This page examines the Labscam and related operations, the bad bundle and three day window frauds. As on other pages the main text gives the story for a quick read. The extracts from press reports give the details.
In the 1980s, the nation's attention was riveted on the twin scandals of insider trading on Wall Street and looting on a massive scale in the country's savings and loan associations.
But while Milken and Drexel, Keating and Lincoln Savings and similar scams were being uncovered and prosecuted, fraud on an even more massive scale insidiously invaded the very roots of our health-care system. But this time, thanks in large part to LABSCAM, a national crackdown designed by the U.S. Attorney's Office in San Diego, the Department of Justice was ready to tackle it. Punishing costly health-care fraud Union-Tribune November 22, 1996
The nation's three largest independent clinical laboratories paid sizable civil settlements following Justice Department probes. Laboratory Corporation of America paid $173 million, Damon Labs paid $81 million, and SmithKline Beecham Clinical Labs paid $319 million to settle charges they routinely billed Medicare for medically unnecessary tests and tests physicians never ordered. BRAGGING RIGHTS: REPORT SHOWS FRAUD PROBES ARE PAYING BIG DIVIDENDS MODERN HEALTHCARE Feb. 2, 1998
Clinical laboratories are one of the most vulnerable areas for fraud. The paying of kickbacks to doctors for using their laboratories is particularly rewarding. It was among the earliest health care fraud in the 1980s but there were no funds to prosecute it. Authorities were heavily involved in prosecuting the illicit drugs trade and in a Wall Street scandal. The revulsion experienced by the exposure of Tenet/NME's conduct in 1991 resulted in the allocation of funds to investigate and prosecute health care fraud. One of the first targets were the big laboratories. Operation Labscam was initiated and secured its first conviction in 1992.
Last Thursday, Allied Clinical Laboratories in San Diego pleaded guilty and paid a $5 million fine for submitting false claims to Medicare and Medicaid for medically unnecessary laboratory tests. Allied's parent, Laboratory Corp. of America, also agreed to pay $182 million to settle government fraud claims against Allied and two other subsidiaries, National Health Labs and Roche Biomedical Labs.
A month earlier, Damon Clinical Laboratories -- another national laboratory chain -- pleaded guilty to similar charges in Boston and paid a total of $119 million in criminal and civil fines to the government.
Stern's estimate (of health care fraud), which is backed up by an independent assessment made by the General Accounting Office, represents an annual drain of $100 billion, or approximately 1.5 percent of our country's gross domestic product. To answer the skeptics in advance, even if this estimate is only 50 percent on the mark, the numbers nonetheless remain staggering.
The money is easy, and until recently the risks have appeared worth taking.
There are 350 FBI agents assigned to investigate white-collar crime in the medical service and equipment industries -- nearly triple the number from 1992. Equal efforts have gone into expanding dramatically the capacity of the Department of Justice to file civil lawsuits against medical providers who defraud the system. Punishing costly health-care fraud Union-Tribune November 22, 1996
In fact, just last month, Inspector General June Brown reported that "Labscam," her investigation of payment fraud by independent clinical labs, could net the Medicare program millions in recoveries and penalties. The Honorable Donna E. Shalala, Secretary U.S. Department of Health and Human Services US SENATE SHALALA 2/12/97 http://www.house.gov./ways_means/fullcomm/testmony/2-12-97/2-12shal.htm
Like the other massive frauds in the USA the
rapid increase in laboratory fraud was a consequence of the capping
of fees and strong competitive pressures - the application of market
principles to health care. Federal regulation, the growth of managed
care and advances in technology dramatically changed the landscape
and led to a frenzy of mergers and takeovers. Those who generated a
profit acquired those who could not compete. The pressures to milk
the system were intense.
By 1996 the market had consolidated into three giants. Labcorp of America was independent. Two were owned by companies, Corning and SmithKline Beecham which had deep pockets. They had other business activities. The laboratories did not work out well for them, perhaps because of the pressures for cost containment. Corning spun off their laboratories as Quest Diagnostics in 1997 and in 1999 SmithKline Beecham's sold its laboratories to Quest. SmithKline already operated laboratories in Australia and Quest Diagnostics now owns these. Quest in turn had to do some downsizing.
