Calif. Officials Back Off From Suspending Labs

Settlement talks started last summer, but Medi-Cal officials have left the issue unresolved

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CEO SUMMARY: Early in the summer, California’s Department of Health Care Services (DHCS) delivered letters to between 10 and 30 laboratory companies notifying them that, effective immediately, it was withholding their Medi-Cal payments and was suspending each lab’s Medi-Cal license. However, the intense reaction triggered by this unexpected and unequal enforcement campaign apparently caused DHCS to defer the ongoing withhold of Medi-Cal payments. DHCS also has yet to suspend the licenses of these labs.

IT WAS GRIM NEWS BACK IN JUNE AND JULY for a handful of laboratories that received compliance enforcement letters from the California Department of Health Care Services (DHCS). Upon opening the letters, each lab learned that DHCS was immediately withholding Medi-Cal payments to the lab and that the lab’s Medi-Care license would be suspended within 15 days.

Because DHCS officials decline to comment on this matter, no one knows the precise number of laboratory companies which received these letters. It is known that more than 10 labs, and possibly as many as 30 labs, were sent these letters by DHCS during the summer months.

Recently THE DARK REPORT was able to speak with Byron J. Gross, who is an attorney with Hooper Lundy & Bookman in Los Angeles. His firm represents several of the laboratories that received DHCS letters this summer and faced the immediate withhold of their Medi-Cal payments and a suspension of their lab’s Medi-Cal license. Gross was willing to discuss certain aspects of these cases.

“We represent five or six labs that got these withhold and suspension letters” stated Gross. “I know of other labs that also were sent these letters by DHCS, so there are at least 12 or 13 labs, maybe more, that were targeted in this way by DHCS. “To my knowledge, none of the cases have been settled,” added Gross. “Moreover, I don’t think DHCS followed through and actually suspended the Medi-Cal licenses of the laboratory companies that received such a letter.

Licenses not Suspended

“The laboratories we represent got the notices from DHCS, but the suspensions were never put into effect,” he said. “Payments to these labs were withheld for a few weeks and the state is still holding that money.

“We hear that the amounts withheld range from $100,000 up to $1 million, depending on how much Medi-Cal business the lab does,” stated Gross. “One lab- oratory company we represent does 50% of its business with Medi-Cal. They really suffered and had to lay off staff.

“Although the department threatened to suspend the labs from the Medi-Cal program, when we met with the department, they decided not to suspend any of our lab clients,” he noted. “The department did withhold money for a few weeks, and the department is still holding some money for a number of labs.”

Medi-Cal Audits of Labs

Gross said that the letters sent by DHCS last summer were in response to on-site audits the department had conducted at these laboratories in earlier months. “Last year, the department did audits for the six months of July 1, 2009, through December 31, 2009,” he stated. “From these audits, DHCS developed a number it says is owed by each laboratory.

“DHCS asserts this number is an overpayment, meaning the difference between what Medi-Cal paid and the lowest price that the lab charged other payers for the same tests,” Gross explained.

“The department has released some of the Medi-Cal money that it withheld from these laboratories because of the alleged overpayment,” he continued. “But DHCS has not released all the funds pending settlement agreements with the laboratories.

“Work on a draft settlement agreement between these labs and DHCS is proceed- ing, but has not been finalized,” commented Gross. “I am not aware that any laboratory has settled this matter with DHCS.”

One Lab May Have Settled

THE DARK REPORT believes at least one laboratory did settle with DHCS this summer. This lab is said to have agreed to repay the alleged overpayment amount to DHCS, along with a penalty.

“Frankly, it’s crazy to call this fraud and suspend labs when every laboratory in the state has offered clients the same range of competitive prices for years,” declared Gross. “In our first meetings with the department, we explained that they can’t just pick these 12 labs and withhold funds and suspend them when all other labs—especially the biggest lab companies in the state—are doing this. If you suspend these 12 labs, other labs will simply offer lower prices, and take over the business.”

“For DHCS to take this action is unexpected,” Gross said. “This has never been something that they enforced, except in a couple of isolated incidents. We do not think it’s legal for them to do so.

“In the past, the department has taken the position that state law requires laboratories to give Medi-Cal the lowest rate,” he added. “However, over the years, several different lawsuits were filed on this issue and the results were mixed.

Qui Tam Case Clouds Issue

“As we all know, in California, there is a qui tam [whistleblower] false claims action pending against a number of labs for this specific pricing principle,” Gross explained. “While the qui tam case is being litigated, no laboratory in California has changed its pricing practices.

“Among the defendants in the qui tam lawsuit are the nation’s two largest laboratory companies,” added Gross. “Both Quest Diagnostics Incorporated and Laboratory Corporation of America are fighting this issue and continuing to offer lower rates than they offer to Medi-Cal.

“No one understands why the DHCS suddenly decided that labs haven’t changed their billing practices, and so it was necessary for them to do these audits, then withhold funds and threaten to suspend these labs as providers to the Medi- Cal program.”

For a state agency that was in a hurry last summer to immediately “shut down” or exclude a handful of laboratories from the Medi-Cal program—apparently to send a message to the rest of the laboratory industry—progress on the settlement agreements has been slow.

“Since we worked on a draft settlement agreement during the summer months, we haven’t heard anything official from the state and the state has not pressured us to settle,” Gross explained. “We thought that if we pushed back on certain issues and tried to work out a settlement, state officials would respond with guideline language about what is okay and what isn’t okay.

 Awaiting DHCS Guidelines

“However, because legal action in the qui tam lawsuit is ongoing and there are billions of dollars at stake, it may be that DHCS has been stymied by the California Attorney General (AG) who is prosecuting the case,” postulated Gross. “It could be the AG does not want DHCS to set any specific guidelines until this qui tam suit is finished.

“Clarification and guidelines on interpretation of California statues is much needed,” noted Gross. “For example, one issue we want clarified for medical laboratories in California involves pricing for the federal qualified health centers (FQHC) that provide care to the poor.

“The goal of these centers is to cover as many people as possible,” he continued. “Many labs have agreements with these centers to charge them less for lab tests than they charge other payers.

FQHCs Are Concerned

“We have pushed back on this point and so has the California Primary Care Association (CPCA), which fears that its members will see the cost of laboratory testing increase,” said Gross. “This example shows that there are situations where the lower prices offered by clinical laboratories are consistent with government health policy and legislative intent.”

In fact, the CPCA believes its member FHQCs do meet certain safe harbors and the lab test price provided to these clinics are protected arrangements. It is actively lobbying all stakeholders with the goal of maintaining legal access to lower laboratory test prices.

Because the Department of Health Care Services did decide to forestall withholding Medi-Cal payments and suspended the licenses of those laboratories it had audited, that is an indication that a number of important legal issues involving low prices for laboratory tests are being contested.

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