By Kirell Lakhman

A bipartisan pair of Senators is investigating LabCorp and Quest for alleged Medicare and Medicaid fraud in general, and so-called "pull-through" schemes in particular.

On Tuesday, Senate Finance Committee Chairman Max Baucus and Charles Grassley, ranking member of the Senate Judiciary Committee, sent the reference labs letters requesting detailed financial information aimed at finding links to pull-through agreements with Aetna, Cigna, or UnitedHealthcare, which received similar letters and have fallen under the same scrutiny.

The investigation aims to track what the Senators claim are "billions of dollars" in Medicare and Medicaid overpayments, but its focus suggests the legislators are more interested in whether LabCorp and Quest participated in pull-through schemes with payors.

Under such agreements, a clinical lab offers a payor below-market prices for tests in exchange for a promise that in-network physicians will send samples or test orders to the lab.

For reference lab giants like LabCorp and Quest, which together control about half the annual $25 billion lab-testing market, such deals in theory could be lucrative because the labs have the margin headroom to trade lower test prices for greater testing volume.

Pull-through deals have been illegal since 1972 when Congress passed the Federal Anti-Kickback law. Although it doesn't mention the phrase "pull-through," the statute states "anyone who knowingly and willfully receives or pays anything of value to influence the referral of federal health care program business, including Medicare and Medicaid, can be held accountable for a felony." [Emphasis added.]

With the Senate's investigation in mind, "price cutting" as it is related to pull-throughs can be synonymous with "receiving or paying" something of value.

Violators can be punished by up to five years in prison, criminal fines up to $25,000, administrative civil money penalties up to $50,000, and could be excluded from participating in federal healthcare programs, the law states.

The last penalty could hurt the two reference labs more than the fines because around 25 percent of each company's annual revenue comes from Medicare and Medicaid reimbursement.

To be sure, the Senators' statement barely mentions Medicaid or Medicare fraud — a completely different crime typically defined by overbilling — suggesting the investigation is more interested in uncovering pull-through schemes. (Click here to see the statement and accompanying letters to LabCorp and Quest.)

However, the investigation could meander into Medicare/Medicaid fraud — which appears to be a growing phenomenon — though not directly because of Baucus and Grassley's apparent intentions. Both LabCorp and Quest have recently been accused of participating in such schemes (see here and here).

Indeed, lawyers I've spoken to since Baucus, the Democrat from Montana, and Grassley, the Iowa Republican, unveiled their investigation are fairly certain the hunt will be almost exclusively for pull-throughs.

"Let CMS worry about Medicare fraud," the Senators' are likely thinking, the lawyers told me. Pull-throughs, apparently, are more sexy.

This is fine. Such sweetheart schemes, a kind of backdoor monopoly, deserve to be investigated because they not only threaten competition, but they endanger quality and lead to poor outcomes. Throw Medicare and Medicaid patients into the mix and you're in for more problems from the tired, creaky programs.

If I were LabCorp CEO David King or Quest's outgoing chief Surya Mohapatra, I'd take the investigation seriously. It's not an election year, which means they can't ascribe it to political chest-thumping.

The companies have until Dec. 1 to respond to Baucus and Grassley's requests. Spokespeople for Quest or LabCorp did not immediately respond to this post.

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