People v. Duz-Mor Diagnostic Laboratory, Inc.

• Decision Date: 11 December 1998
• Docket Number: DUZ-MOR,No. B113282,B113282
• Citation: 80 Cal.Rptr.2d 419,68 Cal.App.4th 654
• Court: California Court of Appeals Court of Appeals
• Parties: , 98 Cal. Daily Op. Serv. 9082, 98 Daily Journal D.A.R. 12,683 The PEOPLE, Plaintiff and Appellant, v.DIAGNOSTIC LABORATORY, INC. et al., Defendants and Respondents.

Page 419

80 Cal.Rptr.2d 419

68 Cal.App.4th 654, 98 Cal. Daily Op. Serv. 9082,

98 Daily Journal D.A.R. 12,683

The PEOPLE, Plaintiff and Appellant, v. DUZ-MOR DIAGNOSTIC LABORATORY, INC. et al., Defendants and Respondents.

No. B113282.

Court of Appeal, Second District, Division 5, California.

Dec. 11, 1998.

As Modified Dec. 24, 1998.

Review Denied Feb. 24, 1999.

Daniel E. Lungren, Attorney General of the State of California, George Williamson, Chief Assistant Attorney General, Thomas A. Temmerman, Senior Assistant Attorney General, Ronald A. Reiter, Deputy Attorney General, and John Dratz., Jr., Supervising Deputy Attorney General, for Plaintiff and Appellant.

Patric Hooper, Los Angeles, for Defendants and Respondents.

ARMSTRONG, J.

This case concerns the marketing and billing practices and procedures of clinical laboratories which perform services for Medi-Cal beneficiaries. The Attorney General, acting on behalf of the people of the State of California, appellant here, alleged that one such laboratory, Duz-Mor Diagnostic Laboratory, violated the Unfair Competition Act ¹ ("the Act") by charging discounted fees to certain patients, by paying commissions to an independent marketing contractor, and by "unbundling" Medi-Cal billing, so that certain tests which should have been billed together were billed separately. Appellant also alleged that the use of unbundled billing violated the False Claims Act, Government Code section 12651. The trial court found that none of the practices were unfair and that none violated any law, and thus that appellant had not proved a violation of the Act or the False Claims Act. We agree with many of the trial court's conclusions, but do find that with regard to one of the factual allegations, concerning commissions paid to an independent contractor for marketing services, appellant proved a violation of law, and thus of the Act. We therefore reverse the judgment.

SUMMARY

Under the Act, "unfair competition" means "any unlawful, unfair or fraudulent business act or practice...." (Bus. & Prof.Code, § 17200.) A business practice constitutes unfair competition if it is forbidden by any law, "be it civil or criminal, federal, state, or municipal, statutory, regulatory, or court-made" (Saunders v. Superior Court (1994) 27 Cal.App.4th 832, 839, 33 Cal.Rptr.2d 438) or if it is unfair, that is, if it "offends an established public policy or ... is immoral, unethical, oppressive, unscrupulous or substantially injurious to consumers." (Podolsky v. First Healthcare Corp. (1996) 50 Cal.App.4th 632, 647, 58 Cal.Rptr.2d 89, internal quotations and citations omitted.)

Here, appellant alleged that respondents Duz-Mor Diagnostic Laboratory, a licensed clinical laboratory, Duz-Mor owner and CEO Joe Morehead, and Duz-Mor controller Zaven Aghankani engaged in a number of unfair business practices relating to Medi-Cal. Appellant alleged that the offer of discounted prices to certain patients and the payment of commissions to an independent marketing contractor violated Welfare and Institutions Code section 14107.2, subdivision (b) ² and Judgment was entered in favor of respondents after court trial. In response to a timely request by appellant, the trial court issued a statement of decision.

                Business and Professions Code section 650 3 and a number of administrative regulations, and that the use of "unbundled" billing for certain tests violated [68 Cal.App.4th 659] Government Code section 12651, subdivision (a), the False Claims Act. 4  Appellant also contended that all those practices were unfair as that term is used in the Act.  Appellant sought civil penalties of not less than two million dollars, restitution of sums unlawfully obtained, and injunctions
                

The statement of decision specified that the ruling was based in part on a finding that two of the above-cited statutes, Welfare and Institutions Code section 14107.2 and Business and Professions Code section 650, must be construed to require a specific intent to violate the law, in order to avoid those Constitutional problems which fall under the heading of "void for vagueness." In so finding, the court relied on case law interpreting the federal Medicare anti-kickback statute, on which Welfare and Institutions Code section 14107.2 is modeled. For reasons set forth later in this opinion, we cannot agree that the statutes can be so read.

After review of all the evidence and arguments, we find that appellant did prove a violation of the Act, since the payment of commissions to a marketing contractor violates Welfare and Institutions Code section 14107.2. However, appellant did not prove that the practice of offering discounted payments to certain patients, or the "unbundled" billing, violated any law or administrative regulation, or was unfair as that term is defined in the Act.

