Operation LabScam: The Added-Test Model That Outlived Its Codes

Operation LabScam was the federal investigation into clinical laboratories that made added tests look free to physicians while billing Medicare for them. A doctor ordered a familiar blood panel. The laboratory included another test, and the billing system turned that addition into another payment. For someone who handles requisitions, laboratory sales or billing, the revealing comparison is between what the physician understood was being ordered and what the government was charged.

The cases reached national laboratory chains and smaller operators using the same opening. They also produced a response aimed directly at the machinery of the business: the order form, the sales message, the profile and the billing code.

How Operation LabScam Began

Operation LabScam grew out of the National Health Laboratories case in December 1992. In its guilty plea, the company admitted submitting false claims to the government. Prosecutors described a marketing and billing practice that misled physicians into believing added tests were free. Their investigation pointed to similar practices at other major laboratories.

The prosecutors’ April 1997 account in the United States Attorneys’ Bulletin explains how the response became national. The Justice Department, investigators from the Department of Health and Human Services, Medicare administrators and state Medicaid investigators coordinated their work. On August 24, 1993, investigators served subpoenas on seven national clinical laboratories, seeking documents about the particular marketing and billing schemes.

Centralized billing analysis gave investigators a view across laboratory chains. The Health Care Financing Administration supplied years of claims data, and the Justice Department mapped relative claim volumes by company and region. Investigators then built company histories, examined marketing documents and interviewed physicians about the tests billed in their names. The claim showed the charge. The physician could explain whether the laboratory had sold something different.

How an Added Test Became Another Medicare Bill

Automated testing created the economic opening. Machines could perform multiple tests on a blood sample together, reducing the labor involved. The General Accounting Office’s 1998 account of hospital laboratory billing explained that the old automated-profile codes generally paid less than billing the same combination of tests individually.

Unbundling took the components of a panel and billed them separately. The added-test model approached the same payment gap from the ordering side: attach a separately billable test to a familiar panel and make the addition seem routine. The physician’s decision to order the familiar panel then carried the extra test into the laboratory.

The laboratory controlled more than the claim. It designed the requisition, named the profile, explained the price and told its sales staff what to say. Those decisions could make a rarely requested test look like part of an ordinary order. The Damon and Meris cases show how that worked in practice, with different tests and different outcomes.

Damon Made Removing the Test More Expensive

Damon Clinical Laboratories’ criminal case supplies an unusually clear account of the sales pitch. The First Circuit’s account of the prosecution described ferritin, a blood test doctors had ordered less than two percent of the time, being added to the much more frequently ordered LabScan panel.

When physicians or patients paid directly, Damon provided the ferritin addition free. When Medicare paid, the laboratory charged for it separately. The court described letters and marketing materials presenting the addition as free without telling physicians about the extra Medicare charge. The requisition offered no option to order the panel without ferritin.

The court also recorded what happened when physicians challenged the extra test:

The sales offer made the unnecessary test cheaper to accept than to remove. The physician saw the price of the panel. Taxpayers paid for the addition through Medicare.

The government’s account connected that strategy to a Medicare fee reduction. A planned cut of almost sixteen percent threatened Damon’s revenue in 1988. One Damon laboratory projected that adding ferritin would increase its Medicare ferritin volume from 25 tests a month to 1,946. That was the company’s own forecast.

In its October 1996 guilty plea, Damon admitted a conspiracy involving ferritin bundled with LabScan and apolipoprotein bundled with a cardiac risk panel. Separately, the company paid $83,756,904 in a civil settlement to the United States and state Medicaid programs.

Meris Billed for Additions the Machine Produced Automatically

Meris Laboratories agreed to pay $5.2 million in the civil settlement announced on February 12, 1997. The Justice Department alleged that the laboratory routinely added medically unnecessary HDL cholesterol and serum iron tests to automated panels, then billed the health care programs separately even though physicians had not specifically ordered them.

Another allegation concerned additional complete blood count indices. The government described these as calculations generated automatically from other test results, at no extra cost to the laboratory. It alleged that Meris billed Medicare and Medicaid for those indices despite their being unordered and medically unnecessary.

That distinction matters to anyone who works with a laboratory’s results system. A machine can generate an additional value without a physician having requested another service. In the Meris allegations, the laboratory turned that output into an additional bill. The extra charge began with a billing decision about something the equipment already produced.

The Companies Behind the Civil Settlements

National Health Laboratories, Allied, Roche, LabCorp and SmithKline appear throughout the LabScam history, but the corporate names changed as the cases developed. Acquisitions brought earlier laboratory operations under new parents.

National Health Laboratories and Its President

National Health Laboratories agreed to a $100 million federal civil settlement alongside its December 1992 guilty plea. It also paid $10.4 million under agreements with state Medicaid investigators.

The company’s president also pleaded guilty to two felony counts, as the prosecutors’ account records. His individual plea sat alongside the company’s case over the added-test marketing practice.

