Continuing Uncertainty For California Lab Firms

Small and mid-sized family-owned labs are concerned about pending settlement talks

CEO SUMMARY: In its ongoing initiative to determine if clinical labs in California have violated the lowest-price regulation, the California Department of Health Care Services is preparing to send out revised letters to as many as 300 laboratory companies in the state. The letters will ask the labs to conduct a self-audit and send the results to state officials. Meanwhile, widespread uncertainty continues over the legal exposure of laboratories large and small that operate in California, pending further guidance by state officials.

IN CALIFORNIA, UP TO 300 CLINICAL LABORATORY COMPANIES are in a regulatory limbo. At issue is the California Department of Health Care Services’ (DHCS) interpretation of the state law that spells out how providers, including laboratories, should price the services they provide to Medi-Cal beneficiaries.

Last fall, DHCS sent these 300 laboratories a letter instructing them to conduct a self-audit to determine their compliance with California Code of Regulations (CCR), Title 22, section 51501(a). This is a state law that covers how providers should price services they bill to Medi-Cal. However, since sending those letters, DHCS bureaucrats have “gone silent” and have not provided additional guidance or explanation about how these self-audits should be conducted and reported to DHCS. (See TDR, December 28, 2010.)

DHCS has declined requests by THE DARK REPORT for comment. As a matter of policy, it does not comment publicly on matters involving an investigation or regulatory action against specific laboratory companies.

Many laboratories that received these self-audit letters are confused and uncertain how to go about complying with the DHCS self-audit request. Further, lab owners state that they do not fully know the legal consequences that would result from any self-audit reports that their lab might submit to DHCS.

Information Vacuum

To help fill this information vacuum, THE DARK REPORT spoke to a number of individuals who have interacted with DHCS officials over this matter. The following intelligence assessment of this situation was compiled from a variety of these sources, each of whom asked to not be identified.

This story is made up of four distinct regulatory events. The first event was the press conference conducted in April 2009, by then-California Attorney General Jerry Brown. He announced that the state had joined the whistleblower lawsuit filed by Hunter Laboratories and Chris Riedel in 2005. Brown accused the seven laboratories named in the qui tam action of having overcharged the Medi-Cal program by hundreds of millions of dollars.

The second event involves the response of DHCS following the unsealing of this whistleblower lawsuit. Between April 2009 and the spring of 2010, it conducted audits of as many as 30 laboratory companies in the state.

Stop Medi-Cal Payments

The results of these audits then triggered the third event. Sometime in June and July, 2010, DHCS sent letters to the audited laboratories, charging them with having violated state law concerning the prices they billed the Medi-Cal program. The letter announced that DHCS was suspending their Medi-Cal payments and within 14 days, would “temporarily suspend and deactivate” the laboratory’s Medi-Cal provider number and National Provider Identifier (NPI) number.

It quickly became obvious that DHCS had overreached in this effort. It was singling some labs out for aggressive enforcement while leaving other labs free to use the low prices that DHCS alleges violate its interpretation of state law to win business away from the audited labs. Additionally, it was clear to outside observers that the DHCS actions were likely to conflict with efforts by the state attorney general to prosecute the whistleblower case.

Request That Labs Self-Audit

The fourth event happened in September and October, 2010. DHCS sent letters to 300 laboratories and directed them to conduct a self-audit of their Medi-Claims. Since that time, DHCS has not responded to the requests of lab companies to provide further details and guidance in these matters.

Over the course of these four events, DHCS officials have interacted with many laboratory owners, executives, and their attorneys. Now some of these individuals have provided THE DARK REPORT with additional facts and their beliefs about how and why these events occurred.

“Here in California, this pricing case has been front and center for everyone in the lab business for months now,” observed one source. “What’s most upsetting to these lab companies is that—no matter who they ask—there has been no guidance from the California Department of Health Care Services whatsoever.

“Labs have no idea what to charge,” continued this source. “The DHCS people have said, ‘Trust us; it will get resolved,’ but so far, nothing has been resolved.”

An attorney representing a laboratory in these matters noted that DHCS sent self-audit letters to some physicians who performed lab tests in their offices. “When DHCS sent letters to 300 labs last fall, some of the labs were in physicians’ offices,” recalled the attorney. “Their labs do routine in-office lab tests, such as pregnancy testing and urine analysis, for example.

Second Letter May Be Sent

“It turns out that DHCS realized it should not have sent the self-audit letters to any physicians,” explained the attorney. “To rectify this error, DHCS officials are preparing a second letter that has been drafted and may be mailed within the next few weeks. We all believe that about 300 labs in California will be sent these letters.

“At issue is how much the labs charge Medi-Cal versus what they charge other payers,” another lawyer representing a laboratory told THE DARK REPORT. “We know that state officials are negotiating with Quest Diagnostics Incorporated to come up with an agreement that settles the charges in the whistleblower lawsuit and also the charges made by DHCS after its audit of the Quest labs last year.

“Similarly, Laboratory Corporation of America is believed to be negotiating with state officials to resolve the whistleblower lawsuit and the DHCS charges placed against it following its audit by the departments last year,” continued the lawyer. “Don’t forget the other 30+ laboratory companies that got suspension letters last summer. Despite settlement talks and draft agreements with at least a few of these labs, DHCS has not finalized any of these arrangements, to my knowledge.

