Did Qui Tam Suit Trigger Medi-Cal Price Concerns?

Unsealing of whistleblower lawsuit in 2009 gave Medi-Cal officials a roadmap for lab audits

CEO SUMMARY: It is easy to track backwards to understand why the California Department of Healthcare Services (DHCS) began aggressive enforcement of its interpretation of statute 51501(a) against a number of labs this summer. DHCS officials were given a full education and a roadmap for action when, in April, 2009, the whistleblower lawsuit that accused seven lab companies of violating 51501(a) was unsealed and joined by Attorney General Jerry Brown. It appears that, informed by facts in this lawsuit, DHCS then decided to vigorously pursue the low price issue.

IT’S BEEN 21 MONTHS since California Attorney General Edmund G. Brown Jr., joined a whistleblower lawsuit filed against seven private laboratories to recover hundreds of millions of dollars in what Brown charged were illegal overcharges to the state Medi-Cal program for the poor.

At the time, Brown was joining a qui tam lawsuit filed under seal in 2005 by Hunter Laboratories, LLC, and Chris Riedel. The legal action alleges violations of the state’s False Claims Act and was filed in San Mateo Superior Court. The suit charged that seven labs (including Laboratory Corporation of America, Quest Diagnostics Incorporated, Westcliff Laboratories, and four other labs based in California) had overcharged the Medi-Cal program since 1995. (See TDR, April 9, 2009.)

The basis of the whistleblower lawsuit is California Code of Regulations (CCR), Title 22, section 51501(a). Plaintiffs charged that the named defendants violated 51501(a) and said, “False claims result when providers submit claims to Medi-Cal at prices higher than what other providers were charged. The Medi-Cal program is entitled to restitution of the false claim payments.”

THE DARK REPORT believes that it is the public unsealing of this lawsuit last April that directly led to the unprecedented enforcement campaign against low lab prices that was instituted this summer by the California Department of Health Care Services (DHCS). The state Medi-Cal agency’s enforcement campaign is based on its interpretation of 51501(a).

This statute, which essentially tells a provider that it cannot bill Medi-Cal at a higher price than it charges another provider, is familiar to most laboratory executives. Further, over the past 20 years, DHCS officials have regularly stated their interpretation of this statute. But what the agency has failed to do during these same two decades is to take significant enforcement action against one or more clinical laboratories or other providers it views as having violated the pricing requirements of 51501(a).

Similarly, over the past two decades, as new pricing dynamics emerged in the healthcare marketplace, state officials have not regularly issued specific guidance on how to comply with 51501(a). For example, is 51501(a) violated if a capitated, full risk managed care or IPA contract was priced by a lab, a hospital, or a physician’s office at a price that is less, on a fee-for-service basis, than what is billed to Medi-Cal?

Lacking ongoing regulatory enforcement action and updated guidance on situations like this, laboratory companies in California have continued the practice of low prices and deeply-discounted pricing into the present day. In legal challenges to its current enforcement actions against laboratories, DHCS will have to defend its current enforcement policy in the face of years of its perceived quiet acceptance of this market status quo.

THE DARK REPORT believes it was the public unsealing of the whistleblower lawsuit in April 2009 that motivated the Department of Health Care Services to mount its major enforcement campaign of 51501(a) this summer. That lawsuit lays out the massive scale of price discounting for laboratory tests that has been common for the past 20 years.

Whistleblower Lawsuit

As alleged in the qui tam lawsuit, the seven California laboratories regularly offered other providers laboratory test pricing that was significantly below the price these same labs charged the Medi-Cal program. In the unsealed and redacted lawsuit against LabCorp, the plaintiffs claim that Labcorp owes Medi-Cal a total of $72 million in overcharges, based on violations of 51501(a) that accrued over the past 14 years. During this time, the lawsuit says Medi-Cal paid Labcorp over $104 million.

In the case of Quest Diagnostics, plaintiffs say that the 14-year total of Medi-Cal payments was $726 million and overcharges associated with 51501(a) violations by Quest total $509 million.

These numbers reveal the extent to which the two national laboratories were willing to deeply discount lab test prices to favored providers, relative to the prices paid by Medi-Cal. Lab executives often complain that Med-Cal reimbursement for certain lab tests is below the cost of performing the test. The numbers provided in the whistleblower lawsuit give a different perspective on the pricing practices of the nation’s largest lab companies.