STANDARD OF REVIEW

The facts of this case are in large part undisputed, and were the subject of findings of fact by the trial court. Where Interpretation and application of statutes is a question of law, subject to our independent review. (Service Employees Internat. Union v. County of Los Angeles (1990) 225 Cal.App.3d 761, 774, 275 Cal.Rptr. 508.) The question of whether a practice is unfair under the Act is such a question, and we consider the issue de novo. (Olsen v. Breeze, Inc. (1996) 48 Cal.App.4th 608, 621, 55 Cal.Rptr.2d 818.)

appellant does challenge the sufficiency of the evidence to support a finding we are bound by the substantial evidence rule, and must accept as true all evidence tending to establish the correctness of the finding as made. Every substantial conflict in the testimony is resolved in favor of the finding. (Jacoby v. Feldman (1978) 81 Cal.App.3d 432, 442, 146 Cal.Rptr. 334.)

FACTS

In summarizing the facts, we rely on the trial court's extensive findings of fact. We summarize only those facts necessary to a determination of the legal issues on appeal, and generally do so as part of our review of each legal issue. We begin, however, with the preliminary facts necessary to an understanding of the case.

Duz-Mor is a clinical laboratory licensed by the state's Department of Health Services ("the Department") to perform diagnostic testing of human blood, urine, and other specimens. Duz-Mor is also a Medi-Cal provider. The Medi-Cal program is administered by the Department, and in order to become a provider, a laboratory must apply to the Department and be accepted by that agency.

Clinical laboratories such as Duz-Mor may perform tests only when tests are ordered by a physician. Where patients will pay for their own tests, and for patients with insurance, physicians may bill the patient or third-party payor. The physician may not mark up the laboratory charge. (Bus. & Prof.Code, § 655.5.) Pursuant to Medi-Cal requirements, Duz-Mor billed Medi-Cal directly for tests performed for Medi-Cal beneficiaries.

Between 65 and 70 percent of Duz-Mor's business involved Medi-Cal billing and an additional 10 to 15 percent involved Medicare billing. Duz-Mor also had private-pay patients, HMO patients, and business which involved direct billing to patients.

The rules for Medi-Cal billing are found in Medi-Cal regulations and manuals. Medi-Cal reimburses laboratories such as Duz-Mor at fixed rates which are substantially less than retail rates. Under a regulation promulgated by the Department, Medi-Cal reimburses for laboratory tests at the least of four prices: the amount billed, the charge to the general public, Medicare's maximum allowance, or the amount set out in the regulation. (Cal.Code Regs., tit. 22, § 51529, subd. (a)(2).) On average, Medi-Cal reimbursement rates are 60 percent of the charges on Duz-Mor's schedule of fees.

The Department conducts routine audits of the amounts paid to providers like Duz-Mor for services to Medi-Cal beneficiaries, and may seek the return of any overpayment. (Welf. & Inst.Code, § 14170 et seq.) A provider is entitled to an administrative review of audit findings and to judicial review of the results of the administrative hearing. (Welf. & Inst.Code, s14171, subd (j); Civ.Code, s1094.5; Physicians & Surgeons Laboratories, Inc. v. Department of Health Services (1992) 6 Cal.App.4th 968, 973, 8 Cal.Rptr.2d 565.)

It was undisputed at trial that Duz-Mor's work was of a high quality. It was also undisputed that two of the practices challenged in the complaint, the payment of commissions for marketing services and the practice of giving discounts to physicians' private-pay patients, were common in the industry.

DISCUSSION

I. It is Neither Illegal nor Unfair for a Clinical Laboratory to Offer Discounts to Physicians' Private-Pay Patients

A. Facts

The trial court found that many physician clients of Duz-Mor negotiated for discounts for tests performed for patients who paid for their own tests. The discount varied from doctor to doctor, and could amount to a reduction of 50 to 80 percent off Duz-Mor's fee schedule. In compliance with a Department directive, Duz-Mor informed the physicians that discounts must be passed along to patients. Duz-Mor's competitors gave similar discounts. Duz-Mor gave the discounts in order to compete with other laboratories, which also offered discounts and which sought such business from the same physicians.

Evidence at trial also established that HMOs negotiated for discounts for their patients, and that testing for private-pay patients constituted a small percentage of Duz-Mor's work.

B. Contentions

1. Unfair

The test of whether a business practice is "unfair" for purposes of the Act "involves an examination of that practice's impact on its alleged victim, balanced against the reasons, justifications and motives of the alleged wrongdoer. In brief, the court must weigh the utility of the defendant's conduct against the gravity of the harm to the alleged victim.... An unfair business practice occurs when the practice offends an established public policy or when the practice is...