Two Senate committees seem interested in how certain medical laboratories offer discounted laboratory test prices to selected health insurers

Is it a coincidence that discounted medical laboratory test pricing offered by the nation’s two largest clinical laboratory companies appears to now be the subject of interest for the Senate Judiciary and Senate Finance Committees? Last Tuesday, Senator Max Baucus (D-Montana) and Senator Chuck Grassley (R-Iowa) issued a press release titled “Grassley, Baucus Scrutinize Practice by Health Insurers and Testing Labs.”

Baucus is Chairman of the Senate Finance Committee and Grassley is the Ranking Member of the Senate Judiciary Committee. Together, these two Senators sent letters last week to two clinical laboratory companies and three big health insurance firms:

According to the press release, Senator Baucus and Senator Grassley asked “for information about a practice where insurers receive discounted pricing from labs in exchange for referrals, including testing for Medicare beneficiaries.” In the letters, the Senators described this pricing practice as “pull-through.”

Clinical Laboratories Said to Use “Pull-Through” Discount Pricing Strategy

More specifically, in the letter addressed to David King, CEO of LabCorp, the Senators described the reason for their correspondence thusly:

We are writing because of reports that Laboratory Corporation of America (LabCorp) and others may be engaged in a practice commonly referred to as “pull-through.” Pull-through” involves the alleged offering by LabCorp for discounted or below cost pricing to managed care organizations (MCOs), such as health insurance companies, in exchange for those MCO’s directing their in-network physicians to refer or arrange for the referral of other laboratory testing business, including testing for Medicare beneficiaries, to LabCorp. Congress passed the Federal Anti-Kickback law to protect patients and the Federal health care programs from potential influence of financial arrangements on health care decisions.

There were two hints as to what might have triggered the Senator’s current interest in the practice of “pull-through” discounted pricing agreements between major medical lab companies and managed care organizations. One hint was the reference to the recent settlements of the Medi-Cal whistleblower lawsuit in California. In the Senator’s press release, it was noted that:

A Medicaid fraud case in California that recently settled for $241 million involved allegations that a medical laboratory had overcharged the state’s insurance program as part of paying kickbacks to doctors and hospitals that referred patients to its labs.

Alert Dark Daily readers will recall that it was Quest Diagnostics that settled with the California Attorney General and agreed to pay $241 million as part of that settlement back in the spring. Further, LabCorp also settled with the California Attorney General and paid $49.5 million this summer. In both settlement agreements, Quest Diagnostics and LabCorp, respectively, strenuously denied all the allegations of the qui tam lawsuit, including that their pricing practices were improper.

Senator Max Baucus (left) and Senator Charles Grassley (right) have a history of working together on issues of healthcare fraud and abuse. Last week, the two Senators issued a press release that they had sent letters to two major clinical laboratory companies and three big health insurance corporations asking for documents relating to discounted pricing for medical laboratory testing. (photo by baucusssenate.gov.)

Senator Max Baucus (left) and Senator Charles Grassley (right) have a history of working together on issues of healthcare fraud and abuse. Last week, the two Senators issued a press release that they had sent letters to two major clinical laboratory companies and three big health insurance corporations asking for documents relating to discounted pricing for medical laboratory testing. (photo by baucusssenate.gov.)

The second hint is the way the two Senators then expressed their concerns about the “pull-through” pricing practice, writing that:

The Department of Health and Human Services Office of Inspector General has previously issued advisory opinions expressing concerns about the “pull-through” practice, noting that discount arrangements such as those at issue here are “particularly suspect.” In fact, LabCorp is currently in the middle of a lawsuit in the Southern District of New York regarding this very issue.

The lawsuit to which Baucus and Grassley refer is the whistleblower case against LabCorp that was filed in New York’s Southern District Court by NPT Associates just months ago—in August 2011. The plaintiff is a group of former medical laboratory industry executives that includes Andrew Baker. He was the Chairman and CEO of Unilab Corporation in Tarzana, California, through January, 2007. Unilab was acquired by Quest Diagnostics in 2003. (Quest is not a party to the NPT Associates suit.)

