Department of Health and Human Services 
OFFICE OF

INSPECTOR GENERAL

Medicare Payments for

Clinical Laboratory Services

Vulnerabilities and Controls 
Statement Before the Expert Committee

on

Medicare Payment Methodology for Clinical Laboratory Services

of the 

Institute of Medicine

by

George F. Grob

Deputy Inspector General for Evaluation and Inspections

Department of Health and Human Services

JANUARY 2000

OEI-05-00-00070
 OFFICE OF INSPECTOR GENERAL 
The mission of the Office of Inspector General (OIG), as mandated by Public Law 95-452, is to 
protect the integrity of the Department of Health and Human Services programs as well as the 
health and welfare of beneficiaries served by them.  This statutory mission is carried out through a 
nationwide program of audits, investigations, inspections, sanctions, and fraud alerts.  The 
Inspector General informs the Secretary of program and management problems and recommends 
legislative, regulatory, and operational approaches to correct them. 
Office of Evaluation and Inspections 
The Office of Evaluation and Inspections (OEI) is one of several components of the Office of 
Inspector General.  It conducts short-term management and program evaluations (called 
inspections) that focus on issues of concern to the Department, the Congress, and the public.  The 
inspection reports provide findings and recommendations on the efficiency, vulnerability, and 
effectiveness of departmental programs. 
OEI's Chicago Regional Office prepared this report under the direction of William C. Moran, 
Regional Inspector General.  Principal OEI staff included: 
REGION  HEADQUARTERS 
Natalie Coen, Deputy Regional Inspector General  Deborah Holmes, Special Assistant 
John Traczyk, Project Leader  Bambi Straw, Program Specialist 
Thomas Komaniecki, Senior Program Specialist  Medicare Payments for 
Clinical Laboratory Services 
Vulnerabilities and Controls 
by

George F. Grob

Deputy Inspector General for Evaluation and Inspections

Department of Health and Human Services 

January 20, 2000 
I wish to thank the Institute of Medicine for the opportunity to present to you the 
concerns of the Office of Inspector General regarding Medicare payments for clinical 
laboratory services. 
I must say at the outset that the current system used by Medicare to pay for these services 
is significantly vulnerable to fraud, waste, abuse, and error.  One of the largest civil 
settlements ever to resolve disputes about incorrect Medicare payments was made with 
one of the nations clinical laboratory companies.  The settlement, amounting to $325 
million, was not an isolated case.  In fact, a series of settlements along the same lines with 
other laboratories, including some of the nations largest, resulted in almost a billion 
dollars in recoveries, fines, and penalties in recent years.  These settlements involved 
complaints of billings for services not performed, unbundling tests, false diagnosis codes, 
kickbacks to physicians for patient referrals, double-billings, and billings for unordered 
tests and tests not medically necessary. 
Many of the large national laboratories have been cooperating in resolving disputes and 
improving their internal safeguards to prevent fraud and abuse.  However, we cannot drop 
our guard.  Just yesterday, the Department of Justice and the Department of Health and 
Human Services announced the conclusion of largest health care case ever, with fines and 
payments totaling $486 million.  Of this, $167 million was explicitly related to laboratory 
tests.  We have also been finding similar problems with Medicare and Medicaid payments 
to smaller local laboratories.  And now appearing on our screen are concerns emanating 
from the development of new, innovative laboratory services, business practices, and the 
larger environment of the medical care market place. 
The prevention, detection and correction of the problems cited above did not result from 
the effective functioning of the Medicare payment system.  Rather, it was the result of 
investigations, audits, prosecution, negotiations, compliance agreements, and 
OEI-05-00-00070 
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 communications all of which are adjunct to, but somewhat outside, the Medicare bill 
payment and adjudication process.  In fact, the current payment system provides neither 
the incentives nor the controls needed to deal with integrity problems.  Such shortcomings 
exist at every level of the laboratory services usage and billing cycle--including interfaces 
with the patients who receive the services, the physicians who order them, the laboratories 
that perform and bill, and the Medicare fiscal agents who review and pay for laboratory 
services. 
For all the reasons cited above, the Office of Inspector General believes that the Institute 
of Medicines study is timely and warranted, and we are hopeful that it will be able to 
address the serious shortcomings mentioned above.  At a minimum, in its deliberations, the 
study panel should not forget the problems that have plagued us in the past, as they will 
surely re-occur if not attended to.  To assist the Institute in its study, we are providing  a 
summary of the work we have conducted over the years, along with some suggestions and 
reflections on options for revamping the Medicare payment system. 
We particularly want to call to your attention to the need to:  simplify the Medicare 
payment system; increase beneficiary involvement in the oversight of billings; experiment 
with innovative payment methods; strengthen the capacity of carriers to review bills and 
analyze billing patterns, and expedite the process by which coverage decisions and billing 
codes are reviewed and approved. 
I will be happy to answer any questions you may have and our staff will gladly discuss any 
of our concerns with you in greater detail during the course of your study. 
OEI-05-00-00070

2
 TABLE OF CONTENTS 
INTRODUCTION  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

VULNERABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Fraud, Waste, Abuse, Error  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Laboratory Marketplace . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Quality of Laboratory Testing  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Emerging And Future Issues  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

ADMINISTRATION AND CONTROLS  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  17

Fiscal Agents and Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Role of Beneficiaries  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

OPPORTUNITIES FOR IMPROVEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  20

