Discounted Lab Prices Become Issue in California

Low prices for lab tests come under scrutiny of regulators at both the state and federal level

CEO SUMMARY: For decades, California’s lab testing market has been considered the Wild West because clinical lab companies have felt relatively free to offer deeply-discounted prices to expand market share and take business away from competitors. Now these discounted pricing practices are being scrutinized by no less than three government bodies. First came a whistleblower lawsuit still winding through a state court. Next were Medi-Cal officials and then it was the Federal Trade Commission.

IN CALIFORNIA, THREE UNRELATED ACTIONS by three different government regulatory bodies may soon unleash disruptive forces on the Golden State’s intensely competitive market for lab testing services.

At the core of the three government agencies’ concerns is the widespread practice of offering deeply-discounted lab test prices to selected physicians, private payers, and other providers as a way to win business from competing laboratory companies.

Three government agencies are now separately reviewing the marketing practices of medical laboratories in California—for different regulatory reasons. But one common theme in these government reviews is the practice of clinical laboratory companies using low lab test prices as a marketing tool to gain new clients and expand market share.

There is a high probability that the regulatory decisions that result from these government agencies will end up triggering major changes in how and when laboratory testing companies can offer private providers a price for lab tests which is lower than these labs charge government health programs like Medi-Cal.

For this reason, this entire issue of THE DARK REPORT is devoted to the events now unfolding in California. Pathologists and laboratory administrators working in other states are generally unaware of the details about these developments.

The significance of these regulatory events should not be underestimated. Clients and regular readers of THE DARK REPORT are encouraged to make their own informed analysis of each government body’s interest in enforcing a laboratory industry activity that incorporates the use of deeply-discounted lab test pricing for marketing purposes. Such an analysis points to a primary conclusion that, within California, there are likely to be important changes in how state healthcare officials interpret and enforce existing statutes that govern how a lab can offer lower test prices to a provider than it charges to the Medi-Cal program.

California State Court Case

The first threat to current lab pricing practices is a whistleblower case in a state court that could result in a decision or settlement that alters existing lab industry marketing practices in situations where labs offer providers lab test prices that are less than what the same labs charge Medi-Cal.

Then, at the beginning of the summer, the California Department of Health Care Services (DHCS) initiated an unexpected and aggressive new enforcement program to address its interpretation of the state statute that deals with the issue of low prices for laboratory tests (and other health services) that are less than the provider charges to the state Medicaid program. This enforcement program goes further than any previous lab price enforcement effort by DHCS.

Meanwhile, early this December, the Federal Trade Commission (FTC) formally challenged the acquisition of Westcliff Medical Laboratories, Inc., in Santa Ana, California, by Laboratory Corporation of America. The FTC stated that its concerns were about market concentration.

Lab Test Prices Play a Role

But a closer reading of the FTC’s analysis of the downstream market consequences of the acquisition is a concern that the new owner would raise lab test prices from current levels. The FTC notes that this would be negative for the public health clinics, IPAs, and other providers that benefit from lower lab test pricing.

THE DARK REPORT is the first lab industry publication to identify the common theme of deeply-discounted lab test prices that is central to the issues now in front of these three different government bodies. If just one of these agencies successfully prevails in issuing a ruling against current marketing practices for pricing lab tests, that would alter the ability of labs to offer deeply- discounted lab prices to favored customers.

Such a ruling would likely trigger significant disruption to California’s competitive market for lab testing services. There would be new winners and losers among the labs operating in the Golden State.

A word of warning before reading further. Government bodies with enforcement and regulatory powers are tackling a lab industry marketing practice that is controversial even within the laboratory profession. Lab executives, attorneys, providers, payers, and government health program regulators will line up on opposing sides of this issue.

Interpreting Existing Laws

Each party will put forth compelling arguments that favor their interpretation of laws that govern lab test marketing practices. However, it is judges, elected officials, and regulatory agencies with the raw power to effect their interpretation of the law. That is, at least until a state legislature or Congress steps in and passes a new law that overturns a regulatory practice or clarifies the law in response to an unpopular court ruling.

The point here is that an impassioned debate about the legitimate use of deeply-discounted laboratory test prices is about to take place in California. It will be an emotionally-charged debate because an interesting mix of healthcare stakeholders will all stand to win or lose.

In the intelligence briefings which follow, THE DARK REPORt provides information and perspectives about these unfolding events. Because of the billions of dollars at stake, high-powered legal teams on both sides of the low price issue will be earnestly working to see that their clients’ interests prevail in whatever decisions are made by the courts and government regulators.


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