Burlington, North Carolina-based LabCorp disclosed the proposed settlement payment in a securities filing. During today’s second quarter earnings conference call, LabCorp executives did not discuss the lawsuit or the settlement other than to repeat what was disclosed in the filing that said that the company is settling “to avoid the uncertainty and costs associated with prolonged litigation.”
LabCorp said that because of the settlement the company has recorded a second quarter, pre-tax charge of $34.5 million, $20.7 million after tax. The settlement is subject to negotiation and execution of a settlement agreement and release. LabCorp competitor Quest Diagnostics (NYSE:DGX)is on the hook for even more money. In May, Quest reached a $241 million settlement agreement, which amounts to the largest recovery in the history of California’s False Claims Act.
The 2005 suit against Quest, LabCorp and six other medical testing lab companies stems from a whistle blower who brought the claims to the attention of the California Attorney General’s office. A subsequent three-year investigation by the Attorney General’s office uncovered widespread abuse of Medi-Cal by medical testing laboratories operating in California.
The whistle blower was Hunter Laboratories, a California lab testing company that could not compete against the lower rates offered by the major medical lab companies. The complaint, California ex rel. Hunter Laboratories v. Quest Diagnostics, et al., claims that the major lab companies offered discounted or free testing to doctors, hospitals and clinics who referred Medi-Cal patients and other business to the labs. The companies subsidized those low prices by overcharging Medi-Cal for testing services. The complaint also notes that many of the discounted tests were priced well below costs, making it difficult for new laboratories to gain a share of the lab testing market.
“In other words, by using the publicly funded Medi-Cal program to subsidize private discounts, the larger and better established laboratories have cornered much of the market for themselves,” the complaint said.
Quest, LabCorp and other medical testing companies were alleged to have charged Medi-Cal up to six times as much as they charged other customers for the same tests, according to the California Attorney General’s office. California law requires that providers bill Medi-Cal “the lowest rates for the same services under comparable circumstances.” The law also prohibits kickbacks, bribes or rebates for the referral of services paid for by Medi-Cal.
The Attorney General’s office says that in the case of some companies, the fraudulent Medi-Cal billing had gone on for more than 15 years. It’s not the first time laboratory billing practices have come under scrutiny. The “Operation Labscam” probe in the 1990s investigated fraud in the form of unnecessary tests billed to Medicare. In that settlement, LabCorp paid $182 million; Quest paid $119 million.
California’s penalty for Medi-Cal fraud is $10,000 for each false claim. The Attorney General’s office places the total fraud to Medi-Cal in the millions of dollars. LabCorp’s proposed settlement resolves all claims brought against the company in the suit. LabCorp was scheduled to go to trial in early 2012.