Medi-Cal Deal Raises Interesting Questions

One interpretation of this settlement is that tough enforcement of 51501(a) only starts in 2013

CEO SUMMARY: From the perspective of the average citizen, it would appear that Quest Diagnostics scored two major “wins” over the California Attorney General in the negotiations as to how the whistleblower lawsuit was to be settled. Language in the settlement agreement would indicate that current lab sales and marketing practices involving deeply-discounted test prices that are not passed along to Medi-Cal will be tolerated by the state government, at least until November 1, 2013.

IF THERE IS ANY SINGLE “sword of Damocles” that hangs over the heads of clinical laboratory executives in the state of California, it is the question of appropriate prices for laboratory test claims submitted to Medi-Cal, the state’s Medicaid program.

The risk of getting this issue wrong was demonstrated back in March 2009, when the California attorney general unsealed a massive whistleblower lawsuit that claimed seven or more laboratory testing companies had “defrauded” the Medi-Cal program of hundreds of millions of dollars by systematically over- charging the state.

Comments at that Time

In his news conference at that time, then-attorney general Jerry Brown stated: “In the face of declining state revenues, these medical labs have siphoned off hundreds of millions of dollars from programs intended for the most vulnerable California families. Such a pattern of massive Medi-Cal fraud and kickbacks cannot be tolerated, and I will take every action the law allows to recover what is owed.” (See TDR, April 6, 2009.)

The next hammer to drop on some lab companies in California were letters sent by Department of Health Care Services (DHCS) to as many as 30 lab firms in the summer of 2010. DHCS informed these labs that, following an earlier audit to each lab’s Medi-Cal claims, DHCS was suspending Medi-Cal payments, effective immediately. (See TDR, December 26, 2010.)

Collectively, these events caught the full attention of every laboratory company that provides testing to patients in California and submits claims to the Medi-Cal program. For this reason, the “Settlement agreement and Release” that was recently negotiated between the California Attorney General, DHCS, and Quest Diagnostics is an important development. It provides insight into how 51501(a) is likely to be interpreted and enforced, at least relative to the claims involved in the whistleblower suit that covers the period of 1995 through the present.

As demonstrated in the preceding pages, certainly Quest Diagnostics will pay $241 million to resolve these allegations, even as it denies that it was guilty of any wrongdoing. But that $241 million must be viewed against the context that, during the years since 1995, the whistleblower lawsuit says that Quest Diagnostics was paid $726 million by Medi-Cal. The plaintiffs alleged that $509 million of that $726 million were overcharges to the Medi-Cal program— based on 51501(a) and similar state and federal laws—and should be refunded.

So, it must be considered a “win” for Quest Diagnostics that it negotiated that number down to $241 million, or 47.3%, of the claimed $509 milion of alleged over-charges. In addition, Quest also faced claims for treble damages and attorneys’ fees from the plaintiffs in the suit. For its part, the California attorney general could claim that this $241 represented the largest state settlement ever for California.

Next, for the periods covering august 1, 2011, and continuing through November 1, 2013, every three months Quest Diagnostics must submit a report to DHCS which essentially requires it to identify each lab test and each customer which has gotten a price during that three-month period that is less than the price Quest Diagnostics charged to Medi-Cal during that period.

Compliance with 51501(a)

However, there is no language in the settlement agreement that requires Quest Diagnostics to comply with DHCS’ inter- pretation of 51501(a) and thus extend that same lower price for that same test to Medi-Cal during that 28-month period. If this is a correct reading of the settlement agreement, then Quest Diagnostics is free to continue offering deeply discounted laboratory test prices to physicians, IPas (independent physician associations), and managed care companies during this time.

Since this reporting requirement ends on November 1, 2013, it means that this settlement agreement allows Quest Diagnostics to continue its deep-discounted price strategy for at least the next 28 months. That must be considered another “win” for Quest Diagnostics in its high-stakes negotiations with the California Attorney General.

This also raises an important question. If Quest Diagnostics is to be allowed to continue deep-discounted prices for tests—without having to extend those same low prices to Medi-Cal for the next 28 months—how will the California AG and DHCS enforce 51501(a) with other laboratory companies in the state?

 Negotiate Comparable Terms

For example, attorneys representing Laboratory Corporation of America may want to negotiate comparable terms with the California AG in order to settle Labcorp’s whistleblower suit. Similarly, the other remaining laboratory defendants may also want these terms as well.

If this proves true, then, for the next 2.5 years, California’s market for laboratory testing services will continue to see deeply-discounted prices for lucky providers, IPas, and managed care plans. But the state’s Medi-Cal program will be reimbursing Quest Diagnostics and other laboratories at a price that, if the allegations of the whistle-blower lawsuit are fully credited, is sometimes 90% greater than the cheapest price given by a laboratory to its preferred clients. Of course, California may well insist on an up-front settlement payment in exchange for allowing discount pricing practices to continue for the time being.

THE DARK REPORT reminds the reader that these insights are offered without the benefit of a knowledgeable attorney reviewing the qui tam lawsuit, the settlement agreement, and the press releases issued by the two parties to the settlement. In future issues of THE DARK REPORT, we hope to provide a more informed legal assessment of the “Settlement Agreement and Release.”

At the same time, relevant language from the document has been presented on these pages. It is the first opportunity for laboratory executives in California and across the nation to get first-hand knowledge of what was negotiated between the two parties that led to this $241 million settlement.




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