All told operation Labscam netted US $800 million in fraud settlements by 1997, a large recovery at that time. There have been more settlements since then with smaller settlements continuing into 2001.
"Operation Labscam," which was started after the 1992 prosecution of National Health Laboratories Inc. for submitting false claims to the government, has recovered more than $800 million in settlements with 10 companies. SmithKline pays millions to settle charges of fraudulent Medicare billing Nurseweek www site accessed 23 Aug 1997
Corning, Inc., has spun off its clinical laboratory subsidiary, which includes drug testing operations, creating an independent company called Quest Diagnostics, Inc. - - - Under Corning, the company had been called Corning Clinical Laboratories, Inc.,
Quest Diagnostics's chief competitors in the clinical laboratory business -- SmithKline Beecham Clinical Laboratories and Laboratory Corporation of America CORNING SPINS OFF CLINICAL LABS TO CREATE INDEPENDENT COMPANY Drug Detection Report February 20, 1997 Copyright 1997 Information Access Company
Furthermore, Corning has agreed to indemnify Quest within certain limits for the future financial penalties, fines, or settlements of claims arising out of a series of government investigations into fraudulent billing practices in reference laboratories. Corning has already paid $ 192 million to settle earlier government and private claims against Quest but an investigation into its Nichols Institute division is still pending.
The birth of Quest ended Corning's 14-year involvement in clinical laboratories. Corning's original intent was to use the laboratory subsidiary, with its strong and predictable cash flow, as a balance against its more cyclical core businesses of glass and plastics manufacturing. Beginning with the acquisition of MetPath Inc. in1982, and continuing throughout the 1980s and early 1990s, Corning's laboratory business grew steadily.
Much of that growth was fuelled by an aggressive acquisitions strategy designed as a response to cost containment pressures and new federal regulations regarding laboratory ownership. These external factors were driving a consolidation wave in the highly fragmented reference laboratory industry.
The greatest growth spurt came in 1993 and 1994 - - -, the company bought three laboratories: Maryland Medical Laboratory Inc., Bioran Medical Laboratory, and Damon Corp., which alone had billings of $ 280 million. The 1994 purchase of Nichols Institute, one of the leading esoteric testing laboratories in the world, expanded Quest's presence in esoteric testing
As a result, by 1996, the field of seven large reference laboratories combined into three surviving businesses, one of which was Corning. The other two were SmithKline Beecham Clinical Laboratories (SBCL), a subsidiary of SmithKline Beecham PLC and LCA (LabCorp of America). SBCL has revenues of $ 1.3 billion, while LCA, the product of a 1995 mega-merger between Roche Biomedical Laboratories Inc. and National Health Laboratories Inc., rivals Quest in size
The emphasis on acquisitions took a heavy toll on those companies who pursued them, however, none more so than Corning/Quest.
The company faced pressing problems, some of which were unique and some of which were common to all reference laboratories. Like its competitors, Quest was losing money on its managed care contracts. It had been willing to price capitated contracts as a loss leader, but the pull-through business it had hoped for from physicians didn't materialize and wasn't going to.