APPENDIX

Case Examples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

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 INTRODUCTION 
BACKGROUND 
Early History and Medicare Payment System 
Medicare pays physicians, hospitals, independent laboratories and other providers for 
clinical laboratory services they provide to patients.  To receive payment, providers are 
required to submit itemized bills for reimbursement to Medicare fiscal agents called 
carriers and intermediaries.  When the Medicare program began, physicians billed 
Medicare for laboratory services they performed in their own office and for laboratory 
services they purchased at a discount from hospital and independent laboratories.  Many 
physicians routinely marked up the cost of the their purchased laboratory services when 
billing Medicare and other insurers. 
In 1980, the statute was changed to eliminate markups on purchased laboratory services. 
The law required physicians to disclose the actual cost of the laboratory services they 
purchased from other laboratories.  Enforcement of this law was difficult and many 
physicians continued to purchase laboratory services at discount prices and bill Medicare 
marked up prices.  Some physicians expanded testing in their office, others entered into 
joint ventures with hospital and independent laboratories. 
Fee Schedules and Caps 
In 1984, Congress again addressed the problem of physician laboratory markups.  The 
Omnibus Deficit Reduction Act of 1984 prohibited physicians from billing for laboratory 
work they did not perform.  This legislation also changed how Medicare paid for 
laboratory tests by eliminating reasonable charge as a basis for payment.  Congress 
required that the Health Care Financing Administration (HCFA) establish regional fee 
schedules as a first step in establishing a national fee schedule by 1990 for all laboratory 
test billed to Medicare.  The requirement of a national fee schedule was repealed in the 
Omnibus Budget Reconciliation Act of 1989, but regional fee schedules remained and a 
cap per procedure code was established for laboratory payments. 
The HCFA established the fee schedules on a carrier-wide basis.  The fee schedule 
amounts vary by carrier.  Currently, the caps are set at 74 percent of the national limitation 
or ceiling for each laboratory service.  The national ceilings were limited to the median of 
all carrier fee schedule allowances.  Claims submitted are paid the lowest of the actual 
charge, the fee schedule amount or the cap.  Deductibles and coinsurance for laboratory 
services were eliminated. 
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 Quality Assurance 
The Clinical Laboratory Improvement Amendments of 1988 (CLIA) required all entities 
that perform testing on human samples to be registered and certified under CLIA in 
accordance with the complexity of testing performed.  Laboratory procedures were 
categorized into waived procedures, physician-performed microscopy, moderate 
complexity, and high complexity testing, with progressively stringent requirements for 
each level of testing.  Physician offices, like all other providers, had to meet the standards 
for the testing performed. 
Expenditures 
Annual expenditures for laboratory tests have risen over the last decade.  Between 1988 
and 1998 the number of laboratory services billed to Medicare rose from 232 million 
services annually to nearly 652 million services.  Despite reductions in the payment caps, 
Medicares annual expenditures for laboratory tests have increased from $2.8 billion in 
1988 to somewhere between $3.4 billion and $4.7 billion in 1998.  Precise estimates are 
not yet available. 
The Balanced Budget Act 
The Balance budget Act of 1997 mandated several actions be taken regarding payment for 
laboratory services.  It reduced Medicare payment caps to 74 percent of the mean.  It 
required that no more than five regional carriers be established to process and pay 
Medicare laboratory claims.  It also mandated that an entity be designated to analyze 
Medicare laboratory data.  Further, the Act required the use of negotiated rule making to 
establish national coverage and administrative policies for Medicare Part B laboratory 
services. 
The law also requires that the Secretary of Health and Human Services request the 
Institute of Medicine to conduct a study of Medicare Part B payments for clinical 
laboratory tests and that it include recommendations regarding alternative payment 
systems and a discussion of access to high quality laboratory services. 
Office of Inspector General Work 
Laboratory services have been of major concern to the Office of Inspector General.  Over 
the years, we have carried out nation-wide investigations of inappropriate payments; 
assisted the Department of Justice in prosecuting wrongdoers and negotiating settlements 
to resolve payment disputes; and, imposed corporate integrity agreements.  We have 
conducted audits of Medicare and Medicaid providers; completed evaluations and audits 
dealing with subjects like quality of services, physician ownership arrangements and self-
referral, physician office laboratories, cholesterol screening, utilization trends, bundling 
OEI-05-00-00070 
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 and unbundling of procedures, and discounts.  We have issued fraud alerts, advisory 
opinions, and compliance guidelines to the clinical laboratory industry; and more generally 
opened up communications with industry representatives to assist them in preventing fraud 
and payment errors. 
SCOPE AND METHODOLOGY 
This report identifies vulnerabilities, control weaknesses, and options to improve Medicare 
payment methods for clinical laboratory services.  It was prepared at the request of the 
Institute of Medicine to support its study effort on this topic. 
Information contained in this report was derived primarily from past work of the Office of 
Inspector General involving laboratories and laboratory testing.  Additional data and other 
information was obtained from HCFA, Internet sites and literature reviews. 
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6
 VULNERABILITIES 
FRAUD, WASTE, ABUSE, ERROR 
Fraud, waste, abuse, and error with respect to payments for clinical laboratory services 
have been significant problems in the Medicare and Medicaid program.  Over the last 
decade, approximately one billion dollars has been recovered from laboratory companies, 
including many of the largest such companies in the nation, to resolve disputes connected 
with false or erroneous bills paid through the Medicare program.  While most of these 
large disputes have been resolved, we continue to find the same billing problems in smaller 
local laboratories and other providers. 
Because of the size of the problem (as measured in dollars lost to the Medicare program), 
its pervasiveness throughout the lab industry in past years, and the continuing vulnerability 
of the Medicare payment system to such improper billings, it is important to gain a clear 
understanding of  the nature of the improper practices that led to these losses. 
Fraud cases involving laboratory services span a broad spectrum, from blatant actions 
intended to defraud Medicare to more subtle efforts that mix legitimate claim information 
with false information.  The most common types of fraud involve the filing of false claims. 
The chart below summarizes the type of billing that results in false claims. 
FRAUDULENT BILLING 
  Billing for Services Not Performed 
  Billing for Services Not Ordered 
  Billing for Services Not Needed 
  Up-coding 
  Unbundling 
  Duplicate Billing 
  Falsifying Diagnoses 
These concepts are fairly straightforward, but there are subtle variations of them which 
make abusive billings hard to detect.  One such example relates to unbundling. 
Unbundling occurs when a laboratory bills separately for some, or all tests, analyzed 
OEI-05-00-00070 
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 simultaneously by a single piece of equipment on a single patient specimen.  There are 
sophisticated versions of this type of false billing.  In some cases, laboratories have 
provided an option for physicians to order customized groupings of tests (called panels 
and profiles) that do not exactly correspond to the coding principles used by Medicare. 
The physicians are led to believe that the additional tests included in the panels and 
