Why ‘Bad Actors’ Continue to Operate in Lab Industry

OVER THE PAST TWO DECADES, pathologists and lab managers have regularly watched certain new lab companies burst on the scene and generate startling growth in revenue and profits by offering proprietary tests–often unsupported by published clinical studies that demonstrate the utility of these tests.

Too often, these newcomers use aggressive sales and business tactics that to some of lab industry professionals would appear to be clear violations of federal and state laws governing inducement and medical necessity for lab tests. Yet, their game continues year after year because of the lack of timely, vigorous, and tough enforcement by U.S attorneys and state attorneys general against these types of lab companies.

Excessive Overuse Charged

Such enforcement failure is extremely frustrating to the vast majority of clinical laboratory professionals. It also has consequences that are equally corrosive to a nation founded on the rule of law. In the absence of swift and tough enforcement by federal and state prosecutors, the offending labs continue to operate for many years, increasing their revenue and net profits generated from the creative ways they induce referrals from physicians willing to conduct business on those terms.

At the same time, other individuals see that, by using the identical sales tactics, they can also make big profits. So they create new lab companies and enter the market. They use these same tactics with little apparent fear of civil or criminal prosecution.

Over these same two decades, both state and federal prosecutors have generally been slow to act against each new crop of offending lab companies. And even in situations in which such labs found themselves to be targets of state or federal investigations, they continued their business practices for months or years before any final resolution of their cases, thus earning more profit.

Another reason why the owners of such aggressively-operated lab companies have little fear of government prosecutors is that often the final settlement will be for only a small proportion of the total revenue and profit. The government seems willing to resolve these types of cases by accepting just a portion of the total amount of profits that could be attributed to the offending lab company’s use of certain sales and marketing practices.

Similarly, the owners and executives of these types of lab companies have watched how the government is reluctant to pursue criminal charges in such investigations. Thus, the owners of these labs believe they face little chance of a criminal indictment and jail time.

Add up these factors, and it is not a surprise that there are constantly new groups of bad actors among the lab companies active in the marketplace.

There is irony in this situation. The majority of laboratory professionals want to comply with the law fully. But the lack of vigorous and effective prosecution against this handful of lab companies by the federal officials charged with enforcing anti-kick-back and medical necessity laws is what seems to encourage each new crop of bad players to regularly emerge and game the system for years at a time.

Current Federal Investigation Proved to Be no Bar to Profitable Sale of Laboratory Company

WILL LAST MONTHS SALE of BostonHeart Diagnostics turn out to be an example of a lab company that allegedly used sales and business practices that violated certain federal and state laws to generate amazing rates of growth in revenue and profits, after which its owners were able to cash out their investment without fear of criminal indictments or an expensive civil settlement with the federal government?

BostonHeart Diagnostics of Framingham, Massachusetts, was one of five lab companies identified as being under federal investigation in a story published by The Wall Street Journal on September 8. The WSJ said that federal prosecutors were investigating allegations that some of the five lab companies: a) induced physicians to refer patients to them using several illegal methods that generated payments to the physicians; b) induced physicians to order medically-unnecessary tests; and, c) did not require patients to pay any money for these lab tests.

Officials of BostonHeart Diagnostics and the other four lab companies denied all allegations and noted that they had stopped the practice and were cooperating with federal investigators.

What is noteworthy about the BostonHeart story and has caught the attention of executives at labs that compete against BostonHeart is the lab company’s recent sale to Eurofins Scientific, a European company. Announced on December
8, the sale confirmed the fast growth of the company, according to a press release.

The press release stated that BostonHeart was on track to earn revenue of $95 million in 2014, a CAGR of 75% since 2011. Purchase price was $200 million, of which $140 million was paid up front and another $60 million in contingency payments could be paid over time. This represents a purchase price that is 1.4 to 2 times annual revenue, a strong price in this market environment.

Executives at competing labs are questioning whether this sale is an example of how lax enforcement action by federal regulators and federal prosecutors allows a lab company to make big profits, even as competitors believe the lab was using allegedly illegal sales and business practices.

These executives note that Bain Capital Ventures, the former owner, is reaping a substantial profit from its ownership of BostonHeart, which was founded in 2007. Moreover, BostonHeart’s buyers apparently do not fear the eventual outcome of the federal investigation. In the press release about its acquisition, Eurofins Scientific acknowledged the federal investigation and said that “after due diligence, Eurofins is confident in the accretive value of this transaction for its stockholders.”

Rumors about the case

The prevailing rumor on the street is that federal prosecutors are negotiating settlements with some or all of the labs under investigation and a resolution to the case may be announced at any time. The conventional wisdom among executives at competing labs is that the resulting settlements are not likely to include criminal charges against the lab owners and operators, nor will the resulting civil settlement recoup the majority of money paid by government health programs for the claims being challenged.

As a final note, under Bain’s ownership, another lab company it owned was involved in a major federal court case. Bain acquired Damon Clinical Laboratories in 1989. It sold that lab company to Corning Corp. in 1993. In 1996, Damon settled a federal case by admitting that, from 1988 to 1993, it had submitted false claims to Medicare and other federal programs. Damon paid a criminal fine of $35.3 million plus $83.7 million in restitution to federal health programs.


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