At the same time, the federal government is squeezing laboratories. The investigations into billing fraud in the industry have taken their toll. At a time when the major players are particularly weak financially, they have been forced to pay hundreds of millions of dollars in fines and settlements; the $ 192 million paid by Quest is by no means the largest fine to date; this winter SBCL agreed to pay more than $ 300 million. LCA was forced to borrow$ 187 million from its minority owner, Roche, late last year, in order to pay its fines without incurring additional penalties - - - . Quest Diagnostics' Turnaround Challenge In Vivo March, 1997 Copyright 1997 Information Access Company
Attorney General Bill Pryor today announced that he has delivered a $153,363 check to the Alabama Medicai Agency as part of a Medicaid and Medicare fraud settlement with LabCorp of America, Inc., one of the largest clinical laboratories in the nation. In a final settlement signed April 24, 1997, by representatives of LabCorp and the Medicaid Fraud Units of 44 states and the District of Columbia, the company agreed to pay a total of $ 20 million in compensation to the participating states' Medicaid programs Pryor Announces $153,363 Payment to State Medicaid in Settlement of "Labscam" Case Apr 97 http://www.e-pages.com/aag/press/090513_41_55.html
Quest Diagnostics (Teterboro, N.J.) will take a series of actions over the next year to reduce excess capacity in its network of clinical labs. Quest Diagnostics to Eliminate 1,000 Positions Industry Profile January 1998
Quest Diagnostics Incorporated - - - - announced today that it has signed a definitive agreement to acquire the clinical laboratory operations of SmithKline Beecham plc (NYSE: SBH) for approximately $1.3 billion in cash and stock. QUEST DIAGNOSTICS TO ACQUIRE SMITHKLINE BEECHAM CLINICAL LABORATORIES FOR $1.3 BILLION Company Informatiion January 27, 1999
SOUND THE RETREAT. British drug giant SmithKline Beecham's five-year expansion stopped on Feb. 9 when CEO Jan Leschly said he would sell two key U.S. businesses, cut 3,000 jobs, and close 67 factories by 2002. Clinical Laboratories, acquired for $ 2.3 billion, will be sold to Quest Diagnostics for $ 1.03 billion in cash and a 29.5% equity stake in the expanded group. Diversified Pharmaceuticals Services, bought for $ 2.5 billion, will go to Express Scripts for $ 700 million. SMITHKLINE PULLS WAY BACK Business Week February 22, 1999
BankAmerica and Merrill Lynch have underwritten a $ 1.575 billion credit backing Quest Diagnostics Inc.'s $ 1.3 billion acquisition of SmithKline's clinical laboratories business, according to Ken Finnegan, treasurer. SMITHKLINE DIVESTITURES SPAWN BIG BANK DEALS Bank Letter February 15, 1999
SmithKline Beecham will also indemnify Quest Diagnostics for potential liability arising from certain government and private claims against SBCL. QUEST DIAGNOSTICS TO ACQUIRE SMITHKLINE BEECHAM CLINICAL LABORATORIES FOR $1.3 BILLION EXTRACT FROM SEC REPORT 8K 17/2/99 BY QUEST
10/10/96 COMPANY/PERSON: Corning, Inc. (Damon Clinical Laboratories Inc.)
ALLEGATIONS: Medicare Fraud
AMOUNT: $119 million
11/96 COMPANY/PERSON: Laboratory Corporation of America Holdings (LabCorp)
ALLEGATIONS: Medicare/Medicaid Fraud
AMOUNT: $182 million
6/12/97 COMPANY/PERSON: Laboratory Corp. of America (US ex rel. Holden and Bunora v. Laboratory Corp. of America, et al., No. 96-6272-CIV-ZLOCH (M.D. Fla.)).
ALLEGATIONS: Overcharging Medicare for mileage expenses for in-home care
AMOUNT: $700,000 ($112,000 to relators)
1/3/01 COMPANY/PERSON: Quest Diagnostics Incorporated (allegations involved conduct by the Nichols Institute, which was acquired by Quest)
ALLEGATIONS: LABSCAM; billing for medically unnecessary lab tests
AMOUNT: $13.1 million
11/21/01 COMPANY/PERSON: Quest Diagnostics Inc.
ALLEGATIONS: Improper submission of Medicare claims to a Colorado Medicare carrier in order to obtain higher reimbursement
AMOUNT: $352,926 ($71,110 to relator). $122,144 was also previously re-paid to Medicare for similar claims, under voluntary disclosures to the government made in 1998 and 1999.
11/26/01 COMPANY/PERSON: Quest Diagnostics Inc.
ALLEGATIONS: Knowing filing of Medicare claims with improper carrier in order to obtain higher reimbursement
AMOUNT: $352,926 (earlier payments made in 1998 and 1999 for same allegations brought total recovery to $475,000). Relator's share: $71,110
11/26/01 COMPANY/PERSON: Corning, Inc.; Corning Life Sciences, Inc.; Corning Clinical Laboratories, Inc.; MetPath Corning Clinical Labs; MetPath, Inc.
ALLEGATIONS: Overbilling federal health care programs for prostate-cancer blood tests.
AMOUNT: $1 million
From FCA settlement agreements Fried, Frank, Harris, Shriver & Jacobson web site accessed Feb 2, 2003
A variety of strategies were used to add in
costly tests, often adding them to a panel of test and then charging
for those tests which had not been ordered by the doctor. Companies
were accused of paying kickbacks to doctors.
