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Allegations of false claims implicate discounted client billing practices

It’s the first major whistleblower lawsuit in the laboratory industry in recent years. On March 20, California State Attorney General Edmund G. Brown Jr. announced that his state had joined a qui tam lawsuit that alleges a number of laboratories have filed false claims on a “massive” scale, thus defrauding the California Medi-Cal program of “hundreds of millions of dollars.”

The unusual twist in this whistleblower lawsuit is that it was originally filed by the owner of a California-based laboratory. In 2005, Chris Reidel, owner and CEO of Hunter Laboratories, in Campbell, California, initiated the legal action, alleging what AG Brown characterized as “massive Medi-Cal fraud and kickbacks. Medi-Cal is the state’s Medicaid health program for the poor.

The original lawsuit filed by Reidel seeks to recover at least $100 million. However, one of his attorneys, Joe Cotchett, of the San Francisco-based law firm of Cotchett, Pitre & McCarthy, believes the state’s actual losses could be more than $1 billion. The lawsuit is pending in San Mateo Superior Court and was filed under seal in 2005.

The lawsuit contends that the seven labs overcharged the Medi-Cal program over a period of 15 years. The defendants are:

Another of Reidel’s attorneys, Niall McCarthy of Cotchett, Pitre & McCarthy, explained that the defendants are required under California law to bill Medi-Cal the lowest prices they charge to any other purchaser under comparable circumstances. “Instead, the lawsuit alleges that since at least 1995, defendants have systematically billed Medi-Cal the highest prices possible, resulting in overpayments totaling in the hundreds of millions of dollars,” McCarthy said. “In some cases, the labs charged Medi-Cal rates for exams that were 500% higher than what they charged others. For example, one lab company billed Medi-Cal $8.59 to perform a blood test. It charged a person with private insurance $1.43 for the same test, amounting to a 501% rate increase.”

These examples were part of a pattern of fraudulent overcharging and kickbacks that developed over the past decade, according to Brown. “Here’s how it worked: The defendant labs provided deep discounts when they were being paid directly by doctors, patients, or hospitals,” Brown said. “Prices were often below the lab’s cost and sometimes free. In exchange for these steep discounts, the defendants expected its customers to refer all of their other patients (where the lab was paid by an insurance company, Medicare, and Medi-Cal) to its lab. Under California law, this amounted to providing an illegal kickback.

“These sharply reduced prices, however, were not made available to Medi-Cal,” Brown continued. “Instead of charging the discounted prices, the defendants charged Medi-Cal up to six times more than the defendant charged others for the same tests. In effect, defendants shifted the costs of doing business from the private sector to Medi-Cal.

“Additionally, defendants offered their clients who paid them directly (not through Medi-Cal or other insurance) deeper and deeper discounts in order to get a larger share of the lab testing business,” the attorney general said. “This created an unfair playing field, and laboratories that followed the law could not effectively compete. These law-abiding companies were sometimes forced to sell or go out of business completely.”

Press reports about the lawsuit noted that a spokesperson for Westcliff Labs denied the charges, as did a spokeswoman for Quest Diagnostics.

Lab administrators and pathologists should note that California state law has many differences from federal Medicare law and regulations. This qui tam lawsuit has been filed under California State statutes. However, if the California Attorney General generates a sizeable settlement in this case, it might encourage federal healthcare regulators to reconsider how Medicare program regulations address the way labs discount services to office-based physicians.

For more information:

State Sues Medical Labs over Billing

Whistle-Blower Suit alleges Labs Defrauded California