Lab-Test Scam Could Cost Medicare Billions
Business + Economy

Lab-Test Scam Could Cost Medicare Billions

iStockphoto/Nicolas Loran

Despite recent court settlements that recouped more than a quarter billion dollars from lab-test companies for allegedly overbilling California’s Medicaid program, the federal government seems to be ignoring similar schemes that drain Medicare coffers.

The cases involve the nation’s two largest medical laboratory-testing companies – Laboratory Corporation of America and Quest Diagnostics – that together control about half the annual $25 billion lab test market. The Medicare suits, filed in federal court in Manhattan by a former industry executive, claim the testing companies charged insurers like UnitedHealthcare unprofitably low rates while squeezing Medicare and Medicaid.

The whistleblower suits allege the schemes relied on sweetheart deals in which managed-care companies required in-network physicians to send their patients’ lab tests to a single testing company. As part of the deal for below-cost prices, the insurance companies allegedly promised to encourage physicians in their networks also to send Medicare and Medicaid patients to the same testing company, which then billed the Centers for Medicare and Medicaid Services (the federal agency that oversees both programs) or state Medicaid agencies at significantly higher rates.

Andrew Baker, a longtime lab-test industry executive, sued Quest and LabCorp seeking restitution for Medicare under the Civil War-era False Claims Act. He now runs Huntington Life Sciences, a pharmaceutical industry contract research organization. District Court Judge George Daniels unsealed the LabCorp case in September after federal prosecutors notified the court that the Justice Department “has not made its intervention decision as of this time.”

While Justice refused to comment on this case, the government is engaged in a massive effort to clean up waste, fraud, and abuse – estimated to run as high as $70 billion a year  -- in the $485 billion Medicare program. Although a Health and Human Services Department strike force over the past several years has indicted a total of nearly 1,000 individuals and companies, its $2.7 billion in settlements barely scratches the surface of the amount of alleged fraud in the Medicare program.

The federal non-decision in the lab billing suits comes in the wake of two settlements earlier this year in which Quest and LabCorp paid the state of California $241 million and $49.5 million, respectively, for alleged overbilling. The companies did not admit liability in reaching the settlements.

Chris Riedel, chief executive officer of Hunter Labs, a small Silicon Valley-based laboratory that competes with the two industry giants, originally brought the California LabCorp suit. LabCorp charged Medi-Cal five times more than it charged other customers for some tests, according to the suit; for a testosterone test, LabCorp charged Medi-Cal $35.04 but other customers $7.36.

Medicare is harmed by the same pricing differentials, according to Baker, the lab-test executive and whistleblower. “The lab company is intentionally billing the government higher prices to make up for the low prices offered the insurance companies,” he claims. “The [Medicare] overcharging by both companies…is in excess of a billion dollars.”

While the Feds have so far refused to join the case, at least five state attorneys general have investigations underway against Quest, according to company filings with the Securities and Exchange Commission. One suit, in New York, has been dismissed. Michigan, Virginia, and Florida, meanwhile, are investigating LabCorp’s alleged overbilling schemes, according to its SEC filings.

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.
Exclusive arrangements in the lab testing business are growing. UnitedHealthcare in 2007 signed a 10-year deal requiring physicians in its networks to deal exclusively with LabCorp. In early September, the companies agreed to extend the deal through the end of 2018.

According to the Baker lawsuit, UnitedHealthcare and LabCorp senior officials met numerous times after the deal was announced to discuss their mutual goals from the arrangement. At a LabCorp national award dinner held in Philadelphia in either late 2007 or early 2008, the company’s Chief Operating Officer Donald Hardison told sales officials that “if LabCorp did not capitalize on the opportunity provided by UnitedHealthcare to obtain the Medicare business, LabCorp would lose its shirt and would not even be able to turn on the lights.”

In subsequent meetings, sales personnel from both companies “coordinated a joint approach to targeted physicians, by telephone and in-person, in which the physicians would be told that they must use LabCorp” for their Medicare and Medicaid patients, the suit charged. “The strategy was for UnitedHealthcare to threaten physicians . . . with financial penalties and ultimately with expulsion from UnitedHealthcare’s networks” if they didn’t comply.

There’s some evidence of pressure being applied. The UnitedHealthcare-LabCorp deal drew the attention of the American Medical Association after it received complaints from New Jersey and Connecticut affiliates, according to Robert Mills, a spokesman for the physicians’ group. “There used to be pressure,” he said. “But the protocol changed after the AMA sent a letter. UnitedHealthcare agreed that if a physician refers the patient out of network [for lab tests], the physician won’t be penalized.”

One potential roadblock to a successful False Claims Act claim on behalf of Medicare is the agency’s half-hearted efforts over the years to define what constitutes unreasonable charges. Unlike state-run Medicaid programs, which by law must be offered the lowest available price by vendors providing services to the program, Medicare is required to pay the “usual and customary charges.”

In an interview, Baker said the absence of a federal law guaranteeing Medicare the same low prices as Medicaid means he will have to rely on federal anti-kickback statutes to prove his case. “The kickbacks are not obvious,” he said. “I need to prove UnitedHealthcare and LabCorp are in cahoots.”