profiles they order are either performed free (as part of the panel/profile) or at very low 
cost.  The laboratories then billed Medicare for the Medicare covered panel plus the 
additional tests.  Many physicians said they were not aware that the extra tests would be 
separately billed and would not have authorized them if they had known. 
Most laboratory fraud cases do not go to a criminal trial.  The vast majority of laboratories 
referred to the Justice Department for criminal or civil action are settled outside of court. 
The settlements represent agreements between a laboratory and Medicare to repay 
financial damages stemming from fraudulent or abusive activity.  In some cases, 
laboratories have agreed to repay Medicare losses plus penalties and fines for engaging in 
fraudulent or abusive practices. 
Law Enforcement Projects 
All of the problems mentioned above were revealed in Project LabScam, the first 
systematic nation-wide law enforcement project in the medical field.  Project LabScam 
stemmed from the December 1992 guilty plea of National Health Laboratory and its 
agreement to repay $111 million.  Information, developed during the course of the 
investigation, made it appear likely that the improper billing techniques used by this 
company were commonly practiced by other large, national laboratory companies. 
Project LabScam was a joint law enforcement task force that followed up on these leads 
and focused on the billing practice of all the major independent clinical diagnostic 
laboratories in the country.  It initially resulted in settlements against several laboratories 
--SmithKline Beecham, MetPath/MetWest, Damon, Roche and Allied.  Some of these 
companies were acquired or merged into other companies, but we were able to pursue the 
recoveries from the new companies.  These companies subsequently agreed to make 
payments to resolve charges of false claims by their own or predecessor companies.  They 
also entered into detailed corporate integrity agreements to prevent improper activities. 
Some enhanced their existing compliance programs. 
Among the largest settlement were those involving Laboratory Corporation of America 
Holdings (LabCorp), which in November 1996 agreed to pay $187 million to resolve 
charges of false claims to government programs; and Smith Kline Beecham Clinical 
laboratories, which in February 1997 agreed to a $325 million civil suit settlement.  The 
latter case was one of the largest civil settlements ever in the medical care area.  The 
settlement covered civil liability stemming from: unbundling clinical laboratory tests; 
billing for tests not performed; inserting false diagnosis codes to obtain payment; paying 
OEI-05-00-00070 
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 kickbacks to physicians for patient referrals; double-billing for laboratory tests provided to 
patients with end stage renal disease; and billing for tests that were unordered and 
medically unnecessary. 
Because of the importance of the Project LabScam and other similar cases in revealing the 
nature and extent of fraud, waste, abuse, and error with respect to Medicare payments for 
laboratory services, we have provided a more detailed summary of this project in the 
Appendix. 
Many of the large national laboratories have been cooperating in resolving disputes and 
improving their internal safeguards to prevent fraud and abuse.  However, we cannot drop 
our guard.  Project LabScam is not the totality of all situations involving improper 
payments for laboratory services. 
In fact, on January 19, 2000, the Department of Justice and the Department of Health and 
Human Services announced the conclusion of the largest health care case to date with 
Fresenius Medical Care North America, the worlds largest provider of kidney dialysis 
goods and services.  The case involved $468 million in fines and payments, of which $167 
million is directly related to laboratory services--$36.6 million in criminal fines for false 
claims; $15.2 million in criminal fines for kickbacks to induce referrals of claims to the 
company; and civil settlement payments of $112.2 for unnecessary tests and $2.8 million 
for tests which were part of clinical trials.  The criminal conduct uncovered during this 
investigation started prior to October, 1996 when Fresenius acquired National Medical 
Care and its subsidiaries.  Fresenius has cooperated with the investigation and has taken 
steps designed to prevent similar misconduct in the future. 
There are indications that problems similar to those uncovered through Project LabScam 
are occurring with smaller laboratories and certain providers billing Medicare and 
Medicaid. 
Hospital Outpatient Laboratory Project 
The Hospital Outpatient Laboratory Project conduct by our office has documented 
hospital laboratory abuses stemming from unbundling and double billing of laboratory tests 
and, in some cases, the improper billing of medically unnecessary laboratory tests.  The 
241 hospitals audited thus far have agreed to repay more than $54.6 million in 
overpayments and False Claims Act damages. 
Duplicate Part A and Part B Payments 
Medicare incorporates laboratory payments into institutional and provider payments for 
hospital inpatients and end stage renal disease (ESRD) patients. These Part A payments 
are made by intermediaries.  For other types of patients, laboratory tests are paid 
OEI-05-00-00070 
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 separately to the laboratory provider.  These payments are made under Part B of the 
program and can be paid by either intermediaries and carriers depending on the type of 
facility billing for the laboratory tests. 
We have found that Medicare paid twice for diagnostic services, including laboratory 
tests, performed within 72 hours of a patients admission to a hospital.  Diagnostic tests 
performed within 72 hours of a hospital admission are considered pre-admission tests and 
payment for them is included in Medicare hospital payment. 
We have also found that Medicare has made duplicate payments to laboratories providing 
services to ESRD patients.  Investigations have found laboratories billing Medicare Part B 
for tests Medicare Part A had already paid under the dialysis center ESRD composite rate. 
Medicaid 
Reviews of 28 State Medicaid programs through partnership audits conducted by State 
and Federal Government auditors found problems similar to those discovered in Medicare
-laboratory services not properly grouped together (bundled into a panel) or  duplicated 
for payment purposes.  In addition, Medicaid payments sometimes exceeded Medicare 
payment rates, contrary to Federal rules. 
Remedies and Prevention 
The descriptions above, particularly those regarding Project LabScam, indicate that many 
serious laboratory payment problems are resolved through audit and law enforcement, 
including convictions, settlements, and corporate integrity agreements.  In addition to 
these measures, we have undertaken a variety of preventive measures designed to reduce 
Medicare and Medicaids exposure to fraud and abuse.  Program exclusions, and new 
approaches such as compliance guidelines and fraud alerts are some of the preventive 
measures in use today. 
Exclusions.  One indication of the extent of the problem connected with laboratory 
billings is the number of individuals and companies excluded from participation in Federal 
Government medical care programs as a result their improper activities. To date, more 
than 125 laboratories and individuals associated with them have been excluded from 
participating in government health insurance programs. 
Compliance Guidelines.  The Office of Inspector General has developed model 
compliance plans designed to assist clinical laboratories in developing effective internal 
controls that help prevent fraud, abuse and waste.  These have been prepared with 
considerable input from medical care industries.  The compliance guidelines for 
laboratories were one of the first developed. They have been subsequently modified based 
on new developments in this field and further consultation with the laboratory industry. 
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 A complete copy of the compliance guidelines can be found on the Office of Inspector 
General website (www.dhhs.gov/oig).  Key elements of the plan include: 
--written standards of conduct,