No sooner had the companies settled with government that the insurers came claiming compensation for similar fraud and adding claims of their own. The outcome of these claims and their resolution is not known. Total settlements may well have push the US $800 million figure towards or even over US $1 billion.
LABSCAM is a five year investigation by the government of a widespread scheme by clinical laboratories to defraud Medicare and other federal health programs by consolidating common laboratory blood tests onto a single automated panel so that physicians would have to order the entire panel even when their patients did not need every test. The laboratories would then bill the government separately for each test, including the tests that the laboratories knew would not be needed to diagnose the patient.
At the same time, they misled doctors into thinking that there would be no extra charge for the unnecessary tests. While each such instance of misbilling resulted in overcharges of less than $20 per test, the cumulative effect of these schemes on the Medicare trust fund was huge. Statement on Health Care Fraud United States Attorney's Office Western District of Texas 25/9/1996 http://www.usdoj.gov/usao/txw/hcf.htm
The settlement involves claims that the predecessor companies to LabCorp defrauded state and federal health care programs by combining exotic laboratory tests with certain commonly ordered blood panels, which caused doctors to order tests which were not medically necessary. State and federal enforcement agencies contended that LabCorp marketed, sold, priced and billed tests in such a way that physicians were led to believe that the added tests did not increase the amounts billed to the government programs.
Three companies accused of these illegal practices between 1989 and 1994--Roche Biomedial Laboratories, Inc., Allied Clincial Laboratories and National Health Laboaratories, Inc.--joined to form LabCorp of America, Inc.
Unnecessary tests involved in the LabCorp agreement specifically involved thyroid tests, gamma glutamyl transpeptidase (GGT), high-density and low-density lipoprotein (HDL and LDL), triglycerides, ferritin, blood indices and creatine.
The LabCorp settlement is one of a number of clinical laboratory settlements among the states that have recovered nearly $800 million in a probe called "Labscam." State and federal settlements of similar fraudulent behavior have been previously entered into with SmithKline Beecham Clinical Laboratories, Corning/Metpath, Corning/BioRan, Corning/Damon and National Health Laboratories.
These settlements represent a concerted and coordinated effort on behalf of federal and state enforcement agencies to end years of clinical laboratory deceptive marketing strategies. These deceptive marketing strategies resulted in millions of dollars of unnecessary tests paid for by state and federal health care programs. Payment to State Medicaid in Settlement of "Labscam" Case Apr 97 http://www.e-pages.com/aag/press/090513_41_55.html
In April 1998, the Company (Quest) entered into a settlement agreement with the U.S. Attorney's office in Baltimore for approximately $6.9 million related to the billing of certain tests performed for which the Company had incomplete or missing order forms from the physician. - - - - In August 1998, the Company entered into a settlement agreement with the Office of Inspector General of the Department of Health and Human Services for $15.0 million related to overcharges for medically unnecessary testing for end stage renal dialysis patients. Quest Diagnostics IncorporatedQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ::: SEC FORM 10 Q 13/11/98
A Pennsylvania pharmaceutical company has agreed to pay $325 million to the government for filing false claims with Medicare, Medicaid and other health care agencies in 42 states, authorities said Monday.
Investigators said SmithKline Beecham Clinical Laboratories Inc. billed the government for tests that were not medically necessary, were not ordered by a doctor or were not performed. The violations occurred from 1988 to 1994, investigators said.
The company also was accused of acquiring a doctors Medicare business by providing kickbacks - free computers and fax machines, free SmithKline workers or payment of rent, Stiles said. Medicare law prohibits providing anything of value to a doctor to get Medicare referrals. SmithKline will pay for false claims Associated Press23 Aug 1997
It is the second largest settlement in the history of healthcare fraud cases.
