, if it does not sell within 360 days, will submit a report every six months to state officials that must list “all purchasers who were charged less for any Laboratory Test than Westcliff or Biolabs was paid by Medi-Cal for the same Laboratory Test during the same reporting period (‘Lower Price Purchasers’)… after giving full effect to all offered, agreed, or regular rebates, adjustments, discounts, write-offs, services, and other allowances and consideration of any kind.”

Moreover, “…It is agreed that neither monthly billing, nor volume of Laboratory Tests done by the purchaser, nor indigency of the patient for whom the Laboratory Test is done shall be used as reason not to charge Medi-Cal at least as low a price.” (Italics by THE DARK REPORT)

Capitated Payment Formula

A formula for capitated contracts obligates Westcliff to calculate a discount percentage, then, “…If the total capitated payments are less than the calculated Medi-Cal fees, the percentage discount will be applied equally to all Laboratory Tests billed to Medi-Cal for that period and a refund to the Medi-Cal Program will be required within 30 days.”

Pathologists and clinical laboratory administrators will recognize how Brown’s approach to enforcing California Medi-Cal laws could radically change lab test pricing practices in the Golden State. That is one reason why the remaining lab defendants will expend substantial resources to defend themselves in this qui tam suit.

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