Crime In the Lab Industry: A Poor Track Record

Since 1990, almost 20% of public lab firms had a CEO indicted or convicted of federal crimes

CEO SUMMARY: In a remarkable finding, THE DARK REPORT demonstrates how 17.5% of the public laboratory companies in operation since 1990 have had an existing or former CEO indicted for federal crimes! This is a powerful statement about business practices in the laboratory industry and the allure of “skirting” the full intent and meaning of federal laws governing the Medicare and Medicaid programs.

IF NEW FEDERAL SUBPOENAS recently served to the two blood brothers eventually lead to a wave of significant civil settlements or even criminal indictments across the laboratory industry, no long-time laboratorian will be surprised.

But what will surprise and shock most lab managers and executives is a startling fact: Compared to most industries of the American economy, public laboratory companies have what may be possibly the highest rate of CEOs who have been indicted for federal crimes!

Since 1990, THE DARK REPORT can identify at least four CEOs of publicly-traded laboratory companies who have been indicted and/or convicted of federal crimes. What makes this statistic even more powerful is another fact: There have been only 23 public laboratory companies doing business since 1990. And just 16 of these could be considered “national/multi-regional,” with the other seven classified as either regional or specialized, focused on drugs of abuse, for example.

Doing the math, it means that 25% of the public lab companies doing business nationally saw their CEO indicted for federal crimes! If the focus includes those public lab firms that were regional or specialty testing companies, the ratio is 17.5%.

There may be no other industry in America which has as poor a track record. By any standard, this is an appalling track record of corporate ethics. If the lab industry has a bad reputation with Congress and the Medicare program, it is not without cause.

Public Lab “Hall Of Shame”

The public laboratory industry hall of shame includes these indictments and convictions under Medicare Fraud and Abuse statutes:

• Robert E. Draper, former CEO of National Health Laboratories, Inc., pled guilty to two felony counts and served prison time.

• Joseph Isola, former CEO of Damon Clinical Laboratories, Inc. pled nolo contendere and received a sentence of five years probation. (A former Damon Vice President, Robert Thurston, was convicted of similar crimes and served prison time.)

Currently under federal indictment and awaiting trial are:

• William Hagstrom, former CEO of UroCor, Inc., facing charges of violating Medicare anti-kickback and SEC statutes. (Also indicted are former UroCor Vice Presidents Mark Dimitroff and Michael MacDonald). (See TDR, July 19, 2004.)

• Anu Saad, Ph.D., former CEO of IMPATH, Inc., facing multiple criminal counts under securities and fraud statutes. (Also indicted are former IMPATH President and COO Richard Adelson and four other former employees.) (See TDR, April 18, 2005.)

Attracting Federal Scrutiny

The number of public laboratory CEOs indicted for federal crimes jumped out at me as I fielded comments and responses from clients and subscribers following THE DARK REPORT’S publication of a story titled “Why Is There Crime in the Lab Industry?” in its May 9, 2005 issue. Most respondents work in not- for-profit laboratory organizations and wanted to state their displeasure that such a large number of public laboratory companies seemed willing to push Medicare compliance far enough across the line to attract the attention of federal healthcare prosecutors.

Our story about the cumulative number of crimes in the public laboratory sector of the industry was in response to the mass indictments of former IMPATH executives, which the U.S. Attorney in New York City made public on March 30, 2005. Thus, the coincidence of new federal subpoenas issued to Quest Diagnostics Incorporated and Laboratory Corporation of America on June 7 and 8 was eerie. Many veteran laboratory executives and pathologists have concerns that these subpoenas might represent the first steps in a new federal campaign to prosecute long-standing laboratory marketing and contracting practices.

Waiting For Direction

However, based on past experience with federal investigations and prosecutions, it may be two to five more years before any federal investigation reaches the stage where civil actions are commenced or criminal indictments are filed. Until then, laboratories will not fully understand if certain existing business practices may now be considered in violation of federal laws.

It also relevant to note that federal prosecutors have a track record of convictions in their criminal indictments of ex-public lab CEOs. In the two cases resolved, Draper pled guilty and Isola pled nolo contendere. At this point, Hagstrom and Saad have entered “not guilty” pleas and are preparing to go to trial. That means federal prosecutors still have the potential to gain convictions on 100% of the cases involving ex-public lab company CEOs.

Time To Improve Ethics?

For my part, the insight that the public company sector of our industry has a federal indictment rate as high as 25% for CEO-level leadership is both unexpected and confounding. It changes the perspective on laboratory compliance and the “unlevel playing field” about which lab managers in both public and not-for-profit laboratories constantly complain. Maybe this insight can trigger a debate within the laboratory industry which leads to a higher standard of ethics and fewer abuses of federal and state laws.

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