Medi-Cal Gets Tough on Low Lab Test Prices

This summer, state Medi-Cal officials targeted up to 30 labs for immediate suspension & restitution

CEO SUMMARY: This may be the most significant lab industry story of 2010, which has gone unreported until now. Starting in June and July, California’s Department of Health Care Services determined that between 10 and 30 labs had submitted what the agency considers to be false claims. It sent out letters to these labs to notify them that they were suspended from the Medi-Cal program. It has since softened that stance, but in September, the agency sent letters to as many as 300 lab- oratories requiring them to self-audit their Medi-Cal claims.

ENFORCEMENT ACTIONS by California’s Medi-Cal program that were both unannounced and uneven have roiled the competitive marketplace for laboratory testing in the Golden State. Upset owners of lab testing companies singled out for enforcement action have even complained to elected officials.

At the core of this issue is the fact that California’s Department of Health Care Services (DHCS), beginning this summer, singled out between 10 and 30 California laboratory companies for submitting what the state’s Medicaid agency asserts are fraudulent claims because they were priced in violation of California state law.

Allegations of False Claims

DHCS sent letters to these labs informing them of its decision on the alleged false claims, along with notice that it had immediately stopped Medi-Cal reimbursement payments to these laboratories and was suspending their Medi-Cal licenses.

Meanwhile, the majority of the state’s laboratory companies continued business as usual, offering the same competitive lab test pricing as the handful of labs that had received the Medi-Cal enforcement and suspension letters from DHCS.

This inequity in enforcement action was quickly recognized by those lab companies whose Medi-Cal payments and licenses had been suspended by DHCS. It put these laboratories at a competitive disadvantage in the day-to-day conduct of their business and raised a host of legal issues.

Of interest for the entire laboratory industry: did DHCS follow due process of law when it singled out the first 10 to 30 laboratory companies and sent them a letter with the notice that it was immediately withholding all Medi-Cal payments to that laboratory, as well as suspending its Medi-Cal license? Were these laboratory companies getting equal treatment under the law, relative to all the laboratories operating in California that extend similar low lab test prices to clients?

Apparently, in response to the problems caused for the handful of labs unlucky enough to be singled out for immediate suspension of Medi-Cal payments and licenses, DHCS has stayed the suspensions of those laboratories.

However, DHCS still had the problem of selective enforcement, since it targeted only between 10 and 30 laboratories in the state for audits and suspension. That may be why, in September, DHCS next mailed out letters to most other laboratories in California directing them to conduct a self-audit of Medi-Cal claims submitted between July 1, 2009 to December 31, 2009.

DHCS told the labs receiving the letter that failure to conduct the self-audit could lead to sanctions that could involve suspension from the Medi-Cal program. In its letters, DHCS describes this enforcement program as the “DHCS Laboratory Price Sweeps Special Project.”

DHCS said the mandatory self-audit was “to ensure compliance with California Code of Regulations (CCR), Title 22, section 51501(a), which states in part, ‘Notwithstanding any other provisions of these regulations, no provider shall charge for any service or any article more than would have been charged for the same service or article to other purchasers of comparable services or articles under comparable circumstances…’”

National Labs Were Audited

Both Laboratory Corporation of America and Quest Diagnostics Incorporated have disclosed in their respective public filings that, in the third quarter of 2010, each laboratory company was audited by the Department of Health Care Services. (See sidebar on page 11.) It is not known whether DHCS initially suspended Medi-Cal payments and the Medi-Cal licenses of either national lab company after it completed its audits.

LabCorp and Quest Diagnostics are currently defendants in a qui tam lawsuit in California. The plaintiffs charge that, dating back to 1995, seven laboratories filed Medi-Cal false claims that violated California’s 51501(a) statute. Trials in this lawsuit for LabCorp and Quest Diagnostics are scheduled to commence during 2011. (See TDR, April 9, 2010.)

Both the set of letters sent to the 10 to 30 laboratories earlier in the summer, and the subsequent set of letters sent out this fall, were signed by Jan Inglish, N.P., Chief, Medical Review Branch, Audits & Investigations at DHCS. People involved in negotiations say that Inglish had a pri- mary role on behalf of DHCS during meetings this summer between DHCS and the laboratories facing immediate suspension from the Medi-Cal program.

When the first DHCS letters announcing the suspension of Medi-Cal payments and licenses were delivered to between 10 and 30 labs in June and July, no laboratory executives with knowledge of this situation were willing to talk publicly about this matter.

Follow-Up to DHCS Letters

Since each lab was in negotiations with DHCS on a possible settlement, no lab executive wanted to be first to criticize the manner in which DHCS was conducting audits to determine instances of fraudulent claims, and then suspending Medi-Cal payments and licenses of the audited laboratories.

The reluctance of clinical laboratory executives to make public statements was understandable. When the DHCS letter arrived at a targeted lab, that laboratory was faced with four major issues.

First, DHCS was “(1) temporarily withholding 100 percent of payment to you, effective the date of this letter.” This denied payment to the laboratory for all Medi-Cal claims currently in the pipeline for reimbursement. The DHCS action was a serious blow to the lab company’s cash flow, particularly if it served a high proportion of Medi-Cal patients. It would also further undermine the ongoing financial stability of the laboratory.

Second, DHCS was “(2) temporarily suspending and deactivating your Medi-Cal provider number and National Provider Identifier (NPI) number, effective [on a date 15 days from the date of the letter].” This enforcement action meant that the laboratory would be unable to handle Medi-Cal specimens from its clients, even as it continued performing work for private pay patients. That would create an immediate competitive disadvantage with the targeted lab’s client physicians.

