Quest Diagnostics Incorporated Discloses Facts About Negotiations With Medi-Cal Officials to Resolve Claims Associated with Discounted Medical Laboratory Prices

In California, Quest Diagnostics Incorporated (NYSE: DGX) and several other pathology testing laboratories, including Laboratory Corporation of America (NYSE: LH), have found themselves caught in the twin jaws of a regulatory vice. At issue is the long-standing practice in the state of clinical laboratories offering discounted prices for medical laboratory tests that are less than prices paid by California’s Medi-Cal program.

One jaw of the vice is a high-profile whistleblower lawsuit that was filed in 2005, and unsealed by then-Attorney General Jerry Brown in April 2009. The suit claims that seven clinical laboratory companies violated state law over a 15-year period by charging certain customers less for medical laboratory tests than what the seven lab companies billed Medi-Cal, the state’s Medicaid program. The suit alleges that the Medi-Cal program was overcharged by hundreds of millions of dollars from medical laboratory test claims submitted by the defendant lab companies during this time.

Quest Diagnostics revealed that its Medi-Cal billings were audited by DHCS in the third quarter of 2010.

Quest Diagnostics revealed that its Medi-Cal billings were audited by DHCS in the third quarter of 2010.

The other jaw of the vice is direct enforcement action by the California Department of Healthcare Services (DHCS). Guided by its interpretation of a long-standing state statute on Medi-Cal pricing, DHCS conducted audits of selected clinical pathology laboratory companies in 2010. DHCS then sent notices to these laboratories last year that it had suspended Medi-Cal payments and was ready to suspend the Medi-Cal licenses of these clinical laboratory companies within 90-days of receipt of the notices.

The Dark Report was the first lab industry publication to report that DHCS had begun aggressive enforcement of its interpretation of the 40-year-old state regulation on “best pricing.” As published in The Dark Report on December 27, 2010, DHCS wants strict compliance with its interpretation of California Code of Regulations (CCR), Title 22, section 51501(a), which requires that the lowest price a provider gives to any payer must also be given to Medi-Cal, the state Medicaid program.

In California, the medical laboratory company with the largest exposure in the matter of discounted laboratory test pricing is Quest Diagnostics Incorporated. Not only is it the nation’s largest clinical laboratory company, but it holds a dominant share of the lab testing market in California. So it is not surprising that Quest Diagnostics has found itself squeezed by both jaws of the Medi-Cal enforcement vice.

During its fourth quarter conference call with analysts this week, Quest Diagnostics disclosed new information about its settlement talks with the California Attorney General and the Department of Health Care Services.

Quest Diagnostics revealed that its Medi-Cal billings were audited by DHCS in the third quarter of 2010. It denies it violated any applicable California regulations, and wrote that “the Company entered into an interim agreement under which it has agreed to temporarily suspend billing Medi-Cal for a period of up to six months through March 1, 2011, during which it continues to provide services.”

Suspension of billing for a government health program by a publicly-traded clinical laboratory is a rare event. Further, it is significant that Quest Diagnostic is willing to continue providing medical laboratory testing to Medi-Cal patients even though the Medi-Cal program is not reimbursing these claims. This may be a sign that both parties are close to a final settlement. In its fourth quarter financial report, Quest Diagnostics said that, as of December 31, amounts due it from Medi-Cal totaled about $25 million, including the amounts for services performed during the temporary billing suspension.

It has been difficult to get details about the breadth and aggressiveness of DHCS’s enforcement program against medical laboratories in California. The state agency will not comment publicly on regulatory actions against individual laboratory companies. However, it is known that, in the whistleblower lawsuit, an unspecified number of the smaller laboratory companies named as defendants in the lawsuit have entered into a settlement with the California Attorney General.

That leaves Quest Diagnostics and LabCorp as at least two of the remaining defendants in this qui tam action without a settlement agreement. In their respective cases, both laboratory companies have trial dates coming up later in 2011. Legal experts believe each company will be motivated to enter into a settlement rather than to see the whistleblower case go to trial.

Should the state of California collect a quarter billion dollars or more in its final settlement with Quest Diagnostics, along with proportionately large settlement amounts from LabCorp and the other defendant medical laboratories in the whistleblower lawsuit, it would certainly catch the attention of Medicaid officials in other cash-strapped states.

In fact, it is known that Medicaid program officials in several states are following the unfolding events in this Medi-Cal enforcement action with great interest. Depending on their respective state laws, the DHCS’s success at collecting large sums of money from these enforcement efforts may end up as a roadmap for how other state Medicaid programs could pursue low medical laboratory test pricing practices that would be interpreted as violating their respective state laws.

The effort by California’s Department of Health Care Services to enforce its interpretation of a multi-decades old state law on discounted pricing for health services—including medical laboratory tests—is a major story for the clinical laboratory industry. The entire December 27, 2010, issue of The Dark Report was devoted to these significant developments. That issue is archived at

There is the potential for these developments in California to cause government health program administrators to take a second look at how deeply-discounted clinical laboratory test prices might violate statutes in certain states—and even aspects of Medicare anti-kickback and fraud and abuse statutes! In the February 7 issue of The Dark Report, there will be an analysis of these issues and these possibilities.

Related Information

Quest Diagnostics Reports Fourth Quarter 2010 Financial Results; Provides Guidance for 2011

Discounted Lab Test Prices Become Issue in California The Dark Report Dec. 27, 2010

State sues medical labs over billing

Quest Diagnostics Reports Fourth Quarter 2010 Financial Results; Provides Guidance for 2011

Quest Diagnostics fourth quarter revenues decrease 1.3% to $1.8 billion