A SmithKline Beecham official said that the company never intentionally violated the law and that ambiguities in regulations and guidelines remain a problem. SmithKline pays millions to settle charges of fraudulent Medicare billing Nurseweek www site accessed 23 Aug 1997
SmithKline also paid the government $1.5 million in 1989 to settle allegations of illegal Medicare kickbacks stemming from its management of three physician-owned laboratories in California. EFFORT TO COOL FRAUD PROBES STARTS SLOW MODERN HEALTHCARE Feb. 2, 1998
A federal grand jury in Massachusetts late last week indicted four former executives of Corning's Damon Corp. clinical laboratory division for allegedly conspiring to defraud Medicare of more than $25 million. Corning, no longer in the clinical lab business, paid $119 million in fines in 1996 in connection with federal Medicare false billing charges. NEWS AT DEADLINE Modern Healthcare Jan. 26, 1998
A consortium of 37 private health insurance companies last week sued SmithKline Beecham, a Philadelphia-based pharmaceutical company, alleging the firm overbilled them for clinical laboratory testing services. - - - - The company denied the allegations and said it will fight the suit. SmithKline faces suit. Modern Healthcare Aug. 25, 1997
Let the government do the investigative work at taxpayers' expense and then hit the hapless targets for a big settlement. - - - - - Insurers typically take such legal actions after the targeted companies settle multimillion-dollar fraud cases with the federal government.
Many of these same insurers recently have filed private healthcare fraud lawsuits against a unit of pharmaceutical giant SmithKline Beecham and against for-profit hospital company National Medical Enterprises, the predecessor company to Santa Barbara, Calif.-based Tenet Healthcare Corp.
"Although the plaintiffs' action is based upon many of the same practices described in (SmithKline's) civil settlement with the government, this action also alleges more extensive fraud in the practices addressed by the government and additional fraudulent practices not included in the government's case," said the insurers' suit against SmithKline. RIDING FEDS' COATTAILS?: BIG INSURERS FILING FRAUD SUITS AFTER GOVERNMENT PROBES Modern Healthcare May 18, 1998
The alleged fraud at SmithKline Beecham was one of the first large whistleblower actions. In 1993 these were rare but by 1999 most of the large fraud settlements depended on whistleblowers. The whistle blower in this case was altruistic but the justice departments almost blew its main source of success by alienating whistleblowers. They challenged the award given by the judge. They failed to understand the enormous sacrifices made by these people. This case is a good example. The story is told in the extracts below.
The three whistleblowers who helped the government win a $325 million settlement from medical supplier SmithKline Beecham have been awarded $52 million by a federal judge for their role. The U.S. Justice Department was contesting their claim to the money, arguing that they provided information useful only to part of the probe. Under the federal False Claims Act, whistleblowers are entitled to 15% to 25% of resulting settlements. Whistleblowers win big award Modern Healthcare Friday, April 10
Rob Merena thought he would be able to call a government fraud hot line, - - - - and then return to his quiet suburban life here.
That was in 1993. Today Merena remains locked in a legal battle but not with the obvious opponent. SmithKline Beecham Clinical Laboratories settled with the Justice Department in February 1997 for $ 325 million, the largest award ever in a whistle-blower case.
Instead, Merena is at war with Justice Department lawyers, who are fighting a judge's decision to award Merena and two other whistle-blowers $ 52 million. Merena once believed department officials were his allies. He now says they have betrayed him and turned a well-intentioned act of coming forward into a bitter episode.
Roadmap of fraud
But Merena says he worked hundreds of hours undercover at SmithKline and then with FBI and other government agents to provide the government a roadmap into alleged billing fraud.
Merena, a computer billing analyst in SmithKline's U.S. headquarters in Collegeville, Pa., alleged SmithKline had billed Medicare and other government programs for tests not performed, granted discounts as kickbacks to doctors who did business with SmithKline and altered test codes to ensure it would be paid.
Merena continued to work at SmithKline, providing information to his lawyer, Marc Raspanti, who then passed it to the U.S. Attorney. Raspanti says Merena was a nervous wreck. "Sometimes, he'd call me from a pay phone and say 'A bunch of executives just went into a meeting. I think they found out about me.' I'd say 'Relax, Rob. Executives have meetings,' " Raspanti says.
Merena worked undercover for 18 months before a court document was unsealed, revealing that he was gathering information for the government. - - - -
After leaving the company, Merena went to work at the government's "war room," a small office the government rented in suburban Philadelphia where agents reviewed boxes of subpoenaed documents and computer files. Merena acted as an interpreter and computer consultant, fielding constant questions from agents who worked in tiny offices arrayed around his desk.
