CEO SUMMARY: There’s movement in the negotiations between California state officials and Quest Diagnostics Incorporated over allegations that discounted lab test prices violated state law. In January, Quest disclosed that it had an “understanding” with California regulators and the amount of $241 million is part of the terms. It was also revealed that Medi-Cal payments to Quest Diagnostics are suspended through March 1, 2011, even as the lab company continues to provide testing.
IT MAY TAKE AS MUCH AS $241 MILLION for Quest Diagnostics Incorporated to eventually resolve allegations that it overcharged California’s Medi-Cal program for laboratory testing services and violated the California False Claims Act.
This figure was disclosed by Quest Diagnostics in a press release about its fourth quarter 2010 earnings report, issued on January 25, 2011. It wrote that in “the fourth quarter of 2010, the Company reached an understanding, which was highly conditioned, to settle [both California] matters pursuant to which the Company would pay $241 million.”
Further, Quest Diagnostics wrote “Conditions included, but were not limited to, reaching an agreement regarding the manner in which the Company’s future billings would be treated by the Department.” In this same statement Quest Diagnostics vowed to “vigorously defend itself” if a settlement could not ultimately be reached.
Another disclosure that caught the attention of laboratory executives and pathologists was Quest Diagnostic’s acknowledgement that the Medi-Cal pro- gram had suspended payments to the company, although Quest Diagnostics was continuing to provide testing services to Medi-Cal patients.
Quest Diagnostics wrote that “While the Company believes it is in compliance in all material respects with California requirements applicable to billing for clinical laboratory testing, the Company entered into an interim agreement under which it has agreed to temporarily suspend billing Medi-Cal for a period of up to six months through March 1, 2011, during which it continues to provide services.”
The language used by Quest Diagnostics to describe its negotiations with California state officials is being carefully parsed by medical laboratory owners and their attorneys in the Golden State. That’s because many laboratory companies are themselves the target of either or both of two ongoing enforcement actions by state regulators.
Discounted Pricing Practices
At the center of this disruptive legal dispute is California Code of Regulations (CCR), Title 22, section 51501(a). It states, in part, “Notwithstanding any other provisions of these regulations, no provider shall charge for any service or any article more than would have been charged for the same service or article to other purchasers of comparable services or articles under comparable circumstances…”
This is a “best price” statute. According to the state’s interpretation, when a provider gives another provider a service at a price below Medi-Cal, California’s Medicaid program, then 51501(a) requires that the provider should also extend that same low price to Medi-Cal. This statute has been on the books since the birth of the federal Medicaid program some 40 years ago.
However, over these same decades, it has been a common practice for clinical laboratory companies to extend deeply- discounted laboratory test prices to certain providers, even as they submitted laboratory test claims to the Medi-Cal program at the higher prices of the Medi-Cal lab test fee schedule.
Two Enforcement Actions
Now state officials are vigorously pursuing enforcement of 51501(a) in two ways. One enforcement action is the qui tam lawsuit. Plaintiffs are the State of California ex rel. Hunter Laboratories, LLC, and Chris Riedel, an individual. The defendants are at least seven laboratory companies. The lawsuit was filed in 2005. The California Attorney General joined this lawsuit and unsealed it in early 2009. (See TDR, April 6, 2009.)
The second enforcement action involves the California Department of Health Care Services (DHCS). In a series of actions in 2010, the state agency put selected laboratory companies on notice that it was enforcing its interpretation of section 51501(a). (See TDR, December 27, 2010.)
Lots of lawyers are now billing for lots of hours in California as state officials and medical laboratory owners square off over these allegations that deeply-discounted laboratory test prices violate state statutes.
Thus, the public information provided by Quest Diagnostics on January 25 offers useful details about how California state officials may intend to settle these allegations—not just with Quest Diagnostics— but with the other laboratory companies caught up in one or both of these enforcement actions.
“As Go Quest and LabCorp”
Lab industry executives know that: “as go Quest Diagnostics Incorporated and Laboratory Corporation of America, so goes the rest of the industry.” What makes this true is that both lab companies have billions of dollars of revenue and armies of top corporate lawyers to press their legal case.
So if the high-powered legal teams of each of the two blood brothers end up settling for significant sums—and agreeing to comply with the California DHCS’s interpretation of 51501(a)—then it is highly probable that other clinical laboratories operating in the state will be expected to abide by these same terms.
With each passing month, it becomes likely that the deeply-discounted laboratory test prices that were so common in California over the past 20 years will not continue into the future. How that alters the Golden State’s intensely-competitive market remains to be seen.