What Comes Next in Battle Over Discount Lab Prices?

In California, this settlement agreement may create new complications for regulators

CEO SUMMARY: Now that the settlement involving Quest Diagnostics Incorporated and the California Attorney General has been announced, attention turns to what comes next with the four remaining defendant lab companies in the whistle-blower lawsuit. There are several different scenarios and it may be that California regulators face tough challenges before they can succeed in enforcing 51501(a) according to their interpretation. Similar lab test pricing cases are active in six other states.

NOW THAT A SETTLEMENT of the whistleblower lawsuit and related issues has been inked by the California attorney general and Quest Diagnostics Incorporated, one question of great interest is: What happens next in California in regards to deeply-discounted lab test pricing and 51501(a) enforcement?

Several possible scenarios come to mind. For example, individually, the remaining four laboratory companies that are defendants in the qui tam lawsuit might work toward a resolution of their respective cases, perhaps settling on terms consistent with those agreed to by Quest.

What’s Next for AG?

It is likely that the California attorney general will next focus on Laboratory Corporation of America. After all, claims against LabCorp represent the largest outstanding amount now that Quest Diagnostics Incorporated has signed a settlement agreement.

In the qui tam lawsuit that names LabCorp as a defendant, the allegation is that LabCorp, for 14 years beginning in 1995, billed and received $104 million from the Medi-Cal program. Of this amount, the lawsuit alleges that 79% of the amount paid to LabCorp represents overcharges due to the “systematic fraud committed by LabCorp against the State.” The lawsuit seeks the return of this amount back to the State of California, which is approximately $72 million.

Like Quest Diagnostics, LabCorp denies these allegations. Last month, in public filings, LabCorp wrote that “The Company disagrees with the Department of Health Care Services’ (DHCS) contentions and interpretation of its regulations and believes that it has properly charged the Medi-Cal program under all applicable laws and regulations.”

Setting aside the expectation of settlements or trials involving four laboratory companies that remain as defendants in the whistleblower lawsuit, there is the practical problem of how the California attorney general and the Department of Health Care Services will choose to enforce 51501(a), now that the settlement terms with Quest Diagnostics have been disclosed to the public.

As noted in earlier pages, the language of the settlement agreement between the California AG and Quest Diagnostics seems to define a period of time between now and November 1, 2013, when Quest Diagnostics will be free to continue to offer low prices for lab tests to its cus- tomers without a requirement that it submit claims to the Medi-Cal program for the same low prices for those same tests.

Lobby to Change Law

Is this a transition period to allow Quest Diagnostics to “wean” physicians, hospitals, independent practice associations (IPAs), and managed care plans away from deeply discounted lab test prices? alternatively, given Quest Diagnostics’ statement in its press release about this settlement, does the nation’s largest laboratory company believe it can lobby the California state legislature and change or amend existing laws? (See page 5.)

In this scenario, Quest Diagnostics would probably like to lobby for changes to be made to the law that would allow it to continue offering rock-bottom laboratory test prices to some providers without a legal requirement that it extend those same low prices to the Medi-Cal program, as the California AG contends is required by the existing 51501(a) law.

Challenge for California AG

For its part, the State of California would appear to have its own unique challenge. It has agreed to give Quest Diagnostics a period of 28 additional months during which time Quest Diagnostics must simply report instances in which a provider got a lower price for a lab test than the (higher) price that was on claims submitted by Quest Diagnostics to the Medi-Cal program.

Thus, how will the AG and the DHCS regulate other lab companies in California relative to their interpretation of the 51501(a) law? If Quest Diagnostics now has a 28-month window which allows it to continue offering deeply-discounted prices to some providers while submitting claims to Medi-Cal at a higher price, will these same terms be offered to other clinical laboratories serving patients in California? Or will the same terms be offered only to labs that, like Quest, agree to settle claims about past billing practices and make a payment to the state?

This has the potential to become a complicated situation for state regulators. It could prove to be equally challenging for lab companies that compete daily against Quest Diagnostics in California.

