Former and current executives of a Kosdaq-listed company have been referred to prosecutors en masse on charges of operating an illegal hospital through a corporate entity for 21 years and pocketing approximately 1 trillion won in illicit gains. This marks the largest-ever scale for an illegal hospital case, with no prior precedent of a listed company being involved in such a scheme.
According to the Seoul Metropolitan Police Agency’s metropolitan crime investigation unit, 31 individuals—including former and current executives of genomic molecular diagnostics company Labgenomics—were sent to the Seoul Central District Prosecutors’ Office on charges including violations of the Medical Service Act and fraud under the Act on the Aggravated Punishment of Specific Economic Crimes. Police stated that the ill-gotten gains include about 820.000 billion won in national health insurance benefits and roughly 60.000 billion won in medical care benefits. Adding another 200 billion won gained from COVID-19 tests, the total scale reaches the 1 trillion won range. Police raided Labgenomics’ headquarters and the residences of key suspects last July.
Labgenomics is accused of having non-medical executives and other individuals illegally operate a proxy hospital named Labgenomics Diagnostic Laboratory by borrowing the names of two medical doctors from 2004 until June of last year. An illegal hospital refers to an unauthorized medical institution run by individuals without medical licenses using borrowed medical credentials, making its very existence unlawful.
Unlike conventional proxy hospitals where individuals simply borrow a doctor’s name to operate and consult patients, this operational structure was complex and meticulous. When patients visited neighborhood clinics for consultations, those clinics collected samples and sent them to Labgenomics Diagnostic Laboratory. The laboratory performed the tests and reported the results back to the local clinics. The clinics then claimed national health insurance and medical care benefits from the National Health Insurance Service (NHIS) to receive payments. Afterwards, the local clinics settled accounts and paid a portion of the funds received from the NHIS back to Labgenomics according to a pre-arranged contract. Consequently, health insurance premiums paid monthly by citizens flowed into these illicit channels.
Additionally, Labgenomics Diagnostic Laboratory reportedly conducted COVID-19 specimen tests during the pandemic. Police estimate that illicit gains from this alone exceeded 200 billion won. According to NICE Information Service data, the laboratory located in Bundang-gu, Seongnam, Gyeonggi Province, opened in 2001 and recorded approximately 80.8 billion won in sales as of December 2023. A job portal described it as a company engaged in diverse diagnostic testing businesses, including COVID-19 testing. It is currently reported to be undergoing closure procedures.
Expanding Investigations and Legal Ramifications
Labgenomics, which can be considered the core entity, was established in 2002 and has provided genomic molecular diagnosis services such as prenatal malformation tests and cancer genetic tests. During the COVID-19 pandemic, diagnostic kits developed by the company gained approval from the Ministry of Food and Drug Safety, leading to record-high financial performance. Sales in 2021 reached approximately 200 billion won, and its stock price surged to the 40,000-won range in the summer of 2020. However, the stock price gradually declined, falling below 1,000 won last August, and the Kosdaq Market Headquarters designated the company as an administrative issue. The reporting team attempted to contact Labgenomics twice but received no response.
Attorney Chang Se-chang of Law Firm Daeyoon, who holds a medical license, emphasized, “If a commissioned testing institution operated in the form of a medical institution where non-medical personnel practically controlled its facilities, personnel, funds, and profits, it constitutes a Medical Service Act violation just like a regular illegal hospital. Not only the non-medical personnel who ran the hospital, but also the doctors who lent their names can face charges of violating the prohibition on license-sharing and acting as accomplices to fraud if they conspired with non-medical individuals.”
Systemic Challenges in Combating Illegal Medical Networks
Illegal hospitals have long been a persistent headache for the healthcare sector. They began to gain widespread attention in 2007 when a doctor at a hospital in Goyang, Gyeonggi Province, self-reported to the Korean Medical Association’s illegal medical reporting center. In 2018, the issue expanded beyond individual unlawful acts into a major institutional disaster when it was revealed that Sejong Hospital in Miryang—where a fire caused 47 deaths and 145 injuries—was operated as an illegal hospital.
More than two decades later, the illegal hospital problem remains an ongoing issue. The Bukbu Police Station in Gwangju announced on the 1st that it apprehended five individuals, including a traditional Korean medicine hospital director, and detained one, on charges of violating the Medical Service Act and fraud for illegally acquiring 2.4 billion won in health insurance benefits by attracting patients through a cash-back scheme that returned a portion of treatment costs. Last August, four administrative directors and others at an illegal hospital in Haeundae-gu, Busan, were indicted for unlawfully acquiring approximately 1.3 billion won in health insurance benefits.
Because illegal hospitals are difficult to recover criminal proceeds from even when caught, they are pointed out as a primary cause of health insurance budget depletion. According to the NHIS, 1,805 illegal institutions (illegal hospitals and license-borrowing pharmacies) were uncovered between 2009 and last year, with recovery decisions totaling approximately 2.91 trillion won. Among these, the actually collected amount stood at about 256.3 billion won, reflecting a meager recovery rate of 8.79%. The NHIS explained that the low recovery rate is due to over 70% of delinquent debtors having no property, alongside suspects concealing and disposing of assets during lengthy investigations. Meanwhile, the health insurance contribution rate for workplace subscribers gradually increased from 6.67% in 2020 to 7.19% this year.
