"In the face of declining state revenues, these medical laboratories have siphoned off hundreds of millions of dollars from programs intended for the most vulnerable California families." Attorney General Brown said. "Such a pattern of massive Medi-Cal fraud and kickbacks cannot be tolerated, and I will take every action the law allows to recover what is owed.”

According to whistleblower Chris Riedel, the chief executive officer of Hunter Laboratories, "I confirmed with the California Department of Health Care Services that these practices were illegal. We then had a choice – either join the other labs in violating the law or be unable to compete for business. We choose to suffer the financial consequence, and follow the law."

The lawsuit, which is pending in San Mateo Superior Court, contends that the seven medical labs systematically overcharged the Medi-Cal program over the past 15 years.

The defendants include:

• Quest Diagnostics Inc., based in Madison, NJ; its affiliate Specialty Laboratories, Inc., based in Valencia; and four other Quest affiliates;

• Health Line Clinical Laboratories Inc., now known as Taurus West Inc., based in Burbank;

• Westcliff Medical Laboratories Inc., based in Santa Ana;

• Physicians Immunodiagnostic Laboratory Inc., based in Burbank;

• Whitefield Medical Laboratory Inc., based in Pomona;

• Seacliff Diagnostics Medical Group, based in Monterey Park;

• Laboratory Corporation of America, based in Burlington, NC.

California law states that "no provider shall charge [Medi-Cal] for any service … more than would have been charged for the same service … to other purchasers of comparable services … under comparable circumstances." Yet, these medical laboratories charged Medi-Cal up to six times as much as they charged some of their other customers for the very same tests.

For instance:

– Quest Diagnostics Inc. charged Medi-Cal $8.59 to perform a complete blood count test (CBC), while it charged some of its other customers $1.43 for the exact same test. This is one of the most frequently requested blood tests.

– Laboratory Corporation of America charged Medi-Cal $30.09 to perform a Hepatitis C Antibody screening, while it charged some of its other customers only $6.44 for the test.

– Health Line Clinical Laboratories charged Medi-Cal $12.65 to perform an HIV Antibody screening, while charging some of its other customers $1.75 for the test.

These are not isolated examples. They are part of a pattern of fraudulent overcharging and kickbacks that developed over the past decade.

Here's how the lawsuit alleged it worked:

– The defendant labs provided deep discounts when they were being paid directly by doctors, patients or hospitals. Prices were often below the lab's cost and sometimes free.

– In exchange for these steep discounts, the defendants expected its customers to refer all of their other patients (where the lab was paid by an insurance company, Medicare, and Medi-Cal) to its lab. Under California law, this amounted to providing an illegal kickback.

– These sharply reduced prices, however, were not made available to Medi-Cal. Instead of charging the discounted prices, the defendants charged Medi-Cal up to six times more than the defendant charged others for the same tests. In effect, defendants shifted the costs of doing business from the private sector to Medi-Cal.

– Additionally, defendants offered their clients who paid them directly (not through Medi-Cal or other insurance) deeper and deeper discounts in order to get a larger share of the lab testing business. This created an unfair playing field, and laboratories that followed the law could not effectively compete. These law-abiding companies were sometimes forced to sell or go out of business completely.

The case was filed under seal in San Mateo Superior Court under California's False Claims Act by a whistleblower and qui tam plaintiff Hunter Laboratories, which processes blood tests. Hunter Laboratories had found that it could not compete in a significant segment of the marketplace where many of the major players were offering referring doctors, hospitals, and clinics far lower rates than they were charging Medi-Cal.

After the whistleblowers filed the complaint, the Attorney General's Bureau of Medi-Cal Fraud and Elder Abuse investigated the allegations and Attorney General Brown intervened under seal. The case became public this week.

Hunter Laboratories' attorney, Niall P. McCarthy of Cotchett, Pitre & McCarthy, commented, "At a time when California is laying off teachers and firefighters and is in a massive budget crisis, it is unconscionable that these defendants would bilk the system to the tune of hundreds of millions of dollars."

Under California's False Claims Act, anyone who has previously undisclosed information about a fraud, overcharge, or other false claim against the state, can file a sealed lawsuit on behalf of California to recover the losses. They must notify the Attorney General as well.

Such a case is called a "qui tam" case. If there is money recovery, the law provides that the qui tam plaintiff receives a share of the amount recovered if the requirements of the statute are met.

The lawsuit asks for relief in the amount of triple the amount of California's damages, civil penalties of $10,000 for each false claim; and recovery of costs, attorneys' fees and expenses. It is estimated that damages could amount to hundreds of millions of dollars.

The clinical testing field is a $50 billion industry nationwide. The defendants named in the lawsuit include some of the largest clinical laboratories in the country.

Quest Diagnostics is the leading provider of diagnostic testing, information and services in the United States, with more than 500 patient service centers in California.

Laboratory Corporation of America performs more than one million tests on approximately 400,000 samples each day and has more than a dozen patient centers in Los Angeles.

To report fraud or abuse, call the Bureau of Medi-Cal Fraud and Elder Abuse's hotline at 800-722-0432.

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