Damon Clinical Laboratories: The Free Test That Medicare Paid For

In the Damon Clinical Laboratories fraud case, the company paid $83,756,904 in a civil settlement after pleading guilty to a conspiracy involving extra tests bundled into blood-test panels. Damon made the ferritin add-on look free to the ordering doctor while charging Medicare separately for it. The sales pitch, the requisition and the government bill told different stories.

The Ferritin Add-On Inside LabScan

Damon’s 1996 corporate guilty plea covered bundling ferritin with its LabScan panel and apolipoprotein with its cardiac risk panel. The First Circuit’s account of the criminal case describes that admission and the separate civil payment to the United States and state Medicaid programs. Damon was then a Corning subsidiary.

The broader case also involved CBC indices added to complete blood counts and add-ons to SMAC panels. The ferritin evidence shows how a laboratory could turn an addition to a familiar panel into a recurring government charge.

In its account of the executive criminal trial, the court described ferritin as a test doctors had previously ordered less than 2% of the time. Damon put it into LabScan, which doctors ordered 30 to 40 percent of the time. Attaching the test to the panel gave it access to an entirely different volume of orders.

When a doctor or patient paid for the bundled LabScan, Damon supplied ferritin at no extra charge. Letters and marketing materials reinforced that message. But Damon charged Medicare roughly $21 for ferritin on top of approximately $24 for LabScan, according to the court. The added test was free to the person choosing the laboratory and a separate expense for the taxpayer.

The court’s account also describes the pressure behind the sales strategy. In 1988, Medicare’s payment agency cut laboratory fees by almost 16%. The government’s theory connected that reduction to Damon’s plan to increase test volume. At one laboratory, Damon projected monthly ferritin testing for Medicare beneficiaries rising from 25 tests to 1,946.

The Ferritin Trial and the Price of Removing a Test

The executive criminal trial exposed what happened when physicians tried to remove ferritin. The court recorded that the requisition did not offer the separate ordering choice and that some doctors who objected encountered a price designed to keep the test in the panel:

Fewer tests could mean a higher price for the doctor. Leaving the extra test in place meant another charge to Medicare. That pricing decision made the sales conversation part of the billing evidence.

The defense argued that Damon could rely on physicians’ certifications that the tests were medically necessary. The government’s evidence reached beyond the composition of the panel to what doctors had been told about the charge and the choices the order form gave them. The court described physicians being induced to order and certify unnecessary ferritin tests. In 2001, a jury convicted the executive who had served as a regional and then senior vice president of operations on the ferritin conspiracy.

The apolipoprotein portion of that executive case ended in an acquittal during trial, even though apolipoprotein was part of Damon’s corporate plea.

What the Doctor Ordered and What the Laboratory Billed

A laboratory profile can present a group of tests to a physician while the billing system assigns charges to its components. In Damon, the court’s account connects the contents of the panel, the price offered to the doctor and the separate charge to Medicare. Seeing the panel name alone would miss the decision that generated the extra payment.

A contemporary industry discussion addressed that same gap. Model Plan Helps Laboratories Fight Fraud, published in Laboratory Medicine in June 1997, described the Inspector General’s new model compliance plan. It recommended that laboratories tell ordering physicians the individual components of automated profiles, the codes used to bill Medicare and how the laboratory would bill for each profile.

Those recommendations brought the billing detail back to the person ordering the tests. A physician choosing a profile should be able to see what that choice sends to the laboratory and what the laboratory sends to Medicare. The article also described monitoring standing orders and analyzing test-use data, connecting the design of an order form to the volume of work it produced.

For a laboratory insider looking at a similar practice, the medical record adds another part of the picture. Under Medicare’s ordering and documentation rules, the ordering practitioner maintains the medical-necessity documentation in the patient’s record. The billing laboratory maintains the information it received and documentation showing that its claim accurately reflects that information.

That separation matters when a laboratory adds a test. The requisition shows what reached the laboratory. The treating record shows the clinician’s reason for the test. The performance record shows the work, and the claim shows what the payer was asked to fund. We connect those records to the laboratory’s decisions about the panel and its price.

The Same Sales Pitch Across Operation LabScam

Damon’s case belonged to Operation LabScam, the federal initiative that followed the 1992 National Health Laboratories prosecution. In its February 1997 account of the initiative, the Justice Department said investigators had found similar practices across laboratories: unnecessary tests billed to Medicare while physicians were led to believe the additions were free. The department described National Health Laboratories’ guilty plea as covering that marketing and billing scheme.

The same announcement reported a civil settlement with SmithKline Beecham Clinical Laboratories and the release of laboratory compliance guidance.

What Evidence Is Needed to Prove Fraud?

For laboratory add-on billing, the evidence connects the physician’s order, the tests performed, the payer’s claim and what the laboratory told the physician about the additions. Damon’s case makes the commercial records especially important. The marketing materials described a free test, the order form limited the available choice, and the response to doctors who wanted less testing revealed the pricing policy.

We examine those connections with laboratory sales staff, billing employees, laboratory operations staff and healthcare workers in the ordering practice who recognize the discrepancy.

The 1997 Laboratory Medicine article linked compliance to both recordkeeping and review of test use. That is why an insider’s knowledge of a recurring profile matters: it can connect individual bills to the decision that keeps generating them.

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.

You Know How the Extra Test Got There

If you know who added tests to a panel, what doctors were promised or which payer received the bill, speak to one of our whistleblower experts about how the extra tests reached Medicare. We work with you to build your strongest laboratory fraud whistleblower case, bring in laboratory fraud whistleblower lawyers who understand ordering and billing, and stay beside you as your partners throughout the case.