Understanding the Deal With Medi-Cal and Quest

Settlement terms may be applied to other labs operating in California, with interesting consequences

CEO SUMMARY: It is now possible to see the specific language in the “Settlement Agreement and Release” document executed by the California State Attorney General and Quest Diagnostics Incorporated. For those clinical lab managers—and the attorneys who represent their laboratory companies—there is mixed news and guidance about 51501(a) from this agreement. That’s because, while assenting to pay $241 million to resolve these allegations, Quest Diagnostics denies any “wrongdoing.”

FOR CLINICAL LABORATORY COMPANIES in California, no single issue is more important at the moment than the correct interpretation of state laws that spell out how providers must bill Medi-Cal, the state’s Medicaid program, when they offer other providers a price that is less than the Medi-Cal fee schedule.

However, there is mixed guidance to be found on this point in the “Settlement agreement and Release” document executed last month between the California Attorney General (AG) and Quest Diagnostics Incorporated.

Many in the lab industry expected that the first settlement between the California ag and one of the two blood brothers would provide some type of template or road map that the AG and the California Department of Health Care Services (DHCS) would then bring to bear against other laboratories facing allegations that they had overcharged the Medi-Cal program, in violation of state laws, including the statute commonly known as 51501(a).

Thus, the lab testing industry watched with strong interest when, on May 20, California Attorney General Kamala D. Harris issued her press release to announce a deal with Quest Diagnostics. What got most of the national press headlines was the fact that, under terms of the settlement agreement, Quest Diagnostics would pay $241 million. according to the press release, this would allow California “to recover illegal overcharges to the state’s medical program for the poor.”

Settlement Document

Along with the press release from the AG’s office, a copy of the 21-page “Settlement agreement and Release” document was made public. The document makes for interesting reading, and begins to open a window on some of the specific approaches that are likely to be used by either the California AG or the DHCS in their ongoing efforts to enforce 51501(a) and related state laws.

THE DARK REPORT contacted a number of attorneys knowledgeable about the general circumstances of the whistle-blower lawsuit and the DHCS enforcement actions during 2010 with a request to discuss the specifics in the settlement agreement. However, as of press time, no attorney was willing to go on the record with their observations or comments.

Neither were any attorneys with direct knowledge of this case willing to speak off the record about the document. In many cases, this was because these lawyers represent lab companies operating in California who are either defendants in the whistleblower lawsuit or are currently in negotiation with DHCS because of enforcement action notices sent by the state agency in 2010.

Key Points in Settlement

What follows are observations about the “Settlement agreement and Release” document that should be useful in helping clients and regular readers of THE DARK REPORT understand key points. In future issues, we expect to have one or more attorneys provide their analysis of how certain legal issues were addressed in this document, which was signed by the California ag and lawyers representing Quest Diagnostics.

The first observation about this agreement and release is that Quest Diagnostics emphasizes that it denies “any and all liability and wrongdoing.” The sidebar on page 7 reproduces the specific language from the settlement agreement that describes Quest Diagnostics’ denial and its position on these legal points.

Is There a Legal Precedent?

It appears that the California Attorney General, in choosing to settle and not allow this case to go to trial, has missed the opportunity to possibly obtain a court verdict that supports the state’s interpretation of 51501(a) and similar state laws that address pricing for Medi-Cal claims.

Thus, this important legal point seems to still be a contested issue, as confirmed in clause II-F of the agreement, which reads thusly:

This Settlement Agreement shall constitute neither an admission of liability by the Quest Defendants nor a concession by California or the Qui Tam Plaintiffs that any part of the Complaint lacks merit, and it does not constitute or contain any statement or interpretation of law. No one other than a Party to this Settlement Agreement is intended to receive any right or benefit under it or to have standing to enforce any of its provisions.

In the preamble of the agreement between the California AG and Quest Diagnostics, the specific acts in dispute were described in the language that is reproduced below. This information can help pathologists and clinical laboratory managers understand the nature of the actions that the state considers to be violations of the law:

II-C. California and Qui Tam Plaintiffs allege that the Quest Defendants submitted or caused to be submitted false claims for payment to the California Medical Assistance Program, which is California’s Medicaid program (“Medi-Cal”), by allegedly engaging in the following conduct (hereinafter referred to as the “Covered Conduct”):

  1. During the period from November 7, 1995, through the Effective Date of this Settlement Agreement (as defined in Section III-W below), the Quest Defendants (including the Quest Releasees as defined in Section III-F below) allegedly charged Medi-Cal more for laboratory tests than they charged other purchasers of “comparable services” under “comparable circumstances,” in violation of California Code of Regulations, title 22, Section 51501(a) (“Section 51501(a)”), other regulations governing Medi-Cal, including without limitation, title 22, Sections 51480 and 51529, and the requirements of their Medi-Cal Provider Agreements.
  2. During the period from November 7, 1995, through the Effective Date of this Settlement Agreement, the Quest Defendants (including the Quest Releasees) allegedly offered and gave capitated and fee-for-service discounts on laboratory tests for non-Medi-Cal services in order to induce purchasers to refer Medi- Cal laboratory test business to the Quest Defendants, in violation of 42 U.S.C. § 1320a-7b, Section 650 of the California Business and Professions Code and Section 14107.2 of the California Welfare and Institutions Code, regulations governing Medi-Cal, and the requirements of their Medi-Cal Provider Agreements.
  • II-3. During the period from November 7, 1995, through the Effective Date of this Settlement Agreement, the Quest Defendants (including the Quest Releasees) allegedly engaged in the conduct that is alleged in the Complaint.