--policies and procedures that address potential fraud,

--designation of a chief compliance officer,

--education and training of employees,

--a hotline or other means to receive complaints,

--adoption of procedures to protect complainants,

--a system to respond to allegations of improper or illegal activities,

--audits and evaluations to monitor compliance, 

--appropriate disciplinary action of errant employees, and

--investigation and remediation of systematic problems.

Some laboratories have agreed to mandatory compliance agreements as part of their 
settlement with the Federal Government.  But the broader guidelines are being voluntarily 
adopted by many large corporations to develop a culture of integrity within their 
businesses and to avoid future integrity problems. 
Fraud Alerts.  A fraud alert regarding inappropriate arrangements for the provision of 
clinical laboratory services has also been issued by the Office of Inspector General.  This 
fraud alert was designed to educate the laboratory community and Medicare 
subcontractors about potential violations of Medicare and Medicaid anti-kickback laws. 
By describing practices that appear to violate the law, it is hoped that laboratories and 
their customers will cease and desist from such illegal practices. 
LABORATORY MARKETPLACE 
The market for laboratory services can be characterized by intense competition for a finite 
number of patients.  Laboratories need a certain minimum volume of tests to succeed 
financially.  To achieve this minimum test volume, a laboratory needs a predictable volume 
of patient referrals.  Because referrals are a function of tests ordered by physicians, 
laboratories try to find ways to ensure that physicians will refer patients and test specimens 
to their laboratory and not another. 
Self Referral 
Several studies conducted in the 1980s, including a 1989 Office of Inspector General 
report to Congress, showed that physicians with ownership interest ordered many more 
tests than their peers who had no financial interest in a laboratory.  This report, Financial 
Arrangements Between Physicians and Health care Businesses (OAI-12-88-01410) found 
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 that 12 percent of physicians who bill Medicare have ownership or investment interests in 
entities to which they make patient referrals and that at least 25 percent of independent 
clinical laboratories were owned in whole or part by referring physicians.  Patients of 
referring physicians who owned or invested in independent clinical laboratories received 
45 percent more clinical laboratory services than all Medicare patients in general, 
regardless of place of service (including physician office labs) and 34 percent more 
services directly from independent clinical laboratories than all Medicare patients in 
general. 
In 1989, serious concerns about the referral patterns of physicians who had ownership 
interests in clinical laboratories led Congress to pass Section 1877 of the Social Security 
Act, commonly referred to as Stark I.  Under Section 1877, a physician having a 
proscribed financial relationship with a clinical laboratory may not make a referral to that 
laboratory for a service paid by Medicare and the laboratory may not bill Medicare for that 
referred service.  Physicians who operate their own office laboratories, licensed under 
CLIA, are exempt from this prohibition. 
Discounts 
In vying for referrals, laboratories may offer volume discounts to gain a competitive edge. 
Discounts are based upon expected volume of referrals and other costs and competitive 
factors presented by each client.  They often may have little or no relationship to the actual 
cost incurred in performing a test.  Laboratories may grant a discount on one or more tests 
to a client if it believes that the client will also order enough higher margin tests to make 
an overall account sufficiently profitable.  Such discounts are possible because the 
discount price of a laboratory test is often significantly lower than the amount paid by 
Medicare and third party insurers. 
Office of Inspector General reports document that Medicare pays more money for 
laboratory tests than the laboratories charge to physicians for the same test.  Our work in 
this area has contributed to the enactment of legislation that has substantially reduced the 
payment caps for laboratory services. 
Customized Test Packages 
A laboratory will also offer customized test packages as a way of attracting patient 
referrals by giving them personalized service, tailored to the needs of that physicians 
practice.  These customized groupings of tests are often discounted when sold to 
physicians, hospitals and other laboratories.  With the exception of services provided to 
patients enrolled in Federal health programs such as Medicare and Medicaid, many 
providers who purchase laboratory work bill their patients and insurers for more money 
than they actually paid.  Federal law requires that the laboratory that actually performed 
the test bill Medicare for them.  No such provision exists with regard to private pay 
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 patients.  Anecdotal evidence suggests that the discount rates offered to physicians by 
some independent laboratories may be related to the number of Medicare patients referred 
to the laboratory. 
Laboratories routinely offer customized profiles and panels to physicians.  Physicians often 
order the profile/panel containing the test they need rather than specifying just the needed 
test(s).  Profiles and panels desensitize physician concerns about the medical necessity of 
the laboratory tests they are ordering.  Moreover, panels and profiles contribute to 
unbundling billing schemes and contributes to the ordering of medically unnecessary 
laboratory tests. 
Customized Services 
In addition to discounts and customized laboratory panels and profiles, business practices 
which streamline day-to-day operations, facilitate rapid turn around time, enable better 
service and provide convenience to the patient are often used to gain a competitive edge. 
Physicians and laboratories have been known to share telephones, computer hardware and 
software, laboratory and other medical equipment, office supplies, management services 
and personnel.  Like other businesses, the sellers and purchasers of laboratory services 
engage in activities designed to promote goodwill.  Under existing Medicare law, these 
business practices may be considered inducements for patient referrals, and therefore 
construed as illegal. 
QUALITY OF LABORATORY TESTING 
The Office of Inspector General has been concerned about the quality of laboratory 
services provided to Medicare beneficiaries.  One of the first areas we examined in the mid 
1980s was unregulated laboratory testing in physician office laboratories.  In particular, 
mistakes made in pap smear tests caused great concern to Congress and others in the 
laboratory community. 
Quality 
We released reports addressing the physician office laboratories issue as well as the quality 
of testing in certain facilities.  Subsequently, the Clinical Laboratory Improvement 
Amendments of 1988 (CLIA of 1988) were enacted.  These amendments addressed 
recommendations in our report by mandating that: 1) all laboratories be regulated based 
on complexity of testing, regardless of volume or testing site; 2) all physician office 
laboratories register and meet certain standards and inspection requirements, and 3) a 
registration fee be imposed on all laboratories.  The ultimate goal of these amendments is 
to assure that all types of laboratories consistently produce highly reliable results. 
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 Another area of concern was the prevalence of public cholesterol screening conducted by 
all types of providers in drug stores, shopping malls and other public places.  In May, 
1990, we found that the accuracy and usefulness of public cholesterol screening were 
compromised by poor quality assurance, inadequate on-site counseling, and lack of 
referral to a physician when appropriate.  Shortly after our report was released, public 
cholesterol screening dropped dramatically. 
Access 
The passage of  CLIA raised concerns by the medical and laboratory community that 
laboratory sites, especially physician office labs, might cease operations and thus restrict 
patient access to certain types of laboratory services.  Aware of  this possibility, HCFA 
requested that we conduct a study.  In a report issued in June, 1995 we found that CLIA 
did not affect physician ability to secure laboratory services for their patients.  Physicians 
who changed their in-office laboratory operations were influenced by factors broader than 
CLIA; these influences included other government regulations, such as the Stark 
amendments and Occupational, Safety and Health Administration requirements, and non-
government factors, such as sales, mergers and managed care. 
The HCFA has recently reported that due to CLIA, the overall quality of laboratory 
services has improved.  We have not conducted any recent studies examining the 
implementation and impact of CLIA, but are again beginning studies in this area. 
EMERGING AND FUTURE ISSUES 
Home Test Kits 
During the next decade, the number of laboratory tests approved for home testing will 
increase significantly.  New technology will spawn new home test kits capable of providing 
laboratory information comparable to traditional and more complex laboratory methods. 
Home tests kits allow people to obtain a sample for laboratory analysis in the comfort of 
their own home.  Some kits produce results very rapidly while other kits only provide a 
method for collecting a specimen.  The specimen is then sent to a laboratory where the 
actual testing is performed. 
Patient initiated testing is not reimbursed by Medicare.  Medicare does pay for glucose 
monitors and glucose testing strips.  To be covered, a laboratory test must be ordered by a 
physician, performed in a CLIA certified laboratory and medically necessary in the diagnosis 
and treatment of a patient.  In recent months, Medicare has seen significant increase in 
