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A final settlement between both parties may become the template state officials use to resolve Medi-Cal overcharge claims involving other clinical pathology laboratories

Authorities in California and Quest Diagnostics Incorporated (NYSE: DGX) appear to be close to resolving a major lawsuit involving allegations that the nation’s largest clinical laboratory company had overcharged Medi-Cal, the state’s Medicaid program, for a period of years beginning in 1995.

Last week, Quest Diagnostics announced it had “reached an agreement in principle to settle a previously disclosed civil lawsuit” and, as part of this agreement in principle, it will pay $241 million to settle the legal matter.

The case against Quest Diagnostics and a number of other clinical laboratory companies was brought by a whistleblower in 2005.

The case against Quest Diagnostics and a number of other clinical laboratory companies was brought by a whistleblower in 2005.

Under the pending agreement, Quest said it further agreed to certain “reporting obligations” regarding its pricing for a limited time. The company said it would give Medi-Cal (California’s Medicaid program) a discount through the end of July 2012. In exchange, the state would give Quest Diagnostics a full release of all claims alleged in the lawsuit, Quest Diagnostics said.

In its announcement, Quest Diagnostics stated that “The agreement in principle is subject to certain approvals by the State of California and final approval by the company’s Board of Directors. In the event that a settlement is not finalized, the company will continue to vigorously defend itself in the pending litigation and could incur significant costs in doing so.”

The case against Quest Diagnostics and a number of other clinical laboratory companies was brought by a whistleblower in 2005. The state joined the case and unsealed it in 2009. In a press conference in April, 2009, then-Attorney General Jerry Brown alleged that the defendant laboratories in the case, including Quest Diagnostics, did not comply with California’s regulations, which resulted in the California Medi-Cal program overpaying the defendant laboratories for medical laboratory testing services.

As a result of the pending agreement, Quest Diagnostics recorded a pre-tax charge of $236 million (which is $195 million after tax), or $1.19 per share, the company said. The charge was reflected in its first-quarter 2011 results, which were reported on April 20. The company has revised its first-quarter 2011 financial reports to include this charge, noted Quest Diagnostics in its public statement.

As originally filed, the whistleblower suit claimed that seven clinical laboratory companies violated state law from 1995 forward by charging certain customers less for medical laboratory tests than what the seven defendant lab companies billed Medi-Cal. Also, 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. The laboratories denied the allegations.

As reported in The Dark Report on December 27, 2010, after the whistleblower lawsuit was unsealed, the California Department of Health Care Services (DHCS) conducted audits of selected clinical pathology laboratory companies. DHCS then sent notices to these laboratories in the summer of 2010 notifying them that DHCS had suspended their 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,” or what Quest Diagnostics calls “comparable pricing.” DHCS wants strict compliance with its interpretation of California Code of Regulations (CCR), Title 22, section 51501(a), which the state says requires that the lowest price a provider gives to any payer must also be given to Medi-Cal.

At issue is the long-standing practice in the state of clinical laboratories offering discounted prices for medical laboratory tests to physicians and other providers that are less than prices paid by California’s Medi-Cal program.

Among medical laboratory testing companies operating in California, Quest Diagnostics has the largest potential exposure in the matter of discounted laboratory test pricing. It is the nation’s largest clinical laboratory company and holds a dominant share of the lab testing market in California. As a result, many observers believe that California officials wanted to settle this case first, and then use the terms of this agreement to resolve claims against other clinical laboratories it alleges have overcharged the Medi-Cal program.

During a conference call with analysts in February, Quest executives disclosed that, during its settlement talks with the California Attorney General and DHCS, its Medi-Cal billings had been audited by DHCS in the third quarter of 2010. Quest Diagnostics denies that it violated any applicable California regulations. Also, Quest Diagnostics had an interim agreement with DHCS to temporarily suspend billing Medi-Cal from September 1, 2010, through March 1, 2011, while continuing to provide clinical laboratory testing services to Medi-Cal. It is believed that Quest Diagnostics may have extended the agreement not to bill Medi-Cal for testing services and may continue not to bill Medi-Cal until July 2012. For its part, Quest has said only that it will extend Medi-Cal a discount through July 2012.

Suspension of billing for a government health program by a publicly traded clinical laboratory is a rare event. Further, it is noteworthy that Quest Diagnostics was willing to continue providing medical laboratory testing to Medi-Cal patients even though the Medi-Cal program was not reimbursing Quest Diagnostics for these clinical laboratory testing services through March 31. In its fourth quarter financial report, Quest Diagnostics said that, as of December 31, the total amount due from Medi-Cal was $25 million. This included the amounts for medical laboratory testing services performed during the temporary billing suspension.

To date, DHCS has not commented publicly on regulatory actions against any other clinical laboratory companies that operate in California and provide medical laboratory tests to Medi-Cal patients.

—Joe Burns

Related Information:

Quest Diagnostics Reaches Agreement in Principle to Settle California Lawsuit Related to Medi-Cal Billing

Quest agrees to $241M Calif. Medicaid settlement

The Dark Report December 27, 2010 Summary