Troubled Calloway Laboratories Shut Its Doors

Calloway has gone away. The troubled Calloway Laboratories abruptly shut its doors on Oct. 16. The closure of the Woburn, Mass.-based lab put about 240 employees out of work.

Calloway Chief Executive Officer Gail Marcus did not respond to e-mail and telephone queries to confirm the closure, but it was reported by several publications.

The lab also issued a statement through Ball Consulting Group, a well-known crisis PR firm in New England, that Calloway was closing "due to unforeseen circumstances beyond the company's control." Employees were paid through Oct. 16, would continue to receive benefits through the end of October, and apparently would maintain control of any accrued retirement funds, according to the statement.

Calloway, which focused on toxicology and substance abuse testing and was founded in 2003, has been in a crisis PR mode for much of the past three years.

In 2012, the company paid $20 million to the state of Massachusetts and agreed to enter a corporate integrity program to settle allegations that straw companies were used to funnel payments to managers of sober living homes where involuntary drug testing takes place. Those venues then allegedly proceeded to overtest their residents and those excess tests were billed to the state's Medicaid program.

Former Calloway CEO Arthur Levitan and former Chief Operating Officer Patrick Cavanaugh pleaded guilty to state charges connected to the scheme, as did the owner of the sober homes. Levitan and Cavanaugh received probation and are barred from being involved in any health care program in Massachusetts until 2016.

Not long after the bribery scheme surfaced, Calloway was acquired by equity firm Ampersand Capital Partners, which installed Marcus and a whole new management regime. But Ampersand still could not completely steer the company out of trouble.

Last year, Calloway agreed to pay $4.7 million to the federal and West Virginia governments that it allegedly defrauded by billing Medicare and the West Virginia Medicaid program for pathology services bundled into urine tests. The venues that ordered the urine tests never requested the pathology services and they were never performed. Instead, Calloway undertook a medical review for each test, but such reviews are not a covered service under the Medicaid program. The alleged false billing took place between March 2009 and April 2013, prior to Ampersand taking ownership, officials said. The settlement was the largest ever for health care fraud in West Virginia history.

The exposure of Calloway's illicit billing practices under its prior regime apparently not only halted the company's growth in its tracks but also dimmed its prospect for long-term survival. Its workforce was about 500 employees prior to the settlements; it was less than half of that at the time it closed.

Additionally, the laboratory sector may be entering what is best described as peak toxicology. That kind of testing has been one of the few areas of the laboratory business that has experienced brisk growth in recent years. However, it is facing potentially steep cuts under the recently released Clinical Laboratory Fee Schedule (CLFS). Under the new schedule, some industry observers say toxicology could be facing reimbursement reductions of 50 percent or more from Medicare in the coming years, cuts that will no doubt be replicated by private payers.

Calloway may have become one of the first victims of the hard new facts facing the toxicology niche. The changes to the CLFS "were probably its coup de grace," remarked one lab executive familiar with the pending payment cuts.

Takeaway: Calloway could not recover from its prior wrongdoing and pending deep cuts in reimbursement for toxicology testing.