SmithKline Lab to Pay Record $1.5-Million Fine : Health Care: The firm allegedly violated a federal law that prohibits payments to doctors to encourage referrals of Medicaid and Medicare patients.

SmithKline Beecham Clinical Laboratories Inc. has agreed to pay $1.5 million to settle a federal investigation of alleged kickbacks for physicians who referred Medicare and Medicaid business to the company, the government said Thursday.

The Department of Health and Human Services’ inspector general found that more than 100 physicians were investors in three California laboratories managed by the company, including facilities in Pasadena and Santa Ana.

The inspector general’s office said the arrangement under which doctors were recruited as investors, and lab profits were distributed to those same doctors, violated a federal law prohibiting payments intended to induce referrals of Medicaid and Medicare patients.

The $1.5-million settlement was the largest ever made under the law, the inspector general’s office said.

SmithKline spokeswoman Tobey Dichter said the settlement “is an agreement that was reached to avoid costly litigation and disruption to our business.”

“It is not an admission of liability in any way. We say there was no wrongdoing. We believe it is an ambiguous statute,” she said.

The inspector general proposed that the three laboratories be barred permanently from participating in Medicare, Medicaid, Social Security and California health-care programs and that some individuals and companies linked to the labs be barred for several years.

The inspector general’s office said the arrangement cost the federal health-care programs an unspecified amount of money.

“Our studies have shown that with this type of arrangement, there is a significant amount of overutilization by those doctors,” said D. McCarty Thornton, chief of litigation in the inspector general’s office. Doctors ordering unnecessary tests “does cost the program significant amounts of money,” he said.

The company agreed to cooperate in the continuing investigation. The inspector general’s office said documents on agreements that the company has with 56 other physician-owned laboratories indicate that there may be other illegal arrangements.

“Physicians referring (business) to entities in which they have an ownership interest and contractual arrangements such as those involved here are very common in the industry,” the inspector general’s office said in a statement.

The labs covered in the settlement were established by the Hanlester Network of Santa Ana. SmithKline Beecham Clinical Laboratories Inc., based in King of Prussia, Pa., contracted to manage the facilities.

Under the inspector general’s recommendation, the Pacific Physicians Clinical Laboratory Ltd. of Santa Ana, the Omni Physicians Clinical Laboratory Ltd. of Pasadena and the Placer Physicians Clinical Laboratory Ltd. of Sacramento would be barred from the various government health-care programs.

Patric Hooper, a Los Angeles lawyer representing the three labs, said they will challenge the HHS attempt to bar them from the programs on the ground that the department lacks authority to take the action.

He added that payments to the physician-investors were based on amount of ownership, not on referrals, and that the investment was marketed to physicians because they “have an interest in maintaining the quality of the laboratory to which they send a specimen.”