Pharmalot: So you run a major CRO. How did you become a whistleblower against the big labs? Baker: I used to be with Corning Glass Works and ran their lab division – the clinical labs and the CRO area – which were spun off into Quest Diagnostics and Covance, respectively. I wanted to run my own company and left and bought Metwest, a lab company in California, from Corning and restructured that and kept the California market in a company renamed Unilab. And it was in that market that I saw the practice of pull through. This was a highly discounted price that was offered to a managed care health plan on the understanding that the insurer would exert pressure in whatever way on their member doctors to give the rest of their lab work to this lab offering the deeply discounted price. And that expression became known as pull through.
The biggest component is Medicare Part B; lab work for people who are ambulatory. These are people who are going to see their doctors, as opposed to hospital lab work. I thought the practice was illegal and also bad business and tried to stop it. But I was not successful and ended up leaving the company. And I sold the company to a private equity firm. The private equity firm put in a new management team and used the same strategy very aggressively. Three years later, they sold it to Quest. We sold for $6 a share and they sold to Quest for $23 a share.
Pharmalot: That was a tidy profit. Baker: Well, the reason the price was so high was because they made substantial gains in business due to this practice of pull through, which I found again not right and the laws are very explicit. You should be offering the government a compensatory discount. The discounted prices were so low, they were actually losing cash on those contracts. But by getting pull through from government work they were making money.
I returned to England and eventually developed another company. What got me going was a tax demand for $1.8 million from the IRS and it was all because the accountants at Unilab basically filled in that the shares I received as capital and treated as a capital gain were in fact stock options and therefore subject to income tax. And Quest now owned the company and refused to put it right. And that was very upsetting and that got me re-engaged. I was able to resolve the issue with the IRS, but I got myself to the point where I didn’t like the practice and felt I should file a whistleblower case.
Pharmalot: So if the tax issue hadn’t come up, you wouldn’t have gotten involved? Baker: Well, no. But since then, we’ve had the case filed (in 2005) and under seal for a very long time (read the lawsuit). I also filed a parallel case against the other large lab doing the same practice, LabCorp (read the lawsuit). The problem we are now facing is the Justice Department is reluctant to intervene. And for this case to get resolved, it is more likely if the government is part of the equation. The government lawyers primarily working on the case with me are of the mind this is a valid case. There’s no lingering doubt. But the head office doesn’t, and we can’t get them to agree on that and we don’t know why and it’s disturbing.
Then we have a case that’s almost identical in California to do with Medicaid and it recently settled for $300 million. Quest paid $249 million and LabCorp paid $50 million. They had been issuing deep discounted prices on the understanding to get not just Medicare, but also MediCal (the California Medicaid program), and the state wanted that money. But why isn’t the federal government doing anything here? The amount of money is substantial in the context of all the other issues facing healthcare.
Pharmalot: Yet, you're proceeding... Baker: Yes, I intend to proceed. To me, its common sense. To do nothing is dereliction of duty... You have a law that says the government should receive the best price and they’re breaking that law. Medicare is paying too much money... I was brought up to believe a bully should be faced up to. And what I believe is going on here is bullying. To me, the issue is there’s something going on and I think it should be sorted out…. Quest showed no desire to change its ways… But they say they did nothing wrong. If so, then why did they pay the state of California? Because they did nothing wrong? Makes no sense to me.
Pharmalot: I recall you were equally adamant in facing down the animal-rights activists. Baker: Yes, for four years I was fighting a bunch of activists and I’m glad to say I’ve succeeded and they’re all in prison now. There were many acts of horrible brutality... From 2001 to 2004, there was a very focused attack just on us… The specific purpose was to put us out of business… We succeeded in having laws changed where they were intimidating third-party suppliers of services to us... We were losing the ability to run our company… And if you’re now caught trying to do that, you’ll be put in jail immediately… Am I a target still, yes? These are horrid people. Their ability to hurt us was driven by the Internet... They were able to whip a story and get gullible people to act as foot soldiers… Those soldiers have moved on and realized they can get locked up, too…