Eyes Are Opened at DHCS

Further, one can now understand the reaction of DHCS officials to the details contained in this lawsuit. For bureaucrats at the cash-strapped Medi-Cal program, disclosure of overcharge amounts such as these must have been a true revelation.

Can it be a coincidence then, that Medi-Cal auditors began to show up at clinical laboratories in California in the months following the unsealing of the qui tam lawsuit? Next, having completed audits that revealed how, in the normal course of business, these laboratories were charging some providers less than they charged Medi-Cal, it would be expected that DHCS was now confronted with the dilemma of how to enforce their interpretation of 51501(a).

This is where DHCS found itself in a paradox of its own making. DHCS may be on the public record about its interpretation of 51501(a). But it had no history of ongoing enforcement of 51501(a), particularly as it applied to low-priced laboratory tests. Nor did DHCS have the benefit of having publicly provided detailed guidance, in prior years, on certain low price arrangements it may have determined violated its interpretation of 51501(a). (See sidebar on page 18.)

Therefore, both DHCS and California’s clinical laboratories have reasons to be unhappy over the current situation involving low prices for laboratory tests as it relates to 51501(a). Each side comes to the table with a legal position that squarely opposes the other. How these events turn out is anyone’s guess. However, it is likely that, going forward, DHCS intends to be diligent in enforcing its interpretation of 51501(a).

It’s Tough For Providers to Comply With A Law If Government Fails to Provide Adequate Guidance

MANY LABORATORY EXECUTIVES in California will tell anyone who asks that the low prices that their labs offer to some providers do not violate any state laws. They offer at least three reasons to support this view.

First, several court cases were litigated in past years over laboratory test pricing. No rulings or decisions resulted that challenged the market pricing practices that were common in California during the past two decades. This gave confidence to the wider lab testing industry to continue with the low pricing strategies that were in widespread use. As a point of interest, some laboratory executives do acknowledge that other sections of federal and state law were at issue and 51501(a) often did not come into question in these particular court actions.

The second fact that supports the popular wisdom is that there are limited examples of California’s Department of Healthcare Services (DHCS) taking enforcement action against clinical laboratories for practices that the state agency considered in violation of its interpretation of 51501(a).

If there is a third reason, it is the “every other laboratory is doing it” argument. Again, the support for this statement comes because laboratories have seen no consistent enforcement action taken against one or more laboratories that offer low prices to clients, but bills Medi-Cal at a higher price.

Section 51501(a) basically says that a provider must give Medi-Cal the lowest price that it charges other providers. Over the past two decades, DHCS has commented publicly that it interprets this statute to mean that a medical laboratory should not charge Medi-Cal a higher price for a test that it sells to another provider at a lower price. For their part, most pathologists and clinical laboratory managers in California are knowledgeable with the language of 51501(a).

However, in California during the past 20 years, state regulatory agencies—including DHCS—did not issue specific and clear guidance on different lab test pricing practices that evolved in response to healthcare market trends since 1990. The courts were little help either, since, as noted earlier, several lawsuits over low lab test pricing produced mixed guidance when it comes specifically to 51501(a) and how it should be interpreted.

Painted into a Corner?

One could thus say that California’s Department of Health Care Services has painted itself into a corner concerning 51501(a). The agency has had 20 years or more of opportunities to educate laboratories on the specifics of compliance with 51501(a), but it did not do that adequately.

Now, in 2010, DHCS wants to enforce its interpretation of the 51501(a) statute. But DHCS is finding that its enforcement efforts are causing turmoil in the competitive healthcare marketplace.

Of equal significance, in the face of opposition from the handful of laboratory companies it singled out for audits and an unannounced enforcement of its interpretation of 51501(a) this summer, the agency has not proceeded to implement full withholding of Medi-Cal payments nor proceeded with its announced suspension of the Medi-Cal licenses of these medical laboratories.

This pull-back can be interpreted as a sign that DHCS, after assessing the legal position put forth by the labs targeted for enforcement, recognizes that it may not prevail on all important points were some labs to decide to litigate the matter in state court.



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