CEO SUMMARY: Prosecutors continue to investigate. Criminal charges could be forthcoming against the company and individuals. Allegations against SmithKline expand the scope of laboratory practices that government regulators consider to be violations of existing statutes.
Despite the fact that Smithkline Beecham’s settlement was expected, details of the case generated surprise among lab industry executives.
At $325 million, SmithKline’s settlement is the largest amount paid by a clinical laboratory to date. It was public knowledge that the company had reserved that amount and expected to pay in excess of $300 million.
The announcement was made Monday, February 24, 1997. The SmithKline case is the latest settlement in what government prosecutors now call “Operation LabScam.” It began when seven laboratories received subpoenas in August 1993.
Six of the laboratories under subpoena have signed settlements. Only Nichols Institute, now owned by Quest Diagnostics Incorporated (formerly Corning Clinical Laboratories) has yet to settle. That investigation continues. During the previous two years, Quest has increased reserves relating to the Nichols Institute subpoena.
Although the civil settlement closes this part of the SmithKline case, United States Attorney Michael Stiles stated that investigations continue and criminal charges could be forthcoming. Such criminal charges may involve the company, company officials and possibly physicians and other healthcare providers who were clients of SmithKline Beecham Clinical Laboratories.
THE DARK REPORT expects that criminal investigations and prosecutions will be pursued in the SmithKline case for two reasons. First, the government wants to send a message to the entire healthcare industry. To follow up SmithKline’s civil settlement with criminal charges would insure headlines throughout the country.
Second, federal prosecutors have two advantages in pressing criminal charges in the SmithKline case. Investigators and prosecutors now possess a sophisticated and extensive understanding about clinical laboratory marketing and business practices. This is the result of six years of investigatory efforts.
Also, evidence against SmithKline is both abundant and fresh. Allegations against the company include reimbursement claims and business practices dating through 1996. Unlike earlier settlements for unbundling activities prior to 1994, SmithKline’s recent practices were at issue. With fresh evidence available, it makes it much easier for government prosecutors to assemble compelling criminal cases against their targets.
The precedent for criminal prosecution exists. In the 1992 settlement with National Health Laboratories, an executive pled guilty to criminal charges and served jail time. Damon Laboratories agreed to criminal charges last fall and it is known that former Damon employees in Boston were called to testify in front of the grand jury.
Prosecutors were attempting to develop criminal charges against several ex-Damon executives. But Damon was acquired by MetPath (now Quest) in 1993. Thus, by 1996 it was difficult for federal prosecutors to assemble sufficient evidence to obtain criminal indictments.
Should criminal indictments be issued in the SmithKline case, it will be a wake-up call to both the laboratory industry and their physician clients. Besides basic allegations of test unbundling common to virtually all of these settlements, SmithKline was alleged to have induced business from physician clients.
This raises the stakes for all clinical laboratory executives responsible for administering billing and reimbursement practices. SmithKline is alleged to have provided physician clients with free computers, fax machines, refrigerators and similar equipment and supplies.
Wherever these items were not used exclusively by the physician for outside laboratory functions, federal prosecutors viewed this as an inducement or kickback. Also at issue was the practice of SmithKline placing a phlebotomist in physicians’ offices and paying some type of “lease” or “rent” arrangement to the doctors.
SmithKline Lab Case Involves Six Issues
Alleged false claims submitted from 1989 through 1996 by SmithKline Beecham Clinical Laboratories were at issue in the settlement with federal investigators. Charges centered around these six issues:
- Test unbundling: add-on tests neither ordered nor needed by physicians.
- Tests not performed: relating to issues of specimen integrity, insufficient quality and similar problems.
- Add-on indices: such as hemagram indices added to CBCs.
- Double billing: involving kidney dialysis tests where covered by composite rates. Also issues of medical necessity or use for diagnostic purposes.
- Inducements/kickbacks: at issue was free equipment, such as computers and faxes, phlebotomists employed by SBCL in doctor’s office, payment of “lease/rent” and testing provided either free or below cost to physician and staff as “medical courtesy.”
- Code jamming: new term for federal regulators. Describes the practice of a laboratory providing ICD-9 (diagnostic) codes for screening tests.
Other Labs At Risk
Because clinical laboratories through- out the United States commonly provide computers, faxes, and phlebotomists to physician clients, the government’s actions against SmithKline regarding these issues may make all laboratories vulnerable to civil and criminal settlements based upon these issues.
The risk may be greatest in California. Last year the California Clinical Laboratory Association (CCLA) notified all licensed laboratories in the state that placing phlebotomists in the physicians’ offices violates existing state statutes. Should federal prosecutors choose to enforce similar federal statutes, California laboratories may find themselves facing investigation by both state and federal prosecutors.
With the added threat of criminal prosecution, clinical laboratory executives will need to seriously consider the consequences of continuing these practices, regardless of what competing laboratories may choose to do.
The case made by government prosecutors against SmithKline Beecham Clinical Laboratories is important. It represents the current thinking of federal investigators and prosecutors in their efforts to curtail Medicare/Medicaid fraud and abuse by clinical laboratories.
This case establishes a number of precedents. It creates new issues and concerns for clinical laboratory executives. Should criminal charges be forthcoming against SmithKline officials, expect that government prosecutors will use their SmithKline experience as a template against other clinical laboratories.
SmithKline’s public statements do little more than reflect the popular defense that, as stated by SmithKline CEO Jan Leschly, “Part of the problem, not just for SmithKline, but for the entire industry, lies in ambiguities over regulations and guidelines.” But that does not address issues such as billing for tests not performed. Guidelines on this point are clear and definitive.
Many details of this settlement are relevant for the entire laboratory industry. It provides specific documentation about how the government is interpreting and enforcing statutes and guidelines governing clinical laboratory activities for federal healthcare programs.
New Compliance Program
Federal regulators chose the occasion of the SmithKline announcement to introduce a national compliance program (see page 5). This is a further sign to the laboratory industry that enforcement of regulations and statutes will continue.
Expect more investigations to be announced, as investigators begin probing regional independent laboratories and hospital-based laboratories.