Third, the DHCS letters typically stated in direct language that the department had determined that the laboratory was guilty of submitting false claims.

False Claims Defined

Here is how DHCS explained its findings of false claims to one laboratory that had its Medi-Cal payments withheld:

[Name deleted] Lab routinely submitted false claims to the Medi-Cal program by misrepresenting that the amount that they charged to the Medi-Cal program was not more than what [name deleted] Lab charged to other payor types for the same service as per California Code of Regulation, Title 22, section (22 CCR §) 51501, which states in part, “(a) Not withstanding any other provisions of these regulations, no provider shall charge for any service or any article more than would have been charged for the same service or article to other purchasers of comparable services or articles under comparable circumstances…” This was evidenced by a review of invoices for private pay patients that were obtained from [name deleted] Lab and/or its referring providers.

In another part of the letter, DHCS reinforces its decision about false claims by writing that “The evidence set out above, which includes evidence of fraud, leads the DHCS to conclude that you may have committed fraud or willful misrepresentation against the Medi-Cal Program.”

Because it had sent a letter of finding that the target laboratory company had “routinely submitted false claims,” DHCS was creating additional legal jeopardy for the laboratory. There are numerous federal and state statutes that criminalize the submission of false claims to a federal health program. To avoid the potential of criminal action against the laboratory company and its executives individually, it was important for the targeted labortory to take immediate steps to challenge the evidence and the legal process used by DHCS to assert that false claims had been submitted to the Medi-Cal program.

The fourth major issue linked to the DHCS’s enforcement campaign is subjective and relates to the process of resolving the issues raised in the DHCS letter. Executives of the laboratory facing suspension describe the series of events as more like a “shake down” than due process of law. That’s because, from the first contact with DHCS after receiving the letter announcing that DHCS was withholding Medi-Cal payments, DHCS officials made it clear to the lab executives that the matter could be speedily resolved.

Follow-Up to DHCS Letters

However, the department’s proffered resolution would require the laboratory to agree to terms that would place it at a competitive disadvantage because other laboratories in the state would continue to charge the lower prices common in California. That would not be true of the targeted laboratory company. It would need to agree to extend lab test prices that comply with 51501(a) and remit the substantial sum of money that DHCS had already determined to be the amount of “Medi-Cal overcharges” associated with its definition of the “false claims” submitted by the laboratory.

This aspect of the Medi-Cal enforcement action has not been disclosed to the public until now by THE DARK REPORT. Off the record, more than one laboratory executive over the course of the summer has told THE DARK REPORT that the amount of settlement demanded by DHCS was equal to or greater than one year’s total reimbursement paid to that laboratory by the Medi-Cal program.

Restitution Amount

In conversations about these meetings with their colleagues, laboratory executives who traveled to Sacramento to negotiate a resolution with DHCS officials said that the strategy and approach of DCHS was communicated to them in a blunt and direct manner. The message was along the lines of “We’ve determined that your lab broke the law on pricing. Here is the amount your laboratory must pay in order to restore its standing as a Medi-Cal provider.”

Information gathered by THE DARK REPORT indicates that it would be reason- able to describe many of these hearings, meetings, or negotiations as hostile and the outcome not in doubt, from the perspective of DHCS officials. Their view is that labs broke the law. They have data generated from the audits to support their position that they have appropriately identified the number and amount of false claims involved in the case. Until the laboratory pays the designated amount back to Medi-Cal, state officals assert that it should not expect to be restored to good standing as a Medi-Cal provider.

This highly intimidating position taken by state officials is probably a major reason why, over the past six months, no laboratory executives nor their attorneys spoke out in a candid fashion about the DHCS demand letters. Nor did they issue a public statement of their confidence that their labs have complied with the law and that they have specific legal defenses with which to respond to the DHCS payment withhold and suspension letter.

Labs Must Conduct Self-Audit

Since the latest enforcement campaign launched by DHCS this fall involves requiring clinical laboratories across the state to conduct a self-audit, it remains to be seen how the department may treat those laboratories which identify Medi-Cal claims that would violate 51501(a).

Moreover, since it is asking nearly every laboratory in the state to conduct a self-audit, DHCS may find itself overwhelmed by the need to negotiate a resolution should it rule that a large number of laboratories are in violation of its interpretation of 51501(a). Plus, DHCS has already learned that withholding payments to just a handful of laboratories can prove disruptive to labs, physicians, and patients alike.

LabCorp Acknowledges Medi-Cal Claims Audit

IN ITS THIRD QUARTER FINANCIAL STATEMENT, Laboratory Corporation disclosed some details about the Department of Health Care Services audit of one of its laboratories in the Golden State. LabCorp wrote that:

During the third quarter, the Company responded to an audit from the California Department of Health Care Services (“DHCS”) of one of the Company’s California laboratories for the period of January 1, 2010 through June 30, 2010.

DHCS subsequently indicated that this laboratory charged the Medi-Cal program more than what was charged to other payers for some lab services and that this is inconsistent with DHCS’s current interpretation of California regulations. DHCS provided the Company with a proposed agreement related to the Company’s billing to the Medi-Cal program, including a requirement that the Company charge Medi-Cal the “lowest price” it charges others for a particular laboratory test.

The Company disagrees with DHCS’ contentions and interpretation of its regulations and believes that it has properly charged the Medi-Cal program under all applicable laws and regulations. The Company is continuing to cooperate with DHCS with respect to the audit.


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