National Health Laboratories: The Apparently Free Panel Add-On That Started LabScam
In the National Health Laboratories LabScam case, the company agreed to a $100 million federal civil settlement over unnecessary tests promoted as free to physicians and billed to the government. The offer made additional testing sound like a favor. Medicare and its taxpayers got the bill. For someone inside laboratory sales or billing, the case turns on a familiar divide: what the physician understood the order to include, and what the laboratory charged for it.
NHL was an independent clinical laboratory whose case became the starting point for Operation LabScam. The prosecutors who ran the investigation described how misleading laboratory marketing could turn a physician’s apparent agreement into claims for tests the patient did not need. When investigators examined other large laboratories, they found reason to pursue the same pattern nationally.
How a Free Test Became a Government Claim
The scheme used a free-test pitch to generate government claims. In their account of NHL’s criminal case in the United States Attorneys’ Bulletin, the prosecutors explained that laboratories billed Medicare for unnecessary tests after persuading physicians that the tests would be performed without charge.
That sales pitch worked across a split in health care: the laboratory business separates the test order from the bill. The treating clinician decides what the patient needs and orders the testing. The laboratory performs the work and submits the claim. The payer receives the bill without the treating clinician’s medical record alongside it. A laboratory selling an expanded panel can therefore know more about the eventual bill than the physician authorizing the work.
Calling an addition free changes the conversation in the physician’s office. The extra test sounds like more service for the same price. But the clinical question is whether that patient needs it. In the conduct the prosecutors described, the sales representation obscured the cost while the resulting order gave the laboratory a way to charge Medicare.
A contemporary article, Model Plan Helps Laboratories Fight Fraud, published in Laboratory Medicine in June 1997, shows how directly the response addressed that gap. Summarizing the inspector general’s model compliance plan, it described uniform requisition forms with space for a diagnosis supporting each test. It also described annual notices explaining a profile’s individual components, the billing codes used and how the laboratory would bill Medicare.
Those notices would put the extra test and its separate charge in front of the physician making the decision. The article also recommended reviewing test-use data, connecting the sales pitch to the pattern of tests performed.
The Guilty Plea and the Separate Civil Payments
National Health Laboratories pleaded guilty in federal court in San Diego in December 1992 to submitting false claims to the government, at the same time it reached the federal civil settlement.
NHL also reached agreements with 33 state Medicaid Fraud Control Units and paid $10.4 million to those states.
The prosecutors connected the marketing and billing practices examined in the later national investigation to the scheme to which NHL had pleaded guilty.
How Laboratory Sales Knowledge Exposes Fraud
A sales representative can know how a panel was presented to physicians, what the laboratory wanted them to order and how questions about the price were answered.
The useful knowledge begins before a claim reaches a billing department. Someone who heard the offer can explain what the physician was told. Someone who knows the claims can explain what the government was charged. Our work is to connect those accounts with the order and the patient’s reason for testing.
A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.
Why NHL Started Operation LabScam
Operation LabScam grew out of investigators’ conclusion that other major laboratories were using the same or similar practices uncovered at NHL. The response brought together federal prosecutors, health-program investigators, state Medicaid fraud officials and people who could analyze Medicare billing data.
The government’s account of the national investigation describes a coordinated demand for records from seven national clinical laboratories. Centralized audit work let investigators examine the billing patterns across laboratory chains while pursuing the marketing behind them.
The investigative work joined commercial records to clinical decisions. Agents assembled company profiles from annual reports and securities filings, built timelines showing which tests were marketed to doctors, and interviewed physicians and other witnesses to establish whether the tests billed to Medicare and CHAMPUS were medically unnecessary. Billing data showed where the volume was. Marketing documents and physician accounts helped explain why it was there.
That is what gave the NHL case importance beyond its own payment. It exposed a repeatable way to turn a misleading offer into government claims, and it gave investigators a pattern to look for across the industry.
Damon and the Price of Removing a Test
The First Circuit’s account of the criminal trial involving Damon describes a similar pitch at Damon Clinical Laboratories: ferritin was included at no extra charge when doctors or patients paid for the LabScan panel, but Medicare was billed separately for it, and some physicians who said they did not need ferritin were told the panel would cost more without it.
You Know What the Physician Was Told
If you saw a laboratory promise free additions while sending the government a larger bill, bring the sales pitch and billing story to our whistleblower experts. We connect your knowledge of the physician’s order to the claims that followed and find laboratory fraud whistleblower lawyers who know panel billing and medical-necessity cases. You have our expertise and partnership from the first conversation through the pursuit of a recovery.