“Meantime, state officials are trying to determine exactly how each lab charges Medi-Cal versus what they charge other payers,” stated the attorney. “DHCS officials insist that the state law mandates that Medi-Cal should be charged the lowest amount that a lab charges any other provider for that lab test.

“Several colleagues and I think that one reason why nothing has been resolved is because Quest Diagnostics has yet to settle with California,” offered a third attorney. “We believe that state officials hoped they could settle the Quest case by the end of the year.

“Having obtained this settlement, the domino effect would follow,” he continued. “The state figured it could next get LabCorp to settle and then settlements with other laboratory companies would fall into place.

Awaiting First Settlement

“We anticipate that, having established a pattern and precedent with all these settlements, DHCS would then issue some guidance or some administrative action,” noted this attorney. “As it is now, DHCS has not reached a settlement with Quest case, which makes it difficult for DHCS to give labs any real direction with certainty.”

“There are numerous small and mid-sized family-owned labs caught up in this case,” noted one source. “These labs have annual revenue of $5 million to more than $30 million. They are very worried about the potential loss they could face—depending on how a judge could rule in these cases. The numbers are potentially quite big.

Hints Of Settlement Terms

“For example, last month, Quest Diagnostics issued a press release stating that it was in ongoing settlement talks with state officials and the figure of $241 million was mentioned as a possible settlement amount,” explained this source. “Quest Diagnostics also stated that it had not billed the Medi-Cal program since September—even though it continues to provide lab test services to Medi-Cal beneficiaries. It noted that this situation was producing losses that Quest estimated at between $25 million to $33 million.

“If Quest Diagnostics was to end up paying as much as $241 million in a final settlement with California officials, then the smaller labs are worried about what they may need to pay,” continued this individual. “It’s just my guess, but one can understand why Medi-Cal officials would look at the state budget and interpret the state law such that the Medi-Cal program should get the best price a provider extends to any other provider. I’ll bet, that in all these settlement negotiations, state officials are refusing to agree to any exceptions to their interpretation of the California pricing statute.”

Consequences Of Settlement

There is another issue which complicates a potential settlement formula that could be universally applied across the entire clinical laboratory testing industry in California. It involves Federally Qualified Health Centers (FQHC). These health centers are eligible for Federal Section 330 grants and provide care to individuals without health benefits, or who lack access to quality healthcare.

It has been common practice among a number of lab companies operating in California to extend very low laboratory test prices to FQHCs, since these lab companies want to support the FQHC mission of serving the underinsured and uninsured. However, because these low prices are less than the Medi-Cal lab test fee schedule, such pricing arrangements with FQHCs would violate the DHCS’s interpretation of 51501(a).

This is a serious problem for California officials. THE DARK REPORT was first to publish precise figures about FQHCs that were provided by the California Primary Care Association (CPCA). There are 478 FQHC clinic sites in California and these clinics serve 2.9 million patients. This is a significant num- ber of patients. (See TDR, December 27, 2010.)

Complex Issues To Settle

The insights shared by knowledgeable individuals and presented here demonstrate just a few of the complexities that face both the California Attorney General and officials at the Department of Health Care Services as they attempt to interpret and enforce state laws governing how providers price services to the Medi-Cal program.

Of equal interest is the belief of some attorneys representing smaller lab companies in these matters that the national lab companies could end up negotiating a settlement that—in resolving state claims— includes terms which give them a competitive advantage over smaller independent lab companies in the Golden State.

Should that to happen, it may end up being a rather cheap price for either national lab company to pay to obtain a state-blessed market advantage over smaller lab companies in California.

Only One Lab Settlement in Qui Tam Case, Other Labs Have “Tolling Agreements” with the State

IT IS NECESSARY TO CORRECT INFORMATION presented in earlier issues of concerning the fact of settlements between the California Attorney General and some of the defendant laboratories in the whistleblower lawsuit.

Only one of the laboratory defendants in the qui tam lawsuit is known to have settled with the California Attorney General. That is Westcliff Medical Laboratories, Inc., and its settlement agreement was made public in May 2010, as part of its bankruptcy action. (See TDR, June 1, 2010.)

At the time that the Westcliff settlement became public knowledge, several sources were indicating that more than one of the smaller laboratories had also settled their role in the lawsuit with the California Attorney General. THE DARK REPORT thus published information stating that one or more other lab defendants had also settled with the California Attorney General and that fact was inaccurate.

To the degree that principals have since discussed this point off the record with THE DARK REPORT, their information on the matter indicates that the smaller laboratories in this action have entered into “tolling agreements” with the California Attorney General.

“A tolling agreement is a tool that parties in litigation use when a statute of limitations could run out,” said one source. “The tolling agreement essentially means you can extend that statute of limitations for a certain period. So, some of the defendant laboratories decided to take tolling agreements and let the two biggest labs—Quest Diagnostics and LabCorp—fight the issues first.”

For legal purposes, this means that the smaller laboratory defendants are taking the risk that, should
the California AG either gain a settlement or win in court against the two national lab companies, the final terms will be better for the smaller labs than having negotiated with the AG using their own legal counsel.


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