Useful Description

This description of alleged violations is helpful to laboratory executives because it identifies the specific laws and regulations—both state and federal—which the California AG argued were violated by the defendant laboratory company’s use of discounted prices for laboratory testing. These are longstanding and widespread practices in California’s intensively-competitive laboratory testing marketplace.

The list of laws that were alleged to have been violated is extensive. Not only does it reference 51501(a), but it also mentions Sections 51480 and 51529 of the California code, and inducements in exchange for Medi-Cal referrals in violation of 42 U.S.C. § 1320a-7b.

The other statutes referenced include Section 650 of the California Business and Professions Code and Section 14107.2, The California Welfare and Institutions Code, the regulations governing Medi- Cal, and the requirements of the Medi-Cal Provider agreements.

The next clause in this section is II-D. This clause contains Quest Diagnostics’ denial of these allegations. It is reproduced in full in the sidebar on page 7.

Having set out the allegations of wrong-doing, along with the denials of these allegations by Quest Diagnostics, the agreement next addresses actions that Quest Diagnostics must take. This includes payment of the $241 million, plus timely reporting and other requirements. These required actions are detailed in the following story, which is found on pages 12-13.

At the heart of the whistleblower lawsuit was the issue that the defendant laboratory companies failed to give the Medi-Cal program the same lowest price for a laboratory test that these defendant lab companies offered to other providers. Language in the “Settlement agreement and Release” document indicates that the two parties still differ in their interpretation of that state law. It is mentioned in two clauses.

Each clause reserves the rights of one party. In the case of the California attorney general and the DHCS, the clause is III-17, which states:

Nothing in this Settlement Agreement has any effect or impact on California’s ability to pursue actions, claims, or remedies that are not explicitly renounced by Sections III.C.15, III.C.16, and III.C.19 of this Settlement Agreement. Without limitation, nothing in this Settlement Agreement shall preclude California from:

(a) initiating a proceeding to recover alleged Medi-Cal overpayments for an asserted violation of Section 51501(a) based on pricing disclosed in an Exception Report, or that is not required to be disclosed in an Exception Report (hereinafter a “Recoupment Action”).

(b) withholding payments to a Quest Releasee, or (c) seeking or imposing temporary or permanent suspension, exclusion, debarment or deactivation of a Quest Releasee’s Medi-Cal provider numbers on any grounds that may be authorized by law other than those explicitly renounced by Sections III.C.15, III.C.16, and III.C.19 of this Settlement Agreement.

…Without limitation, nothing in this Settlement Agreement shall preclude California from seeking or imposing temporary or permanent suspension, exclusion, debarment, or deactivation of a Quest Releasee’s Medi-Cal provider numbers for failure to pay or comply with a final order, judgment, or assessment that is made or affirmed by court or administrative tribunal of competent jurisdiction at the conclusion of the action or proceeding, including any appeals of the judgment, order, or assessment obtained.

This description of alleged violations is helpful to laboratory executives because it identifies the specific laws and regulations–both state and federal–which the California AG argued were violated…

The rights reserved to Quest Diagnostics are described in clause III-18, which is reproduced below:

Nothing in this Settlement Agreement shall preclude a Quest Defendant from initiating any proceeding that may be authorized by law that seeks a declaratory judgment or dam- ages sustained due to the withholding by California (including by DHCS) of any portion of a Medi-Cal reimbursement payment based on California’s or DHCS’s contention that Section 51501(a), Section 51529(a), or Section 51480(a) of Title 22 of the California Code of Regulations precludes payment, in whole or in part, due to information disclosed in an Exception Report (here-inafter a “Quest 51501(a) Action”).

The Parties agree that such a Quest Section 51501(a) Action shall be deemed untimely and therefore barred unless it is commenced within one year from such a withholding by California. To the extent permitted by law, the Parties further agree that following such a withholding, Quest may commence such a Quest Section 51501(a) Action in court without first having to exhaust any otherwise applicable administrative remedies and that California will, to the extent permitted by law, expressly waive any defense of failure to exhaust administrative remedies with respect to such an action so that the Parties may obtain an expeditious judicial decision.

Quest agrees that if it brings more than one Quest 51501(a) Action, it will stipulate to such total or partial coordination, designation as related 13 cases, or consolidation of those Actions as DOJ or DHCS may request. Quest further agrees that if it chooses to commence a Quest Section 51501(a) Action in court without first having to exhaust any otherwise applicable administrative remedies, it will commence all such Quest Section 51501(a) Actions exclusively in Sacramento County Superior Court.

The Parties further agree that DHCS will not temporarily or permanently suspend, exclude, debar or deactivate any Quest Releasee (or its Medi-Cal provider number) due to the mere filing or pursuit of a Quest Section 51501(a) Action.

Quests’ Right to Challenge

One way to read this clause is that Quest Diagnostics is keeping its legal powder dry and preserving its right to challenge decisions made by the California Department of Health Care Services that involve the agency’s interpretation of 51501(a) and related laws.

These sections are followed by language in the “Settlement agreement and Release” document that are a series of releases among the parties. Overall, this document illustrates how differently each party to the agreement viewed the issues in dispute. Because smaller laboratories typically cannot afford the legal resources deployed by Quest Diagnostics, it will be interesting to see if their settlements with the state turn out to have different conditions.

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