billings from nursing facilities for blood glucose monitoring performed with equipment 
approved for patient use at home.  Testing performed in the home is not paid by Medicare. 
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 Medicare policy does not adequately address the use of laboratory test kits approved for 
home testing.  The number of tests for home use will continue to rise and current Medicare 
policies may be inadequate to address the coverage problems that will accompany this 
increase.  Medicare needs to evaluate its coverage polices for home test kits, bed side 
testing and new technology.  What constitutes routine testing?  When, if ever, is it payable? 
How, if at all, will Medicare pay for HIV tests, pap smears and other home tests order by a 
physician, collected by a patient and analyzed at a laboratory? 
Nursing Homes 
Many elderly patients confined to nursing homes have standing physician orders to monitor 
a patients glucose levels.  In many cases, patients have their blood sugar checked three or 
more times each day and records of the results are kept for physician review. 
Historically, nursing facilities have not billed Medicare for glucose screening.  Recently, 
they began billing for each glucose test they perform on a patient.  They obtain a CLIA 
certificate of waiver that permits them to bill for laboratory tests approved for home use. 
Policy on coverage is unclear and some Medicare fiscal agents pay nursing homes for 
glucose testing while others do not. The HCFA is working on clarifying policy in this area. 
We have urged them not to pay for glucose monitoring in nursing facilities because it is a 
routine service and should be covered in the nursing facilities per diem rate. 
Alternative Medicine 
Patient interest in alternative medicine has increased during the last decade.  Accompanying 
the increased interest in alternative medicine are new laboratory technologies purported to 
provide information about a patients medical status.  Live Blood Analysis (LBA) and 
Biological Terrain Analysis (BTA) are two tests widely marketed over the Internet.  The 
tests are ordered and used primarily by nutritionists, chiropractors and naturopaths.  The 
efficacy of these tests and their ability to produce consistent results has not been established 
using scientific methods.  Evidence suggests that different providers obtain different results 
and interpret the results differently. 
Under current law, all sites analyzing specimens derived from the human body must register 
and apply for a CLIA certificate.  This policy was designed to ensure uniform testing, 
regardless of where the tests were performed. 
It is unknown how many labs currently certified under CLIA perform LBA or BTA.  Some 
laboratories performing LBA and BTA have been certified under CLIA.  Others claim that 
they are exempt from CLIA because the tests are performed solely for research purposes 
and not used in patient care and treatment decisions.  It is believed that the vast majority of 
sites performing LBA and BTA are unknown. The extent to which patients are sold 
nutritional supplements and natural remedies based on the results of these tests is unknown. 
OEI-05-00-00070 
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 Electronic Medical Records and Billing 
Many of the safeguards used by the Medicare program rely on the separation of 
responsibility.  This separation allows Medicare to compare a patients medical record to 
the claims submitted for payment.  If the person or entity billing Medicare changes or adds a 
diagnosis or adds a laboratory service not ordered by the patients physician, the patients 
medical record and other records in the audit trail would show who and how information 
was changed. 
The current processes used in patient care can be viewed as one directional.  Increased use 
of electronic systems that generate the medical record, billing claims and most supporting 
documentation may change these processes to bi-directional.  For example, under the linear 
system the billing department might add a diagnostic code to ensure payment of a particular 
laboratory test.  To avoid detection of the added diagnostic code, the patients medical 
record would need to be pulled and modified to reflect the added code.  The source 
document completed by the physician and used to prepare bills would also need to be 
modified.  These additions and modifications to the key records in the billing audit trail 
would in all likelihood be noticed during an audit. 
New technology can be bi-directional or interactive.  In our example, changes and additions 
by the billing department might interact with the patients record, changing or adding to the 
original information recorded by the physician, so that it agrees with the claim submitted to 
Medicare for payment. 
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16
 ADMINISTRATION AND CONTROLS 
Evidence clearly shows that Medicare and Medicaid systems are vulnerable to laboratory 
claims that have been manipulated to defraud the program and to maximize reimbursement. 
The administrative systems for paying Medicare claims are inherently incapable of dealing 
with the vulnerabilities.  They contain neither incentives to curtail use nor controls to 
prevent improper payments.  The pervasive and substantial improper billings uncovered by 
Project LabScam were not prevented, detected, or corrected by Medicares claims payment 
system.  They were largely dealt with through investigations, audits, civil settlements, 
prosecutions, corporate integrity agreements, industry outreach initiatives, and voluntary 
compliance plans--all adjunct to but not integrally connected to the payment system. 
Similarly, the problems of self referral, quality, and access were more subjects of evaluation 
studies than they were of payment control systems. 
In the previous sections of this report, we attempted to discuss incentives and the lack 
controls related to physicians and laboratories billing  Medicare. We have described the role 
of law enforcement, audit, evaluation, legal advice, and voluntary efforts of laboratory 
corporations to cultivate a culture of integrity and develop internal controls of their own to 
prevent a re-occurrence of integrity problems.  In the sections below, we will address more 
specifically the shortcomings of the payment system and of the role of beneficiaries in 
controlling laboratory use and identifying inappropriate billing. 
FISCAL AGENTS AND CONTROLS 
Billing Volume and Payment Controls 
In 1998, clinical laboratory services represented approximately 2.2 percent of Medicare Part 
B expenditures, including hospital outpatient services, but accounted for considerably more 
of the Medicare Part B service volume.  The average payment per laboratory service was 
$7.21.  Payers have claimed that their efforts to monitor and properly pay laboratory 
services do not give them sufficient return to cover the expenses associated with claim 
monitoring. 
Past audits have revealed that both Medicare carriers and intermediaries have not always 
had adequate controls to detect and prevent inappropriate payment for certain laboratory 
tests (chemistry, hematology, and urinalysis) tests.  Implementing adequate safeguards is 
complicated and expensive for such a huge volume of claims. 
Medicare often receives multiple claims for laboratory services provided to a beneficiary 
during a period of  illness.  Clinical diagnostic laboratory tests can be submitted by multiple 
OEI-05-00-00070 
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 laboratory providers, e.g. hospitals, physician offices, independent laboratories, etc.  These 
claims can be submitted to a number of Medicare contractors who potentially have different 
payment policies, different screens and edits, and different documentation policies.  Serious 
problems have been identified when claims for the same patient are submitted to more than 
one fiscal agent. 
Medical Necessity 
Medicare fiscal agents must deny or adjust payment for claims they determine to be 
medically unnecessary.  Unlike claims for primary care, Medicare and Medicaid fiscal agents 
have a difficult time determining the medical necessity of laboratory services because little 
consensus exists concerning the appropriateness and intensity of laboratory services for a 
given medical condition or complaint.  Determining medical necessity can involve complex 
claim development with a relatively small return for the effort involved. 
Moreover, when claims for medically unnecessary services are discovered, Medicare holds 
the billing laboratory financially responsible for any incorrect payments.  Laboratories claim 
they have no control over the tests ordered and that they are not in a position to question 
the medical judgement of an ordering physician. 
Procedures Codes 
In 1997, more than 1,300 laboratory procedure codes were billed to Medicare.  Of these 
1,300 codes, over 30 percent  were not eligible for payment.  More than half of the codes 
billed were billed less than 1,000 times.  Yet the processing of these claims (whether paid or 
denied) is administratively costly and resource intensive. 
The shear number of laboratory procedure codes also contributes to overutilization. 
Multiple procedure codes describing similar tests and procedure codes that dissect a test 
into its individual components contribute to excessive payments and other abuses that harm 
the Medicare program financially.  Excessive coding options increases the risk of coding 
error.  They contribute to Medicares inability to detect duplicate claims and they allow 
providers to up-code or unbundle laboratory services to maximize reimbursement. 
Perhaps of equal importance is the difficulty that Medicare has in keeping up with advances 
in the laboratory industry.  New equipment makes it increasingly easy to perform more and 
more tests with minimal additional cost.  Billers of laboratory services have argued that they 
were unable to bill packages/profiles as a single procedure code because no approved 
Medicare code existed that accurately described their package. Changes and additions to the 
laboratory procedure codes have been evolving rapidly to accommodate new technology 