At a minimum, these potential scenarios indicate that a host of legal issues are likely to come into play as California regulators take additional steps in coming weeks and months to enforce their interpretation of 51501(a) with other clinical laboratories operating in the state. Certainly at least some lab companies competing with Quest Diagnostics would want similar terms extended to them. Further, these same competing laboratories would have a motive to press their legal arguments through any channel possible, including the California court system.

National Implications

Setting aside these potential scenarios, the unfolding events in California are likely to have national implications. There are other states with similar laws that define how a provider must bill the state’s Medicaid program in situations in which it has given a low price to another provider that is below the state’s Medicaid price for that same service.

In recent years, both Quest Diagnostics and LabCorp have disclosed that they each received subpoenas regarding Medicaid billing practices involving six states. These states are Florida, Georgia, Virginia, Michigan, Nevada, and Massachusetts.

In the “Settlement agreement and Release” document, one clause references these six state actions and notes that “the release also specifically excludes any governmental amendments to the previously brought actions in Florida, Georgia, Massachusetts, Michigan, Nevada, or Virginia, or amendments by Qui Tam Plaintiffs which do not assert new causes of action.”

As California regulators either negotiate a settlement or go to trial with each of the four remaining defendant laboratory companies in the whistleblower lawsuit, it is possible that the outcomes of these efforts may establish precedents that find application in the individual qui tam cases apparently active in Florida, Georgia, Massachusetts, Michigan, Nevada, and Virginia.

Establish Legal Precedents

Were this to happen, then there would be a growing number of legal precedents at the state level affirming that the practice of laboratory companies offering deeply-discounted lab test prices violates those state laws that require a provider to give the state Medicaid program the same lowest price it gives other providers for that service.

In turn, such a series of similar decisions in multiple states could encourage the federal Medicare program to revisit this same subject. It is believed at least one federal qui tam lawsuit is still active that alleges that certain discounted pricing actions by Quest Diagnostics and LabCorp violate federal Medicare laws, including the anti-kickback statute and the false claims act. These lab companies deny the charges. Other unsealed whistle-blower suits may also exist.

More Whistleblower Lawsuits

The point here is that this first settlement in California for $241 million can have a number of consequences. It may catch the attention of attorneys general in other states and encourage them to more aggressively enforce state laws that address “comparable pricing.” It may also encourage a new wave of laboratory whistleblowers and their attorneys to file qui tam lawsuits against lab companies they believe have offered deep discounted lab test prices in violation of state or federal laws.

Could Federal Qui Tam Cases Trigger Price Enforcement?

IT WOULD BE IRONIC if any unsealed or sealed qui tam action now wending its way through a federal court ended up moving on a parallel track as has the qui tam case of Hunter Laboratories, LLC, and Chris Riedel vs. seven lab companies in California state courts.

Remember, back in 2009, when this qui tam lawsuit was unsealed by then-California Attorney General Jerry Brown, most lawyers and lab executives in California scoffed at the possibility that the plaintiffs could prevail. They pointed out that no court rulings, nor enforcement actions, nor any strong legal precedents, relative to 51501(a), gave clear support to the legal arguments of the plaintiff. Indeed, the law had been on the books for years and California had seldom taken decisive action to assert its interpretation.

Now, just 26 months later, $241 million has been collected from one defendant and the remaining defendants could similarly settle in order to avoid a court case. Will this example motivate the federal Department of Justice (DOJ) to more energetically pursue qui tam case(s) involving allegations of deep discounted lab test prices which violate Medicare statutes for anti-kickback and false claims that are currently in federal court(s)? Will it motivate other individuals and companies to consider filing new qui tam suits?

Certainly the financial incentive is there, putting aside the legal merit of such claims, if any. Added together, the two blood brothers probably bill the Medicare program for a total that approaches $1 billion per year, maybe going back a decade. Recovering 10% of that amount, times ten years, would be a large recovery for DOJ and the Medicare program.


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