Emotional, financial toll
Being a whistle-blower has taken its toll, Merena says. He left a $ 60,000-a-year job he says was a dream position. At times, he was deeply in debt and barely able to support his wife, a homemaker, and children. Taxpayers Against Fraud loaned him $ 25,000 to get through a holiday season.
Old friends from SmithKline would turn away from him when they spotted him in stores. Sworn to secrecy, Merena and his wife, Daina, told family members Merena had left the company to work as a "consultant."
For a while, Merena suffered from panic attacks and would have to pull his car to the side of the road because he was hyperventilating. Raspanti says Daina once told him she would calm her husband at night by telling him everything was going to be all right. Then she would roll over and cry herself to sleep.
When Justice announced the SmithKline settlement, Merena and two other whistle-blowers -- Charles Robinson, a former SmithKline lab medical director, and his lawyer, Glenn Grossenbacher -- were praised as heroes. SmithKline neither confirmed nor denied the allegations.
But when Merena and the others asked for their share of the settlement under the federal False Claims Act, Justice balked.
Justice's challenge has caused a rift between top civil fraud lawyers in Washington and the FBI agents and the U.S. Attorney in Philadelphia, who worked closely with Merena.
Rick McAdams, an FBI agent, now retired, who spent more than two years on the case, says Merena has paid a high price. "You're out of the industry you've worked hard to get ahead in -- suddenly you're gone. He's lost friends and he's still seen as a pariah. That's tough."
The irony, Raspanti says, is that Merena didn't even know about whistle-blowers being paid when he first came forward. "Most whistle-blowers come in and ask, 'What do think this case is worth?' " Raspanti says.
Merena says he's had trouble finding a job because prospective employers ask him why he left SmithKline. Merena tells them and never gets a call back.
When asked if he has any regrets, Merena takes his time: "No. I want to see this through to the end now. I'm thankful, though, that I didn't know the process going into this." Whistle-blower now fighting former allies USA TODAY November 9, 1998
Most of the fraud settlements involving clinical laboratories in recent
years, including the $ 2 million fine paid by Sacramento-based Bio-Cypher Laboratories Inc., stemmed from whistle-blower complaints. Medicare fraud crackdown pays off in Sacramento. Sacramento Business Journal March 19, 1999
Laboratory fraud was not restricted to the
large laboratory groups. Columbia/HCA,
Tenet Healthcare, its predecessor National
Medical Enterprises, many other
groups, and their doctors were also at various times accused of
carrying out unnecessary tests and procedures to fuel profits.
As part of ongoing Labscam investigations authorities mounted "Operation Bad Bundle", investigating tests which were bundled together but then charged separately, and a "three day window project" to address the practice of billing tests which should have been covered by the DRG fee more than three days after discharge when they could collect an additional fee.
At the same time the big lab corps like SmithKline Beecham/Quest started linking up with hospital chains like Tenet Healthcare. These two companies had paid the two largest fraud settlements in the USA and were both constrained by compliance agreements. This was shortly before Tenet began targeting high end care and initiated its outlier and stop-loss scams. No doubt Quest ultimately benefited.
Using theories and information gained in these national investigations, the regulators are now turning their attention to hospital laboratories and other independent labs.
Operation Bad Bundle is a joint project initiated by the Department of Justice and the OIG targeting approximately 5,000 hospitals for certain Medicare/Medicaid outpatient laboratory claims. This investigation focuses on whether the hospital laboratory improperly "unbundled" tests, that is, billed two or more CPT codes in lieu of one inclusive code.
Operation Bad Bundle is similar in structure to the Three Day Window project. It appears, however, that local enforcers will exercise greater control and hence the scope of the investigation and terms of any settlements will be less uniform. National Enforcement Initiatives Spark Interest in Compliance by Robert G. Homchick http://www.dwt.com/News/healthnews/initiatives.html January 1998
Tenet Healthcare Corp. (THC: NYSE, PSE) and SmithKline Beecham's Clinical Laboratories today announced the signing of the nation's largest laboratory management contract, in which SmithKline Beecham Clinical Laboratories (SBCL) will manage laboratory operations for 30 of Tenet's Southern California hospitals, which perform nearly 7 million clinical lab tests annually. Tenet Healthcare Corp. (THC: NYSE, PSE) and SmithKline Beecham's Clinical Laboratories Tenets www site press release. -- Jan. 7, 1998