Why Is There Crime In the Lab Industry?

Indictments of Ex-IMPATH executives are one more example of bad lab leadership

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CEO SUMMARY: Since 1991, there have been criminal indictments or criminal convictions of four former CEOs of public lab companies. Given the limited number of public lab companies active in the market at any moment in time, this is a remarkably high rate of criminal behavior. Moreover, the “bad behavior” of such lab firms puts the entire laboratory industry in a bad light and invites federal scrutiny of abusive business practices.

CRIME IN THE LAB INDUSTRY is a difficult topic for all of us. News that federal prosecutors indicted six ex-executives from IMPATH, Inc. is an event which dishonors a profession which deserves better.

Unfortunately, the indictments of these former IMPATH executives are not an exceptional event for the laboratory industry. Just eight months ago, three ex-UroCor executives were indicted for violating Medicare anti-kickback laws and Securities and Exchange (SEC) statutes. (See TDR, July 19, 2005.)

Lab Industry Misdeeds

The shameful list of lab industry criminal misdeeds goes back many years. Remember the “sink-testing” laboratories during the 1980s? This scandal caused Congress to pass the Clinical Laboratory Improvement Act (CLIA) as a way to stop the most egregious actions of unscrupulous laboratory operators, some who never performed tests, but poured specimens down the drain and sent the referring physician an invented lab test result.

Following declines in Medicare reimbursement in 1987 and 1988, certain executives at some public lab companies decided to “game” the Medicare system. Their goal was to offset lower Medicare fees by manipulating test ordering, coding, and billing techniques on certain laboratory tests in ways that would generate additional Medicare reimbursement to their lab company.

There was a bad harvest from these actions. When federal healthcare investigators finally took action in the early 1990s, National Health Laboratories (NHL) was the first to feel the sting of federal prosecution. The company agreed to pay $112 million to settle charges of Medicare Fraud and Abuse. Robert E. Draper, CEO of NHL, pled guilty to two felony counts and served prison time. Joseph Isola, former CEO of Damon Clinical Laboratories, and Robert Thurston, formerly a Vice President at Damon Labs, earned criminal convictions for similar actions.

During the 1990s, the so-called “Lab Scam” investigation by the Office of the Inspector General (OIG) generated more than $1 billion in restitution and fines from laboratories accused of violating Medicare Fraud and Abuse statutes, along with the criminal convictions noted above.

Criminal Behavior In Labs

Why does the laboratory industry find itself dogged by episodes of criminal behavior? What motivates some among us to institute and sustain business practices which, at their worst, are outright violations of regulations and statutes, and, at best, certainly violate the intent and spirit of such laws?

I would like to speak candidly on a number of points. Throughout my 15 years of service within the laboratory industry, I have heard and overheard many comments and opinions by all types of laboratorians. Generally, those in the profession of laboratory medicine abhor this criminal behavior and the mindset which encourages it.

During the past 25 years, it could be said that two “types” of laboratory companies can be linked to business behavior which violates state and federal regulations and statutes. The first type, loosely, is made up of privately-held laboratory companies where the owners brazenly defraud the healthcare system with obvious criminal behavior.

“Old Country” Mindset

“Sink testers” of the 1980s are one example. Another example are labs which bill for services never performed and/or collude with referring physicians to initiate unnecessary claims. These types of labs have been a somewhat common phenomenon, particularly in California and Florida. Often such labs companies are quite small, tied to specific ethnic communities, and are operated with an “old country” mindset.

The other “type” is more troubling to the entire laboratory profession. It is publicly-traded laboratory companies which “go bad.” Essentially, at certain times and for certain reasons, there are executives within these types of lab companies who make decisions which are just plain criminal. Indictments in the UroCor and IMPATH cases allege precisely this type of behavior.

However, there is another dimension to the ethical decisions made in some public lab companies. It is certainly true that, across the laboratory industry, there is a broadly-held perception that executives in some public companies are willing to push the boundaries of Medicare/Medicaid compliance up to, and past, the point of violation.

What motivates some among us to institute and sustain business practices which, at their worst, are outright violations of regulations and statutes, and, at best, certainly violate the intent and spirit of such laws?

This is certainly a widely-held belief by pathologists and lab managers working in hospital labs and other not-for-profit laboratory settings. In fairness to their bias, they do have good reason to hold this belief. For many years, they have watched several generations of public lab companies institute sales, marketing, pricing, and coding/billing/collection practices which caused great damage to the reputation of the laboratory industry.

Further, lab administrators and pathologists running independent lab- oratories and hospital outreach programs have first-hand knowledge of the sales, marketing, and billing practices used by their public laboratory competitors. They collect the documents provided by competing laboratories from physicians. They show these documents to their legal counsel and discuss how and why such practices might violate compliance laws.

Too often their legal counsel advises them that the business practice in question either crosses the line into outright violation, or skirts that boundary so close that it is not a risk they advise their local laboratory client to take.

High-Priced Lab Firms

In contrast, because of the potential for economic advantage that accrues from aggressively pushing compliance boundaries, public laboratory companies often use high-priced Washington and New York law firms to give them legal opinions which they feel gives them the justification to engage in this activity in the marketplace.

What allows this situation to continue is the lack of clear and consistent guidance—and enforcement action—by the Centers for Medicare and Medicaid Services (CMS) and the Office of the Inspector General (OIG). Laboratory companies willing to push compliance boundaries take advantage of the lack of detailed guidance on key points of Medicare compliance and paucity of specific enforcement by the OIG on laboratory business practices which do cross over the compliance line.

This creates an unlevel playing field in the laboratory services marketplace. Hospital lab outreach programs and local pathology group practices—advised by their attorneys to adopt a conservative legal interpretation of Medicare statutes and OIG guidance—find themselves at a competitive disadvantage to certain public lab companies willing to be more aggressive in their sales and marketing practices.

THE DARK REPORT has spotlighted some of these issues. One is the use of the “Waiver of Charges to Managed Care Patients.” (See TDR, August 26, 2002.) Another is the decision to not back-charge client-billed accounts for physicians’ failure to provide the lab with the diagnosis information required to file a Medicare claim. (See TDR, June 16, 2003.)

Certainly each of these two business practices has an appropriate use in the marketplace, per guidance from the OIG. However, too often a local laboratory will see a public lab competitor use these techniques in an aggressive manner—one which crosses the line from compliant practice to violation.

Local labs have reason to believe this to be true. The physician office receiving the benefits from the competing laboratory often discusses the details of the business arrangement. It may even pass over copies of documents supporting the “non-compliant” or “abusive” marketing practice.

This is a dichotomy in the lab marketplace between the compliance practices of hospital outreach programs and certain publicly-traded lab companies. In specific years, it seems to be the source of the worst criminal behavior in the laboratory profession.

First To Be Investigated

Evidence bears that out. It is seldom a hospital lab outreach program which is the first target by federal investigators and prosecutors. To the contrary, it is usually a public lab company which undergoes a federal investigation for specific laboratory business practices viewed as violations of compliance statutes.

The incessant pressure to produce ever-greater profits—and the lure of great personal financial reward—are the key factors which motivate individuals working in these settings to push the law as far as it allows. In the absence of more effective regulatory enforcement, our industry can expect to see more Drapers, Isolas, Hagstroms, and Saads—all indicted or convicted former CEOs of
public laboratory companies.

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