Antitrust Law Daily Wrap Up, ANTITRUST NEWS: Quest charged with using market power to charge inflated prices for lab tests, (Jan 30, 2015)

By Linda O’Brien, J.D., LL.M.

A diagnostic laboratory has exploited its monopoly position in the market for health plan and out-of-network patient billing for testing services by providing below-cost discounts to physicians in exchange for exclusive referrals of their other diagnostic testing, by colluding with two major private health insurers to suppress competition, and by aggressively acquiring competitors, according to a complaint filed in the federal district court of San Francisco (Eastman v. Quest Diagnostics Incorporated, January 29, 2015).

Quest Diagnostics is the largest provider of clinical laboratory services to hospitals, clinics, physicians, and patients in the United States. Colleen Eastman, Christi Cruz, and Carmen Mendez are consumers that paid Quest for routine diagnostic testing services under health plan/out-patient billing plans to fulfill co-payment and deductible obligations.

The complaint alleges that, since 2011, Quest has abused its market power by charging supra-competitive prices on the sales of routine diagnostic tests that are billed directly to health plans and out-of-network patients. First, Quest allegedly has leveraged its market dominance by discounting its pricing on testing that is billed to medical providers, often under capitated contracts, as much as 50 percent below cost in exchange for commitments by those medical providers to exclusively refer to Quest all additional testing done under plan/out-patient arrangements. These discounts function as “kickbacks” to the medical providers, the consumers charged. Because medical providers prefer “one stop shopping,” they refer all their routine diagnostic testing for plan-out-patient billing to Quest, regardless of whether Quest can provides out-patients and health plans with the lowest cost or higher quality testing.

Second, Quest has suppressed competition in the plan/out-patient billing market by aligning itself with two large private health insurers, Blue Shield of California and Aetna, Inc., the plaintiffs claimed. Quest allegedly has paid large sums to these health insurers to induce them to exclude competitors of Quest from their networks, which has made it difficult or impossible to compete with Quest. The health insurers allegedly pressure physicians not to refer plan/out-patient business to competitors of Quest or face retaliation by refusing to cooperate. Most physicians are not in a position to resist these threats, since they depend heavily on the membership in the large plan networks, the consumers contend.

Accordingly to the complaint, the third step in Quest’s scheme has been to acquire competitors aggressively. In 2003, Quest acquired its largest competitor, Unilab Corporation. In response to the acquisition, the FTC required Quest to make substantial divestitures to prevent suppression of competition. The mandatory divestitures failed to preserve competition. Even with the divestitures, the acquisition of Unilab allowed Quest to increase its market share from 17 to 53 percent, making it by far the largest competitor in the market.

Additionally, the high penetration of managed care in Northern California, the pervasiveness of exclusive capitated contracts between Quest and medical providers, the inducements offered to medical providers to refer business to Quest, and physicians’ preference for “one stop shopping” for testing services were alleged to suggest that Quest’s market share for plan/out-patient billing in Northern California is at least 70 percent. Moreover, barriers to entry and expansion make competitive entry and expansion difficult and costly in the plan/out-patient billing market, the complaint states.

The plaintiffs assert claims for monopolization in violation of Section 2 of the Sherman Act and violation California’s Unfair Competition Law, Unfair Practices Act, and Cartwright Act. The action seeks declaratory and injunctive relief, treble damages, pre- and post-judgment interest, costs of suit, attorneys’ fees, and any other just and proper relief.

The case is No. 3:15-cv-00415-EDL.

Attorneys: Colleen Duffy-Smith (Morgan Duffy-Smith & Tidalgo LLP), J. Ross Wallin and Silvia Ostrower (Grais & Ellsworth LLP), and R. Stephen Berry (Berry Law PLLC) for Colleen Eastman, Christi Cruz, and Carmen Mendez.

Companies: Quest Diagnostics Incorporated

News: Antitrust CaliforniaNews