Watching the California Medi-Cal Settlements

Thus, it may be reasonable to conclude that the two Senators noticed how the California Attorney General had collected almost $300 million in resolving allegations that the defendant laboratories had overcharged the state’s Medicaid program. Similarly, the two Senators next recognized that “pull-through” pricing schemes as alleged in the whistleblower lawsuit against LabCorp—a company that bills the Medicare program as much as $1 billion per year—may represent a considerable recovery to the Medicare program were it to be determined that the “pull-through” pricing agreements between national lab companies and major health insurance companies violate current federal laws and regulations.

Of course, the two national laboratory companies both assert that all of their business practices fully comply with all federal and state laws. But neither company has yet to comment to the press about this latest matter. In its news coverage about the Senate press release, The Fiscal Times wrote that, “Spokesmen for Quest and UnitedHealthcare, which is not a defendant in the suits, refused to comment on pending litigation. Representatives for LabCorp did not return repeated phone calls seeking comment.”

Discounted Lab Test Prices Can Sometimes Be “Below Cost”

Veteran clinical laboratory managers and pathologists will recognize that discounted pricing is a long-standing practice in the clinical laboratory industry. Using deeply-discounted lab test prices—sometimes below cost, as allegedly described above by Baucus and Grassley—has been a hotly-debated topic within the lab industry for more than 25 years.

Throughout these decades, medical laboratory executives have regularly bemoaned the fact that federal healthcare officials do not issue guidelines that add clarity as to how relevant federal laws are to be interpreted and enforced. As well, there are few examples of court cases and federal enforcement actions that can be used to determine whether some discounted clinical laboratory test pricing arrangements represent an “inducement” to the physician-client or the managed care organization when offered by a clinical lab company, and thus may be in violation of existing federal laws and regulations.

As noted above, it may be that the qui tam lawsuit filed by Hunter Laboratories, Inc., and Chris Riedel in California in 2005—and settled this year by the California Attorney General—alerted federal and state healthcare regulators to how widespread the practice of deeply-discounted lab test pricing had become. This is why the issue of discounted clinical laboratory test prices offered to managed care companies came to the attention of the two Senate committees.

What Next Steps Could Ensnare Some Clinical Laboratories?

There could be several consequences from this renewed scrutiny of discounted lab test pricing arrangements. First, the bolder U.S. Attorneys and State Attorneys Generals may allege that certain of these activities do violate existing statutes and warrant the filing of criminal charges and/or civil lawsuits. There is a precedent for this with the prosecution of National Health Laboratories, Inc., back in the early 1990s. That case resulted in a $112 million settlement and a criminal guilty plea by the CEO. It also launched years of federal prosecution of clinical laboratories and more than $1 billion in repayments and penalties in the program that the Department of Justice dubbed “Lab Scam.”

Second, it may be the Medicare program officials and the Office of the Inspector General decide that stronger and more detailed guidance about the use of discounted lab test pricing arrangements is necessary. That could lead to the issuance of OIG Advisory Opinions and similar federal rule-making that puts clearer boundaries about how medical laboratory companies can extend discounted prices to providers that are less than Medicare Part B Laboratory Test Prices.

Third, the now-unfolding interest by the Senate Finance Committee and the Senate Judiciary Committee into this multi-decade practice of discounted lab test pricing could result in a decision by Congress to legislate solutions to this lab marketplace issue. That could mean a new law or a legislated mandate that directs the Department of Health and Human Services (HHS) to craft new rules to curb this practice.

At a minimum, the action last week by Baucus and Grassley to request documents from the two biggest clinical laboratory companies and three major health insurance corporations specifically pertaining to discounted lab test pricing arrangements is a signal that this long-standing sales practice has caught the attention of some important people in government. For these reasons, the actions of the two Senate committees will be closely watched by many in the clinical laboratory testing industry.

Related Information:

Grassley, Baucus Scrutinize Practice by Health Insurers and Testing Labs 

US senators probe insurers, labs on Medicaid fraud

Senate Investigates Billion Dollar Health Care Scam

Lawmakers query insurers, labs about possible kickback schemes

LabCorp Cheats Medicare, Costs Billions, Whistleblower Suit Alleges

Quest Diagnostics Discloses Pending Agreement to Pay California $241 Million to Settle Medi-Cal Medical Laboratory Test Pricing Case