DOJ Sends Subpoenas To Quest & LabCorp

Unexpected development raises questions as to what lab business practice is of interest

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CEO SUMMARY: In Newark, New Jersey, the Office of the U.S. Attorney served subpoenas to each of the two blood brothers, seeking information on “capitation and risk-sharing arrangements with government and private payers for the years 1993 through 1999.” At this point, little is known or understood about the interest and motives of federal prosecutors in researching this aspect of laboratory business practices.

JUST A DAY APART, SUBPOENAS were issued to Quest Diagnostics Incorporated (on June 6) and Laboratory Corporation of America (on June 7) by the U.S. Attorney’s office for the District of New Jersey.

Both subpoenas were for the same information. Each lab company issued a press release revealing that it had been asked to produce “business and financial records regarding capitation and risk sharing arrangements with government and private payers for the years 1993 through 1999.” The words used to describe the subject of the U.S. Attorney’s subpoena were identical in each lab firm’s press release.

News that the two blood brothers had received subpoenas from the Department of Justice (DOJ) rippled throughout the laboratory industry. Lab executives and pathologists who lived through the federal “Lab Scam” prosecutions of the 1990s consider these subpoenas to be an ominous portent.

That’s because these subpoenas have an uncanny resemblance to the prosecutorial patterns of “Lab Scam.” In 1993, the Department of Justice sent subpoenas, almost simultaneously, to at least five of the nation’s largest public laboratory companies. By that act, the DOJ sent a message that it was looking for industry-wide practices it suspected to be in violation of Medicare statutes.

And, just as these new subpoenas request the production of documents dating between six and 12 years ago, the 1993 wave of subpoenas requested documents that reached back five to six years earlier, into the late 1980s.

It will be some time before the exact motives of the U.S. Attorney in New Jersey become known. Federal officials cannot comment publicly about ongoing investigations. Meanwhile, officials at both Quest Diagnostics and LabCorp each said that the Department of Justice had stated that their company was not the target of an investigation.

No One’s Talking…Yet

In the absence of specific facts, informed speculation can be useful. First, by the language used in the federal subpoena, it is clear that federal investigators want to look at the capitated pricing contracts that Quest Diagnostics and LabCorp have offered to both private payers and government health programs. It is probably a safe assumption that laboratories which have never engaged in capitated pricing arrangements would not be targets of this federal inquiry, if it were to expand beyond the two blood brothers.

Second, the interest in capitated contracts dating between 1993 and 1999 is interesting. Although this may be considered “ancient history” by those of us managing in 2005, these are the years when the use of capitation in laboratory testing contracts exploded. By looking at this six-year period, federal investigators will be able to see how this trend evolved.

Medicare HMO Enrollment

Third, THE DARK REPORT observes that 1993 to 1999 coincides with peak enrollment in Medicare managed care programs offered by private payers. If federal investigators are exploring a “usual and customary price” violation, then it would be logical for them to identify the capitated lab test pricing granted by these two lab companies to commercial HMOs and Medicare HMOs. It is even possible that lab test pricing for these Medicare HMO contracts, whether capitated or highly-discounted fee-for-service, might be compared to what these companies billed Medicare for lab tests done on behalf of Medicare beneficiaries under Part B fee-for-service during the same years.

The lab industry has never seen an enforcement action that involved violations of the Medicare “usual and customary” price statutes. However, during the course of the 1990s, Medicare’s fee schedule became one of the “most generous” of all major payers. That means many providers are giving the nation’s largest insurers a significantly lower price than they give Medicare. Because of this market evolution in pricing, federal healthcare investigators might have a new motive to review this situation. New guidelines on how to calculate “usual and customary” charges, coupled with enforcement action, could yield significant savings to the Medicare and Medicaid programs.

Warning Shot For Labs

At a minimum, these new subpoenas by a U.S. Attorney must be seen as a warning shot to the entire laboratory industry. Since federal investigators have limited resources, they tend to devote their time to issues which promise: 1) that the federal government will prevail if the case comes to court; and/or, 2) will generate a substantial economic benefit (return) for the effort expended on the investigation and subsequent prosecution of the case.

Of course, because these cases take many years to reach a conclusion, it is likely that we may have to wait another three to five years to learn if the fresh subpoenas served to Quest Diagnostics and LabCorp two weeks ago are a significant event for both companies and the entire laboratory industry.

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