$15 million suit shows that liability is inherited

A former lab manager is $1.5 million richer after winning a $15 million False Claims Act suit against the New Jersey clinical lab Quest Diagnostics, where he worked. The irony: Quest is paying for the sins of Damon Clinical Labs, in an expensive illustration of the legal principle that acquiring a company means you acquire its legal problems.

Quest was not accused of any wrongdoing per se. The company’s crime was that it was spun off a year ago from Corning, which had previously acquired Damon Clinical Labs. Damon paid $200 million in 1996 to settle criminal and civil charges in one of the biggest cases against a clinical lab.

The convoluted whistle-blower suit charged that from 1987 to 1996, Damon had joined with Community Psychiatric Services (which later spun off into Vivra Inc.) to set up a joint venture lab in Smyrna, GA, CPC and later Vivra referred all their ESRD lab tests to the lab, and split the profits with Damon, according to Gareld Kneepkens, the whistle-blower who was the former general manager of the Smyrna site. The suit accused Quest, or rather its predecessors, of:

- inserting secondary diagnosis codes on Medicare claims from the joint lab from 1990 to 1995, even though the lab didn’t obtain those diagnoses from the treating physician or medical documentation.

- deliberately splitting routine 19- or 20-test panels into two panels for which blood was drawn on two separate days. The Smyrna lab was not entitled to payment for the second Chem 7 panel.

- adding non-routine tests to weekly and monthly panels of routine tests for ESRD patients, regardless of whether they were medically necessary.

- deceiving HCFA and carriers. For example, in 1987 Damon and the joint lab told the Georgia carrier that Damon had a contract "to perform certain laboratory work for a national dialysis company. The carrier was not told that the new laboratory was a joint venture between Damon and the dialysis company." Employees of the joint lab also were told that physicians wanted tests split over two days.

As is customary in these cases, Quest admitted no wrongdoing, but said it settled to avoid the expense of litigation. Another reason may have been that Corning is obliged to indemnify Quest for the $15 million cost of the settlement, as well as any other government claims that arose before December 1996. Quest won’t be excluded by OIG, but the settlement specifically does not absolve Damon, Vivra, or Community Psychiatric Centers of any liability. Quest still is operating under a corporate integrity agreement with OIG.

Quest’s compliance program now includes biennial audits of all regional labs, according to a company statement. In addition, all employees receive an initial four hours of compliance training plus an hour of supplemental training annually. "Particular emphasis is placed on prohibited sales and marketing activities," and offering inducements to referrals, says Quest. The company also maintains a compliance hotline.

The settlement doesn’t totally end Quest’s legal headaches, especially in terms of private insurers whom Damon might have overcharged for lab tests. "The company has received notices of claims from a number of private payors relating to billing issues similar to those that were the subject of the government settlements with MetPath and Damon," says Quest’s 1997 10-K. The 10-K also acknowledges that since 1992, Quest or its predecessors have settled 14 private actions relating to the government’s investigation, for a total of $12 million. Corning is obligated to indemnify Quest for part of those settlements.