Allied and Roche Became Part of LabCorp

National Health Laboratories acquired Allied Clinical Laboratories in 1994. It then merged with Roche Biomedical Laboratories in 1995 to form Laboratory Corporation of America. The company’s fiscal 1995 filing records the Roche merger. The LabCorp name therefore gathered several earlier operations into the later resolution.

The government alleged that the laboratories combined unusual tests with commonly ordered blood panels. In its November 1996 guilty plea, Allied admitted submitting false claims to Medicare and Medi-Cal.

The federal health care fraud report for fiscal 1997 described a $173 million civil settlement. LabCorp was the parent named in the settlement. A separate $20 million payment went to state Medicaid programs in April 1997.

SmithKline Reached Beyond the Added Panel

SmithKline Beecham Clinical Laboratories agreed to a $325 million civil settlement on February 24, 1997, according to the Justice Department’s announcement.

The allegations covered tests that were unnecessary, not ordered or not performed. They also included fabricated diagnosis codes and altered test codes. The ordering problem could therefore continue into the explanation for payment: a diagnosis entered into the billing system could make a claim appear supported by the patient’s condition.

The government also alleged referral incentives, including free computers, fax machines, personnel and paid rent. These allegations connected the laboratory’s bill to what it offered the physician’s office. The business relationship could help bring in the specimen, while the profile and coding practices determined what the laboratory billed afterward.

Whistleblowers filed the qui tam cases against SmithKline. Quest Diagnostics acquired the laboratory business in 1999, after the settlement.

Nichols Extended the LabScam History Beyond the Main Announcements

Nichols Institute was among the laboratories subpoenaed at the start of the national initiative.

The federal health care fraud report for fiscal 2001 recorded that Quest Diagnostics agreed to pay more than $13 million on behalf of Nichols in a settlement from the continuing LabScam investigation. The alleged conduct began in 1989 and ended shortly after Quest acquired Nichols in 1994.

The Compliance Response Reached the Order Form

The 1997 model compliance plan addressed the places where laboratory sales and billing could pull away from the physician’s decision. In June 1997, Laboratory Medicine published Model Plan Helps Laboratories Fight Fraud, explaining the Department of Health and Human Services inspector general’s voluntary recommendations.

The plan reached directly into the order form. Requisitions should give physicians space to document the medical necessity of each test. Annual notices should identify a profile’s components, the codes used to bill it and how Medicare would be charged.

That was a direct response to the gap exposed in Damon: the physician’s understanding of the package could differ from the bill submitted for it. Naming each component and explaining its payment treatment brought the extra test into view before it became a claim.

The paper also described physician acknowledgments for custom profiles and monitoring of existing standing orders. It reported a recommendation to retain and analyze annual use data for the laboratory’s top 30 Medicare tests. A change in a profile could become visible as a change in test volume. The order form and the utilization report were parts of the same oversight problem.

The plan recommended evaluating supervisors and managers on whether they promoted and adhered to compliance.

The Codes Disappeared, but the Ordering Pattern Returned

The August 1998 laboratory compliance guidance recorded a major change: the American Medical Association had deleted the automated multichannel chemistry codes from its 1998 coding handbook, and the Health Care Financing Administration no longer recognized them for payment. Physicians now had to order individually the tests that had made up a chemistry profile.

The guidance also addressed laboratories that continued to offer custom profiles. It recommended annual notices explaining the reimbursement for each component and the risk of ordering tests without medical necessity. The code structure changed, while the order form remained a focus of oversight.

The later Health Line Clinical Laboratories allegations show why that mattered. The government alleged that the company added specialized, expensive tests to commonly ordered panels so physicians would order them unwittingly. The alleged conduct ran from January 1996 through September 2003, spanning the coding change. The fiscal 2004 federal health care fraud report recorded a $10 million settlement with the United States and California.

The familiar panel still supplied the demand for the additional test. Changing the old codes had not removed the ability to build that demand into the order itself.

What Exposed the Added Tests

In LabScam, sales materials, claims data and physician interviews connected what a laboratory told physicians an order meant with what it billed the government. Damon’s sales materials and pricing explained why physicians accepted the added test. Its revenue projections explained what the laboratory expected to gain. The Meris allegations focused on what the machinery generated and what the laboratory chose to bill.

A person in sales, laboratory operations or billing may know where those accounts diverge, or who decided to keep using the profile after someone questioned it.

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. The useful starting point for a conversation with us is the connection you recognize between the order, the extra test and the payment.

When the Panel Hides the Extra Test

If you know how an extra test gets into a familiar order and onto a government bill, talk with our laboratory fraud whistleblower experts. We work with you to turn that knowledge into a focused case and bring in laboratory fraud whistleblower lawyers who understand ordering systems, medical necessity and healthcare billing. We stay beside you through the decisions that turn an insider’s account into a case worth pursuing.