and the customization of panels.  However, audits have revealed that the procedure codes 
and laboratory guidance by HCFA have not kept pace with these new developments.  The 
process which Medicare uses to periodically review and approve new procedure codes to 
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 accommodate advances in technology and changes in laboratory practices may be several 
years behind the current medical care and laboratory testing practices. 
ROLE OF BENEFICIARIES 
Medicare beneficiaries play little or no role in controlling laboratory utilization.  This is 
primarily because, unlike other services Cover under Part B of the Medicare program, they 
do not make co-payments for these services and receive no information from Medicare 
about laboratory services that are billed in their names. 
Medicare beneficiaries generally rely on the recommendations of their physicians regarding 
the appropriateness of medical tests.  This is largely because of the complexity and 
sophistication of the tests ordered for them.  It is worth noting, however, that beneficiaries 
do interact with and question their physicians about equally if not more complicated 
surgeries, equipment, and other treatments. 
Deductibles and Co-payments 
As noted in the background section, beneficiaries pay no deductibles or co-payments for 
laboratory tests.  To some extent this may reduce their involvement in decision making 
about tests ordered for them, since they have no financial stake in the prescription. 
It  is uncertain what effect deductibles and coinsurance would have on laboratory test 
utilization.  Most of todays Medicare beneficiaries have supplemental insurance or 
Medicaid coverage that pays for such expenses.  Patients who do not qualify for Medicaid 
and who are too poor to afford supplemental insurance policies appear most likely to be 
hurt by deductibles and coinsurance.  However, the introduction of private supplemental 
insurance programs does bring the added advantage of oversight by these insurers, since 
they do have a financial stake in the tests ordered.  The medical needs of low income 
beneficiaries are no different for laboratory tests than for any other Medicare benefits. 
Notice of Payment 
Another laboratory payment vulnerability is the lack of a beneficiary notice.  Generally, 
beneficiary notices are sent to inform patients as to what services have been billed to and 
paid for by Medicare.  One exception is laboratory tests.  No notice is sent to inform the 
beneficiary when a laboratory test has been paid.  This was largely because of the sheer 
volume of tests and the cost of generating a notice each time a laboratory test was billed. 
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 OPTIONS FOR IMPROVEMENT 
Over the years, the Office of Inspector General has made a number of recommendations to 
Departmental policy makers and Congress regarding laboratory services.  As the Institute of 
Medicine deliberates an alternative method for payment of clinical laboratory services we 
offer the following for consideration: 
Reduce the Number of Procedure Codes 
We believe that any discussion of an alternate laboratory payment system should focus on 
reducing the number of procedure codes available for billing, thus, reducing the chance of 
inappropriate billing and administrative costs. 
Designate Regional Carriers 
The Balance Budget Act of 1997 (BBA) mandated that no more than five regional carriers 
be designated to pay all Part B laboratory claims, excluding hospital outpatient claims.  As 
yet these carriers have not been designated.  We urge this be done soon.  We believe that 
these specialty carriers can more effectively deal with the highly specialized nature of the 
vulnerabilities we have described for laboratory tests.  The efficacy of the specialty regional 
carriers has been demonstrated for durable medical equipment which has also been subject 
to considerable and specialized fraud vulnerabilities. 
We question why hospital outpatient departments would be excluded from the jurisdiction 
of a regional Medicare payer.  A considerable amount of Part B laboratory testing is being 
performed by hospital outpatient departments.  Excluding them from any kind of laboratory 
billing analysis does not seem prudent.  Allowing hospital outpatient departments to bill a 
different fiscal agent other than the designated payer perpetuates a system that is vulnerable 
to duplicate billing. 
Establish Statistical Data Analysis Unit 
The Balanced Budget Act also stipulated that a central statistical resource be designated 
to perform analysis, identify billing trends, identify aberrant providers, and suggest changes 
in national laboratory policy.  This provision has also not yet been implemented.  A central 
statistical resource could be effective in detecting vulnerabilities, referring suspected 
providers for audit or investigation, and analyzing the impact of current and proposed 
coverage policies. It would probably work best in tandem with specialty carriers discussed 
above, but it could also be effective without them. 
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 Establish National Coverage and Administrative Policies 
The Balanced Budget Act of 1997 mandated that HCFA use the negotiated rule making 
process to develop national coverage and administrative policies for clinical diagnostic 
laboratory tests under Medicare Part B, excluding tests performed in hospital outpatient 
departments.  Among issues to be negotiated are: 1) the medical condition for which a 
laboratory test is reasonable and necessary, 2) the appropriate procedure codes used to bill, 
including when laboratory tests should be bundled into one code, and 3) the medical 
documentation that is required by a Medicare contractor when a claim is submitted.  If 
implemented, this process would go a long way toward addressing the shortcomings of the 
current process in keeping up with testing and payment practices in the laboratory arena. 
We believe that any national policies regarding the billing for and documentation of 
laboratory services should apply to all laboratory billers, including hospital outpatient 
departments. 
Restore Beneficiary Notices 
Restoring beneficiary notices is also viewed as an opportunity for improving Medicares 
program safeguards.  These notices may improve patient awareness of the costs related to 
their laboratory services.  They may also improve Medicares ability to detect aberrant 
providers, but their effect on controlling use and rising costs is limited. 
Now that beneficiary notices are being sent to some beneficiaries on a periodic basis instead 
of each time a claim is paid, it may be feasible to include laboratory payment information on 
them.  Patient review of notices is a corner stone in the nationwide campaign to encourage 
and train beneficiaries to identify questionable billing and report suspected fraud.  Such 
notices are used routinely by commercial insurance plans. 
Apply Patient Deductibles and Coinsurance 
Other options for addressing the rise in laboratory use and expenditures call for the 
restoration of  patient cost sharing.  These proposals would require patients share in the cost 
of their laboratory services by imposing the Medicare annual deductible and coinsurance on 
patients. 
Establish A Competitive Bidding Demonstration 
The Balanced Budget Act of 1997 calls for the establishment of no more than five 
demonstration projects concerning the use of competitive bidding in securing Medicare 
items and services.  One of the five projects must involve the competitive bidding for 
oxygen and oxygen equipment. Another demonstration could involve competitive bidding 
for laboratory services. 
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21
 The HCFA has proposed a number of different competitive bid methods.  All have faced 
strong opposition from the medical community and the laboratory industry.  Apprehension 
about the possible effects of sending laboratory work to the lowest bidder, and possible 
effects on the quality of testing has, until recently, kept competitive bidding on the back 
burner.  Competitive bidding may save money but it may also lead to other abuses such as 
sink testing.  It may also undermine the development of new laboratory procedures and have 
other consequences. 
Prospective Payment 
Establishing a prospective laboratory payment is an option that would control both the rise 
in use of  laboratory services and the rise in expenditures.  It would virtually eliminate the 
fraudulent and abusive practice mentioned previously.  A prospective laboratory payment 
system would eliminate  the current administrative burden associated with policing 
laboratory claims.  A prospective payment system would combine a fixed amount to cover 
laboratory services with the amount paid for patient office visits.  Studies would need to be 
conducted to determine what, if any, harm a prospective laboratory payment system would 
have on a physicians medical practice.  Any such proposal would also need to establish a 
way for physicians potentially harmed by such a system to present evidence to justify an 
increase in their laboratory prospective payment.  This could be accomplished by an outlier 
payment provision. 
It may be appropriate to experiment with a limited version of this proposal--e.g., for certain 
specialities or for the most common tests.  One opportunity for such experimentation could 
present itself during the implementation of the outpatient prospective payment system 
currently being  developed for hospitals.  At one point clinical laboratory test were going to 
be included in the hospital payment, the current proposal is to pay for all diagnostic test 
separately.  It might be worth while to bundle laboratory tests into certain of the outpatient 
payment categories, at least to test this concept.. 
In any prospective system, incentives to withhold services exist.  Past studies have shown 
that physicians are not likely to withhold services they feel are in the patients best interest. 
Nonetheless, controls to ensure that patients get appropriate laboratory services would 
need to be established. 
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  APPENDIX 
CASE EXAMPLES

