Excluding Lab Competitors Helps Big Labs Grab Greater Market Share

With greater frequency, the largest labs are asking payers to exclude their competitors from contracts

CEO SUMMARY: Changes in healthcare are motivating health insurers and the nation’s largest lab testing companies to enter into contracts in which the large lab company lowers its lab test prices to the payer in return for having the payer exclude that lab company’s toughest competitors from the payer’s provider network. A number of lab consultants and executives say that this tactic is being used more frequently and the biggest lab firms are taking market share as a result.

CLINICAL LABORATORY CONTRACTING with many health insurers has always been somewhat predatory.But lab industry consultants now say that in the past 24 months the predatory nature of contracting has become overt.

In simplest terms, certain large health insurers and national lab companies are entering into provider contracts in which the national lab agrees to reduce lab test prices and the health insurer agrees to exclude that national lab’s toughest lab competitors from the insurer’s provider networks.

Increasing use of this tactic is altering the competitive market in lab testing services. Several consultants and lab executives say that Laboratory Corporation of America and Quest Diagnostics Incorporated have been grabbing market share with this tactic while also, whenever possible, leaving their lab competitors with no access to health plan contracts, the consultants say.

LabCorp and Quest Diagnostics are the nation’s largest clinical lab companies. All of the consultants and lab executives interviewed for this article asked not to be named.

According to several consultants, one example of this tactic occurred in recent months. Late last year, during negotiations with one large national health plan, the consultants say that Quest Diagnostics and LabCorp sought to outbid each other for the work.

“LabCorp and Quest both bid for the Humana work separately, so that no one could say there was any collusion involved,” stated one consultant. “In those separate conversations with Humana’s executives, each lab company offered lower test prices for most routine lab testing in exchange for access to Humana’s sizeable number of patients.”

To this point, the negotiating process was straightforward. It is what knowledgeable individuals say happened next that shows how the nation’s biggest lab companies are becoming more aggressive at restraining competitors.

“The Humana executives took the lowest price offered and awarded the contract to LabCorp,” stated a lab consultant who is often involved in managed care contracting activities. “Certainly that is what health plans do: They take the lowest price whenever they can.

“But then LabCorp went one step further,” she continued. “It handed over a list of labs that it wanted out of the Humana network. One lab company excluded from the Humana network as a result of these negotiations was BioReference Laboratories, Inc. (BRLI). A number of other labs were excluded as well, including small community labs and labs that do molecular testing.

Overtly Predatory Actions

“As we all know, contracting for lab services has always been somewhat predatory,” stated the consultant. “What’s changed is that the national lab companies are struggling just to stay even and health insurers are under pressure to manage costs and keep shareholders happy. So the tactic of excluding the competitors of the national lab in exchange for significantly lower lab test prices is happening more overtly and this Humana contract is an example,” the consultant said.

“With more health insurers willing to contract for lab testing services on this basis, a lot of lab organizations are destined to fail, particularly the smaller labs,” observed one lab executive familiar with other managed contracts similar to the Humana deal with LabCorp.

In the June 9 issue of THE DARK REPORT, we reported that health plans throughout the nation may be at war with labs. One lab consultant disagreed with this assessment, instead suggesting that it was the nation’s two largest labs that were at war with smaller labs and with specialty labs.

Issue of Payers vs. Labs

“I see the ‘payers at war against labs’ issue differently,” noted this individual. “If you ask the health plans if they are trying to put labs out of business, they would say, ‘No, we’re just trying to run our business and keep costs down at the same time.

“But make no mistake: LabCorp and Quest Diagnostics are out to crush labs, and the health plans benefit by taking the lowest lab test prices these two multibillion-dollar lab companies offer to them,” said the consultant. “Payers are willing to exclude competing labs in exchange for getting lower lab test prices. For health plans, it’s all about costs. The people in charge of lab contracting at payers simply need to reduce unit costs wherever possible. They don’t care which labs are in network and which ones are out.”

In Philadelphia recently, another example of the tactic of excluding competing labs as the quid pro quo for getting lower lab test prices happened. “LabCorp did a deal with Independence Blue Cross that was similar to the one LabCorp did with Humana,” noted an attorney familiar with details of this process. “By bidding extremely low prices for its routine tests, LabCorp won the bid. It then asked Independence Blue Cross to eliminate Quest Diagnostics and a well-known molecular lab from the network.

Contract with Molecular Lab

“All the while, executives from Independence Blue Cross were negotiating a new contract with that molecular testing company,” continued the attorney. “In fact, it was very late in the contract review stage. Both sides had seen the contract and suggested changes. It was all marked up and ready to go into a final version.

“When the contracting executive from the molecular testing company went to Independence Blue Cross to sign the contract, he was told the deal was off,” noted the lawyer. “This molecular lab has a lot to offer in terms of life-changing tests. But now, due to the payer’s contract with LabCorp, it is excluded as a network provider.”

“In situations such as these, is it a violation of antitrust laws to ask a health plan to exclude your competition or is this a legal method for establishing narrow networks?” asked one lab management consultant. “At the moment, the biggest lab companies are using this tactic to handcuff their toughest lab competitors to gain market advantage and to increase their market share.”

Do Agreements between Big Labs and Payers that Exclude Competing Labs Violate Antitrust Laws?

FEW PATHOLOGISTS AND LAB ADMINISTRATORS understand federal and state laws governing antitrust activity and monopoly behavior.

That is why many lab professionals believe it is unfair, if not illegal, when health insurers and big lab companies collude to exclude competing labs from the insurers’ provider networks in exchange for lower lab test prices from the national lab companies.

THE DARK REPORT contacted two university professors with knowledge of anti-trust law. Based on a general understanding of this tactic, and with the understanding that such cases would be complex to litigate in court, each provided an answer indicating that a health insurer and its contract lab company would need to carefully craft an agreement that complies with existing federal and state antitrust and anticompetitive trade laws.

“Normally, vertical exclusive contracts are addressed under the rule of reason,” stated Herbert Hovenkamp, Ph.D., J.D., Professor of Law at the University of Iowa. “This means that market power and anticompetitive effects need to be proven and this is a highly fact-specific inquiry. In general, exclusive contracts in health care delivery are common, but that does not mean that they are automatically legal.”

Professor Hovenkamp is said to be “the most influential antitrust scholar of our generation.” The New York Times has written that many consider Hovenkamp to be “the dean of American antitrust law.”

At the Tuck School of Business at Dartmouth University, Robert. G. Hansen, Senior Associate Dean and Professor of Business Administration, addressed this same issue. “The quick answer would be that this sounds like exclusive dealing, which can be illegal. However, it would need to be judged under the rule of reason analysis, looking at the overall impact on competition.

“Excluding competitors is something that looks bad on the surface,” continued Hansen. “This was part of the St. