Kan Di Ki Diagnostic Labs: Discounts for the Nursing Home, Full Rates for the Government
In the Kan Di Ki Diagnostic Labs fraud case, the company agreed to pay $17.5 million to resolve kickback allegations that it traded below-cost nursing-home services for Medicare Part B and Medi-Cal referrals. Under the alleged arrangement, the nursing home saved money on services it paid for itself. Diagnostic Labs allegedly made up the difference on business it could bill to the government. The price on the facility’s invoice told only part of the story.
Kan-Di-Ki LLC, doing business as Diagnostic Laboratories and Radiology, provided laboratory and portable x-ray services to skilled nursing facilities in Southern California from its Burbank headquarters. Two former employees brought the qui tam case. Their complaint described how the company allegedly used customer discounts, referral expectations and forgiven debts to secure government-paid business.
A Discount on One Bill, Referrals on Another
Diagnostic Labs allegedly offered nursing homes cheap services for their Medicare Part A and HMO patients in return for their Medicare Part B and Medi-Cal business. The whistleblowers’ complaint described the facility paying the discounted bill out of its own budget, then sending Diagnostic Labs the work it could bill directly to those programs at the maximum allowable rate. Medi-Cal is California’s Medicaid program.
The facility’s incentive starts with how it gets paid. Under Medicare’s skilled nursing payment system, the Part A laboratory services at issue fell within the facility’s bundled payment. Medicare pays the nursing home, and the home pays its outside supplier under their contract. A lower laboratory bill leaves the facility with more of its payment.
The complaint described a similar arrangement for HMO patients, whose services the facility paid for from its daily payment. For the separately covered Part B and Medi-Cal tests at issue, Diagnostic Labs billed the program directly. The alleged bargain joined those different payment streams: a discount where the nursing home bore the expense, referrals where the government paid the laboratory.
That difference matters in a business paid by the day. The California Research Bureau’s 1997 report, Fraud and Abuse in the Health Care Market of California, explains that capitation gives a provider something like a fixed budget and shifts the risk of treatment costs to that provider. In the Diagnostic Labs allegations, the facility’s incentive to reduce its own costs became the supplier’s way into the separately billed business.
How Low the Price Went
The whistleblowers alleged that Diagnostic Labs offered discounts as high as 80%, with flat daily rates as low as $1 per patient. They described those rates as insufficient to cover the laboratory and x-ray work. The alleged bargain left taxpayers funding full-rate health care claims while the facility got the discount.
The complaint made the alleged exchange plain:
This is an illegal kickback scheme, no more legal than if Diagnostic Labs, rather than providing below-cost discounts, had instead simply handed the SNFs an envelope of cash.
Whistleblowers’ allegation, United States and State of California ex rel. Pasqua et al. v. Kan-Di-Ki, LLC, complaint, paragraph 1
According to the complaint, Diagnostic Labs would withdraw, or threaten to withdraw, a customer’s discounted rate if the customer failed to send enough of the profitable business. The discount depended on what else the facility sent back.
The whistleblowers also alleged that the arrangement drove competing providers out of the market. A laboratory trying to win the facility’s business on the price of its services faced a competitor allegedly willing to lose money on those services to obtain the government-paid work.
What Evidence Is Needed to Prove Fraud?
For this alleged referral swap, the useful evidence connects the discounted facility price, the expected referrals and the resulting government claims. The complaint identified internal account spreadsheets and customer invoices that put those parts of the relationship together.
One spreadsheet, titled “Per Diem Analysis: April-2002,” allegedly covered more than 200 nursing-home customers. It compared revenue per test from Part A and HMO patients with revenue per test across the whole account, including Medicare Part B. According to the whistleblowers, almost every customer’s daily-rate tests brought in less per test than the account’s overall average.
The complaint described another analysis, from March 2005, covering hundreds of accounts. It allegedly showed discounts of approximately 71% for laboratory tests and 69% for radiology services, measured against fair market value, in exchange for the customers’ pull-through business. That is the business term for the referrals the low-priced work was expected to bring along.
Those allegations show why an account’s overall profitability can conceal the value of its discounted services. The complaint said the company accepted losses on the facility-paid work because the separately billed referrals made the account profitable overall.
Our work with a laboratory or nursing-home insider connects the customer contract and rate schedule to the invoices, payer-specific claims, account analysis and decisions about continuing the discount. The person who knows why the rate was approved may explain a connection the claims alone cannot show.
Forgiven Debts and Different Prices
The alleged benefit also appeared in bills the company stopped collecting. The complaint said Diagnostic Labs frequently forgave customer debts to keep Medicare Part B and Medi-Cal referrals coming. That makes the decision to forgive a balance part of the same account relationship as the original price.
We examine write-off approvals and account payment records alongside the referral business to understand who authorized the benefit and what the supplier expected in return.
The complaint also described a nursing home in Pasadena receiving prices 40% below the Medicare maximum. Diagnostic Labs allegedly withheld those discounts when billing Medicare and Medi-Cal for the same types of laboratory tests and x-rays. The customer price and the government price were different parts of the same business relationship.
The Settlement and the Whistleblower Reward
The Department of Justice announced the Diagnostic Labs settlement on September 27, 2013, resolving the allegations under the federal and California False Claims Acts. The announcement allocated $12.95 million to the United States and $4.55 million to California.
The two former employees were to receive about $3.8 million collectively as their share of the federal recovery.
A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.
Free Testing, the Same Referral Incentive
The whistleblower complaint against LabQ alleged a similar exchange at nursing homes: free testing for the facilities in return for government-paid business for the laboratory. It alleged that nursing-home employees had insurance, but the laboratory billed the federal COVID-19 Uninsured Program for their tests.
The shared incentive was the facility’s avoided expense. In each complaint, the alleged benefit reached the nursing home while the laboratory sought its revenue from a government program.
You Know Why the Rate Was Approved
If you know a laboratory price depended on the referrals a nursing home sent back, tell our whistleblower experts about that arrangement. We work beside you to build the case around the pricing decisions and government claims, and bring in healthcare fraud whistleblower lawyers who understand laboratory referral cases. From the first account of the deal through the pursuit of a recovery, we stay beside you to build your strongest laboratory kickback whistleblower case.