Introduction 
The primary mission of the Office of Inspector General (OIG), Office of Investigations (OI), 
is to investigate allegations of fraud, waste and abuse in the Medicare program and to 
protect the integrity of the program and the well-being of program beneficiaries. 
Investigations conducted by the OI result in criminal prosecutions, administrative sanctions 
and civil actions against wrongdoers, including monetary penalties and exclusion from 
participation in the Medicare program.  One of OIs most successful efforts in the battle 
against Medicare fraud was a nationally coordinated effort between the OI and other Federal 
and State law enforcement agencies, known as Project LabScam. 
Project LabScam began in 1993 and grew out of criminal investigation of National Health 
Laboratories (NHL) and its fraudulent billing schemes involving the unbundling of clinical 
laboratory tests.  The NHL investigation revealed that laboratories used abusive marketing 
practices that caused doctors to order medically unnecessary tests.  After the laboratories 
determined which tests were profitable to perform, profiles were created containing these 
tests and the tests commonly ordered by physicians.  Physicians were encouraged by the 
laboratories to order the new, more profitable, profile of tests as opposed to ordering only 
those individual components of the profile, i.e., individual tests, needed for the care of the 
patient.  Unknown to the physicians, laboratories unbundled the profile tests and billed 
Medicare, Medicaid and other health care programs the full price for the unnecessary tests 
as if each test were ordered and performed separately by the laboratory.  In addition to using 
these abusive marketing schemes, laboratories also billed Federal health care programs for 
services that had not been ordered.  For example, Medicare was routinely billed for tests not 
requested by the ordering physician. 
At the conclusion of the NHL investigation, several of the agencies involved in the 
investigation formed a task force to coordinate a nationwide investigation of these unlawful 
billing practices.  Task force efforts culminated in Project LabScam and focused on the 
billing practices of all of the major independent clinical diagnostic laboratories in the 
country.  Project LabScam also sought to promote interagency cooperation and proactive 
investigations, unconstrained by geographic or agency boundaries.  This investigative 
approach enabled the Government to pursue criminal, civil and administrative actions on a 
national level, as well as recover millions of dollars. 
To date, Project LabScam has resulted in approximately $823 million in recoveries from the 
major independent clinical diagnostic laboratories.  In addition to the recoveries received, 
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 the laboratory industrys awareness of the Governments efforts in this area spawned a 
series of qui tam lawsuits, investigations against smaller laboratories and a national project 
targeting hospital-based laboratories.  Like Project LabScams counterparts, these cases are 
significant not only because of the recovery of Medicare funds, but also because they 
highlight vulnerabilities that continue to put the Medicare program at risk. 
Project LabScam was the first joint Federal, State and local law enforcement effort to 
combat Medicare fraud on a national level.  Based on the success of this project, the OIG 
will continue these joint investigative partnerships in its effort to protect the integrity of the 
Medicare program. 
Laboratory Cases 
SmithKline Beecham Clinical Laboratories, Inc., agreed to pay $325 million and to 
implement stringent compliance requirements to settle its civil liability for filing false claims 
for reimbursement to the Medicare, Medicaid, Civilian Health and Medical Program of the 
Uniformed Services (CHAMPUS), and Railroad Retirement Board (RRB) health care 
programs.  SmithKline, a target of a multi-agency laboratory initiative, engaged in many 
improper activities including unbundling clinical laboratory tests, billing for tests not 
performed, inserting false diagnosis codes to obtain reimbursement, double billing for 
laboratory tests for patients with end stage renal disease, and billing for calculations which 
were both unordered and medically unnecessary.  This settlement also resolves several qui 
tam lawsuits alleging these violations.  A separate qui tam raised allegations of test data 
manipulation and falsified test results, but an independent review found only minor quality 
problems with no adverse effort on patient care. 
In Michigan, Dearborn Regional Clinical Laboratories, Inc., agreed to pay the Government 
$500,000 to resolve its liability under the False Claims Act.  An independent clinical 
laboratory, Dearborn allegedly submitted improper Medicare Part B claims for additional 
hematological indices, calculations derived from CBC test results.  The CBC testing 
machines were programmed to automatically calculate the additional indices results for 
which the laboratory billed, even though the physicians did not order them.  Since the 
additional indices were not medically necessary, they were not covered under Medicare 
guidelines.  Corporate integrity provisions were not required as Dearborn is no longer in 
business. 
In Massachusetts, Brigham and Womens Hospital Pathology Foundation of Boston agreed 
to pay the Government $476,167 to resolve allegations of improper billing practices and to 
enter into a 3-year corporate integrity agreement.  The settlement with Brigham, a hospital 
specializing in clinical laboratory services, resulted from a voluntary disclosure by Brigham 
under the OIGs Voluntary Disclosure Pilot Program.  The investigation focused on 
improper billings for various pathology laboratory tests over a 6-year period.  The 
disclosure and a subsequent verification audit determined that various billing irregularities, 
OEI-05-00-00070 
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 primarily involving services claimed but not documented, and up coded services, resulted in 
an approximate overpayment of $326,000 by Medicare and Medicaid. 
In Florida, Miguel Mendez, owner of Prime Laboratory, Inc., was sentenced for conspiracy 
to submit false claims to 3 years probation, with a special condition that he serve 4 months 
in a special treatment center, followed by 8 months home confinement.  Mendez paid 
kickbacks to local doctors and clinic owners in return for their referring clinical laboratory 
services to Prime Laboratory.  Moreover, he actively solicited clinics and encouraged them 
to order certain tests, with a higher Medicare reimbursement rate, for which he could bill the 
program.  In order to have the cash necessary to pay these kickbacks, Mendez engaged in an 
elaborate money laundering scheme.  Two other co-defendants, who participated in the 
money laundering scheme by cashing checks under the $10,000 Internal Revenue Service 
reporting requirement, were sentenced as well.  Hanna Adams was sentenced to 60 days 
home confinement, 2 years probation, and participation in an approved outpatient mental 
health program. 
Mediscope Diagnostic Laboratories, Inc., a clinical laboratory in New Jersey, was excluded 
for an indefinite period after the State suspended the laboratory from Medicaid participation. 
Because of the laboratorys high earnings the previous year, the State Medicaid agency 
conducted a prepayment review of all claims which the laboratory submitted to Medicaid for 
