Antitrust Law Daily Wrap Up, ANTITRUST—N.D. Cal.: Hub-and-spoke conspiracy involving diagnostic testing lab, insurers not adequately alleged, (Jun 26, 2013)

By Jeffrey May, J.D.

Independent medical diagnostic testing laboratories failed to adequately allege that they were excluded from the market as a result of anticompetitive agreements between a national competitor--Quest Diagnostics, Inc.—and three health insurers—Blue Shield of California Life & Health Insurance Co. (BSC), Blue Cross and Blue Shield Association (BCBSA), and Aetna, Inc., the federal district court in San Francisco has ruled (Rheumatology Diagnostics Laboratory, Inc. v. Aetna, Inc., June 25, 2013, Tigar, J.).

Four California medical diagnostic laboratories engaged in the “commercial reference laboratory business” brought the action, alleging a hub-and-spoke conspiracy in which insurers conspired with one another, in concert and common purpose with Quest. The plaintiffs also alleged that Quest attempted to monopolize the market for diagnostic testing services through predatory pricing practices.

The court rejected the allegations of a horizontal conspiracy. The plaintiffs merely alleged three “three ‘bilateral agreement,’ executed by each insurer and Quest, wholly independent from one another.” The court explained that a hub-and-spoke conspiracy must have a “rim,” which required an “agreement or understanding between and among the spokes that the other spokes would cooperate in the conspiracy.” However, the complaint did not allege that any insurer knew of the others’ contracts with Quest.

The plaintiffs also failed to allege a vertical agreement between BCBS and Quest based on a BCBS policy change that caused independent laboratories to lose business to laboratories with in-network status with a particular BCBS plan. The plaintiffs contended that the change in policy drove the Blue Plans in every state or territory into nearly exclusive arrangements with Quest, which had a national presence. The only factual allegation to support the vertical agreement was that Quest vetoed a letter protesting the policy change drafted by members of the American Clinical Laboratory Association. Even if the allegation were true, it did not serve to impute knowledge of or participation in Quest’s conduct to BCBS, the court explained. The plaintiffs were, however, granted leave to amend.

Although the defendants did not contest allegations of vertical agreements between Aetna and Quest, and BSC and Quest, the plaintiffs failed to allege that these “exclusive dealing arrangements” substantially foreclosed competition to support a conspiracy claim subject to rule of reason analysis. The plaintiffs were, however, granted leave to amend their complaint regarding the impact of an agreement under which Quest allegedly offered BSC a ten percent discount in exchange for the exclusion of two of its competitors from BSC’s network and an alleged agreement under which Quest served as Aetna's “preferred national provider,” which purportedly resulted in low or no deductibles or co-payments for patients whose lab work was referred to Quest by their treating physicians.

Monopoly Claims. Monopolization and attempted monopolization against Quest were insufficiently stated, the court also ruled. According to the plaintiffs, Quest engaged in predatory pricing practices. Quest allegedly contracted with physician groups on a “loss leader” capitated basis—a fixed price charged by Quest for all lab tests, per patient, on a monthly basis—in order to exclude competition from the lab testing markets. The plaintiffs alleged that Quest lost money on the capitated rates, but made up the difference because physicians and Independent Physician Associations agreed to refer all their lab testing business, including the lucrative fee-for-service patients, to Quest.

The plaintiffs alleged that Quest had a 70 percent market share of the outpatient testing market in Northern California, that it was the dominant diagnostic testing laboratory nationally, and that it had sufficient market power to induce Aetna and BSC to agree to terminate diagnostic testing providers at its behest. However, these allegations, by themselves, were insufficient to establish that Quest has monopoly power in the relevant markets, the court ruled.

The court also determined that the plaintiffs failed to allege that Quest willfully acquired or maintained its monopoly power, because there were “no allegations regarding Quest’s position in the relevant markets over time.” In addition, they failed to allege that Quest’s allegedly anticompetitive conduct presented a “dangerous probability of success” in monopolizing the relevant markets.

California Unfair Practices Act Claims. A claim that Quest's capitated rate contracts were provided at “below cost” in violation of the California Unfair Practices Act (UPA) also were dismissed. The plaintiffs' allegation that Quest engaged in “loss leader” pricing on capitated contracts in exchange for more lucrative fee-for-service business was too conclusory to state a plausible UPA claim. The plaintiffs did not set out the basic elements of their UPA claim, because they did not allege Quest’s sales prices, costs, or cost of doing business, according to the court.

The case is No. 3:12-cv-05847-JST.

Attorneys: Anne Marie Murphy (Cotchett, Pitre & McCarthy, LLP) for Rheumatology Diagnostics Laboratory, Inc. Craig Ellsworth Stewart (Jones Day) for Aetna, Inc. Christopher John Kelly (Mayer Brown LLP) for Blue Shield of California Life and Health Insurance Co. Ryan M. Sandrock (Sidley Austin, LLP) for Quest Diagnostics, Inc. Jean M. Doherty (Jenner and Block LLP) for Blue Cross and Blue Shield Assn.

Companies: Aetna, Inc.; Blue Cross and Blue Shield Assn.; Blue Shield of California Life & Health Insurance Co.; Quest Diagnostics, Inc.; Rheumatology Diagnostics Laboratory, Inc.

Cases: Antitrust CaliforniaNews