SCORE A BIG WIN FOR THE GOOD GUYS! An appeals court in New York state has upheld a lower court ruling that the New York State Department of Health (NYSDOH) intentionally overcharged clinical laboratories for the costs of regulating clinical laboratories and blood banks, possibly going back decades.
On July 22, the Appellate Division, Third Department of the Supreme Court of New York, issued its ruling. One direct consequence of this decision is that NYS-DOH will now need to recalculate the fees that should have been charged to member laboratories of the American Association of Bioanalysts (AAB), which was the plaintiff in the case.
NYSDOH has indicated that the resti- tution to AAB member laboratories may be as high as 75% of the money that these laboratories paid to the Department of Health between 1998 and 2006. In the future, the DOH will be required to issue bills to laboratories that conform to the Court decision.
11-Year Legal Battle
In its complaint, originally filed 11 years ago, the AAB had noted that the fees charged by the NYSDOH increased seven-fold during the period 1984 through 2010, raising from $2.4 million per year in 1984 to over $17 million per year today. According to state law, charges assessed upon laboratories were to be “limited to reimbursing the Department for the necessary costs of the regulation of clinical laboratories and blood banks.”
Attorney Jeffrey Sherrin of the Albany, New York, law firm of O’Connell & Aronowitz, PC, served as general counsel for AAB. In response to the appellate court ruling, Sherrin wrote that “In today’s ruling, the Court agreed with the lower court’s finding that the fees charged to the labs were ‘arbitrary and capricious,’ and that the Department’s ‘bald estimates’ of the actual costs of the laboratory regulation program could not support the fees charged when the Department failed to either keep accurate, contemporaneous financial records or even disclose those documents cited in support of the cost estimates.”
The scale of the DOH’s miscalculations appears to be substantial. Sherrin quoted Justice Robert S. Rose, who wrote for the Appeals Court that “The Department’s intention to shift as many costs as possible onto the clinical laboratories was further revealed in the testimony that the Director had once boasted that he had been able to transfer 17% of the [NYSDOH] Wadsworth Center’s budget to the clinical laboratories.”
In a press release about the appellate court’s ruling, Mark S. Birenbaum, the Administrator of AAB, stated that “Once again, a New York State Court has vindicated AAB’s efforts to prevent the New York State Department of Health from covertly inflating the fees it charges clinical laboratories. In affirming the lower court’s Decision, the Appellate Division has recognized that the New York State Department of Health clearly abused its authority for years at the expense of clinical laboratories.”
The outcome of this long-running court battle is a reminder that the laboratory medicine profession can benefit by challenging state and federal health programs in appropriate circumstances. It was a legal challenge by several labora- tory organizations in San Diego, California, for example, that ended the Medicare Part B Competitive Bidding Demonstration Project in early 2008. (See TDR, April 8, 2008.)
Judges’ Written Rulings
According to accounts of the testimony in the AAB lawsuit against the NYSDOH, as well as written rulings by judges involved in the case, the Department of Health wandered far afield from its statutory responsibilities and authorities.
Sherrin wrote that “Testimony at the trial showed that laboratories were being charged for things like $1,000 of baked goods for Health Department meetings [to which the laboratories were not even invited]; the costs of developing new assays for which DOH scientists held patents and [for which] the Department would receive royalties; research into environmental pollution; and many other activities amounting to millions of dollars that did not support clinical laboratory regulation.”
There was similar commentary by one of the judges. Retired Supreme Court Justice Edward R. Sheridan was the Judicial Hearing Officer. He presided over the entire 30-day trial, which took place in 2008. In his decision, issued on September 28, 2008, Sheridan wrote “In effect, [NYS- DOH] has turned the clinical laboratory reference system special revenue account into an unauthorized and unsupervised revenue stream that is limited only by the bounds of defendant’s creativity…”
What originally triggered the lawsuit by AAB was its discovery that the DOH was taking money from clinical laboratory and blood bank fees and spending that money on salaries of individuals who did no work related to the regulation of New York licensed clinical laboratories. AAB even found instances where these funds were flowing to individuals who did not work for the NYSDOH. AAB also knew about instances where funds from laboratory fees financed trips to California and Europe, as well as cars for the New York Commissioner of Health.
Aspects of this legal case are worth considering. For example, this litigation was originated by the American Association of Bioanalysts and sustained by it over 11 years on behalf of its members, which are mostly smaller private laboratory companies.
Thus, it is interesting to consider whether larger laboratory associations and organizations declined to join this lawsuit over the years because of their fear that suing regulators would turn out badly for the largest of their laboratory members. After all, history is replete with examples of industry regulators, who, after losing an important challenge by a company under their regulation, intentionally turn the regulatory spotlight onto that company and exact revenge through what might be characterized as “micro-regulation” in a punitive fashion.
Another informative insight is how a regulatory agency that lacks effective oversight can use its government powers to tax and assess fees in a manner that violates the law. But because the companies such an agency regulates do not have access to information about these collections and expenditures, it is almost impossible to accurately monitor the situation and identify activity that violates either or both the intent and the fact of the law.
At a minimum, Mark Birenbaum, the AAB, and its independent lab members should be recognized for standing up to a clear case of regulatory over-reach. This was an expensive and time-consuming law suit. But the final appellate court ruling confirms that—in this lawsuit—the defendants were not on the right side of the law.