payment.  The review showed over 70 percent of the claims to be fraudulent.  In addition, a 
number of claims reviewed lacked physicians signatures on the requisition forms. 
In Florida, AGL Laboratory Corp and its president Ileana Reinoso agreed to settle their civil 
liability under the False Claims Act for submitting false Medicare claims.  The defendants 
agreed to be permanently excluded from participation in Federal health care programs and 
to release claim to approximately $103,675 in funds administratively suspended by their 
Medicare carrier.  Although the defendants documented an inability to pay the judgements 
against them, both the laboratory and Reinoso agreed to the entry of judgements against 
them in the amount of $2.8 million and $27,000 respectively.  They further agreed that 
about $215,300 in bank accounts frozen by the United States will be transferred to the 
Government.  Over a ten-week period, this clinical laboratory submitted Medicare claims for 
diagnostic testing and received approximately $952,000 in payments.  Interviews of the 
referring physicians listed on the laboratorys Medicare claims, however, disclosed they had 
not referred patients to the laboratory for testing.  Moreover, most of the physicians had 
never seen the beneficiaries they supposedly referred. 
Quest Diagnostics Incorporated agreed to pay the Government $15 million to resolve its 
civil liability under the False Claims Act and the Civil Monetary Penalties Law.  Quest, 
formerly known as Corning Clinical Laboratories, Inc., entered into a joint venture 
agreement with Vivra Renal Care, Inc., to operate a clinical laboratory and perform 
laboratory tests for end stage renal disease (ESRD) patients.  Between 1987 and 1996, the 
clinical laboratory allegedly billed Medicare and unbundled laboratory and medically 
OEI-05-00-00070 
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 unnecessary tests and submitted claims with boiler plate diagnoses, without regard to the 
ESRD patients true diagnosis, to facilitate payment of claims by Medicare.  As a result, the 
clinical laboratory received approximately $5.8 million in Medicare overpayments. 
Laboratory Corporation of American (LabCorp), the countrys largest independent clinical 
laboratory, agreed to pay the Government $187 million to resolve civil and criminal 
liabilities for defrauding Medicare, Medicaid and various health care programs.  LabCorp 
also agreed to enhance its existing compliance program by adopting a corporate integrity 
plan approved by the OIG.  LabCorp allegedly submitted false claims for medically 
unnecessary laboratory tests.  In addition to the civil settlement, Allied Clinical Laboratories, 
a subsidiary of LabCorp, pled guilty to a criminal charge relating to the submission of a false 
claim to the Medicare program.  Allied will be excluded from participating in all Medicare 
and State health care programs. 
In Ohio, Allied Clinical Laboratories signed a settlement and corporate integrity agreement 
in response to a qui tam action alleging false billing to Medicare, the Railroad Retirement 
Board (RRB) and the Civilian Health and Medical Program of the Uniformed Services 
(CHAMPUS).  Allied agreed to pay $4.9 million after investigation showed it used false 
diagnosis codes, lied about patient waivers, gave wrong addresses for nursing home 
patients, used blanket physician diagnosis letters to justify billing for limited-coverage tests, 
and used inaccurate provider numbers.  Allied also agreed to train its employees, conduct 
annual reviews, establish standards of conduct, make certain annual disclosures to the 
Department for 5 years, and reimburse beneficiaries it had claimed executed waivers. 
Damon Clinical Laboratories, formerly headquartered in Massachusetts, agreed in a global 
settlement to pled guilty to submitting false laboratory test billings to Medicare.  Damon 
agreed to pay $119 million to the Government, more than $35.2 million as a criminal fine 
and over $83.7 million to resolve related civil liabilities.  The $119 million represents 
recovery of three dollars for every dollar stolen from Medicare, Medicaid, the Civilian 
Health and Medical Program of the Uniformed Services (CHAMPUS) and the Federal 
Employees Health Benefits Program.  Damon bundled three extra tests in blood panels 
commonly requested by physicians, even though they did not request the extra tests.  It then 
billed Medicare for the panel, and charged separately for the three tests.  The global 
settlement was reached with Corning, Inc., which earlier had purchased Damon and stopped 
the illegal billing. 
Two national clinical laboratories agreed to pay $11 million to settle allegations of 
submitting false claims to Medicare and other federally funded insurance programs by billing 
for certain blood profiles neither ordered by doctors nor medically necessary.  The 
settlement by Corning Clinical Laboratories, Inc. - - formerly know as MetPath, Inc., and 
headquartered in New Jersey  - - and Unilab Corporation, headquartered in California, 
resolves a civil fraud qui tam filed in New Jersey and covers laboratories in California, 
Colorado, Connecticut, Florida, Michigan, Missouri and Georgia.  Whenever a doctor 
OEI-05-00-00070 
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 ordered a complete blood count test, the laboratories billed Federal insurers for additional 
hemogram indices even though they were not requested or needed.  Corning and Unilab 
denied any wrongdoing but wanted to settle the dispute. 
In California, Spectra Laboratories, Inc., agreed to pay over $10 million to settle its civil 
liability for making false claims and paying kickbacks.  Spectra is a clinical laboratory 
specializing in tests of end-stage renal disease patients.  It submitted separate claims for tests 
to Medicare, the Railroad Retirement Board, the Civilian Health and Medical Program of 
the Uniformed Services, and the Federal Employees Health Benefits Program, when those 
programs had already paid the patients dialysis centers for the tests under the composite 
rate.  Spectra also devised schemes to induce payment for unnecessary laboratory tests such 
as a test-ordering system that permitted physicians to order all of the same tests for all of 
their patients, and paying salespersons commissions based on the Medicare reimbursements 
obtained from their accounts.  As part of the settlement Spectra agreed to enter into a 
comprehensive compliance program.  The compliance program requires, among other 
things, that Spectra implement a patient-specific test-ordering system and a tracking system 
that ensures proper billing of Parts A and B of the Medicare program. 
Bioran Research Laboratory, based in Massachusetts, agreed to pay $6.7 million to settle 
civil allegations that it overcharged the Medicare program.  An Office of Inspector General 
(OIG) investigation showed that between 1989 and 1992 Bioran routinely billed Medicare 
for a serum iron test whenever a physician requested a standard panel of tests.  Physicians 
did not knowingly request the serum iron tests; rather, they assumed they were part of the 
standard panel.  A computer analysis program development by the OIG investigator showed 
that Bioran, which was purchased by Corning Clinical Laboratories in 1994, improperly 
collected more than $3.352 million from Medicare for the serum iron tests.  The computer 
program is readily adaptable to similar cases throughout the country. 
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