How Could So Many Labs Violate California Law?

51501(a) has been on the books for 40 years, as has the practice of labs offering low prices

CEO SUMMARY: If a 40-year-old state law on Medi-Cal pricing was known to regulators and clinical laboratories alike, how did the legal and compliance departments of so many laboratories—staffed by some of the smartest legal minds in California and nationally—interpret the law in such a different way as the state’s primary laboratory regulator? After all, the civil and criminal penalties for submitting false claims to government health programs can be crushing and career-ending.

FEARING THE POWER that regulators have over the companies they regulate, it is no surprise that the usual lab industry spokespeople have not stepped into the public eye to speak out about how the California Department of Health Care Services (DHCS) suddenly launched an aggressive enforcement action based on its interpretation of state code 51501(a). They are wary of the wrath of bureaucrats who prefer that the regulatory matter stay out of the media spotlight.

But this is quiet acquiescence to a bureaucracy that is suddenly challenging a business practice that it has observed for decades, yet never took the types of actions that normally get the full attention—and strict compliance—of the companies under its regulation. So why now?

And why did DHCS design an enforcement campaign that suddenly drops a letter on the target laboratory company, declaring it to be a lawbreaker and notifying it that its Medi-Cal payments are immediately withheld and its Medi-Cal license is being suspended? The United States of America is a republic where the rule of law provides order to society, there is justice for all, and those charged with a crime are considered innocent until proven guilty.

It should not be overlooked that submitting false claims to a government health program can trigger criminal charges and criminal convictions. Laboratory executives received letters from DHCS where it was written that the department “…conclude(s) that you may have committed fraud or willful misrepresentation against the Medi-Cal Program.” This sobering statement represents serious jeopardy because the civil matter in dispute could lead to criminal charges.

Payments Were Withheld

As reported on these pages, DHCS’s decision to withhold Medi-Cal payments without advance notice caused some labs to lay off employees. It disrupted the service relationships these labs had with physicians and patients in California. While singling out these labs for enforcement, DHCS allowed other laboratories to continue using the same lab test pricing practices, with no apparent regulatory restriction or contemporary warning on their marketing and business activities.

Further, as described on pages 5-6, should DHCS prevail in enforcing its interpretation of 51501(a), there is a high probability that the state’s poorest citizens—and the medical clinics that serve them—will end up paying higher prices for lab tests. The California Primary Care Association (CPCA) estimates that, just for FQHCs in the state, the lab test cost increase would top out at $55 million per year. It would seem these outcomes are at cross purposes with the government’s goal of improving care for California’s neediest residents.

Asking the Larger Question

However, there is a larger question which must be asked. If medical labs in California are guilty of breaking the law by offering low prices, then the state’s patients, physicians, and medical laboratories in California are owed an explanation. How could so many laboratories engage in a business practice—offering providers lower prices than the Medi-Cal fee schedule—for as long as 40 years if, as now insisted by DHCS officials, these low laboratory prices were in clear violation of 51501(a)?

Regulated companies have responsibilities and legal obligations. The same is true of the regulatory agencies that oversee their activities. Thus, over the past 40 years, did the government agencies of the State of California provide an accurate interpretation of the law governing situations where provider prices were less than the Medi-Cal fee schedule?

During this same time period, was the government’s interpretation of 51501(a) reinforced by high-profile enforcement actions against laboratory companies or other types of healthcare providers that it judged in violation of 51501(a) by their continuing use of low prices, while not giving Medi-Cal those same lower prices?

Did California’s regulators issue and/or update guidance on low pricing practices that became common as the healthcare marketplace evolved? The use of capitated, full-risk managed care contracts in the early 1990s is one example of such a new development.

Public Record about 51501(a)

The public record of such statements, such enforcement actions, and such advisory opinions is what guides the compliance programs that are required of every provider participating in a government health program. Some of the smartest lawyers in California and across the United States have studied the body of law and the regulatory actions associated with 51501(a).

Over the past 40 years, as legal advisors to California’s laboratory companies, their interpretation of the law, based on relevant court cases and the published commentary by regulatory bodies on this section of state law, have formed the basis of the compliance policies that guide each laboratory licensed by the Medi-Cal program.

Lab Test Pricing Policies

Thus, why did such a sizeable number of well-established, respected laboratory companies fail to extend to Medi-Cal the same lower prices they were offering to IPAs, physicians, patients, FQHCs, and payers for periods extending back decades? The answer to this question represents a strong legal position for those laboratories currently in the cross hairs of DHCS, now that the agency has determined that the low pricing policies of the laboratory violated its interpretation of 51501(a).

It is quite unusual for a regulatory “mass non-compliance” event to occur in a highly regulated industry. Moreover, with hundreds of millions of dollars at stake, it is not difficult to predict that the stakeholders on both sides of this issue will not hesitate to go toe-to-toe. However, because the government typically holds most of the high cards in the deck, labs contesting DHCS’ interpretation and enforcement of 51501(a) will face daunting odds.


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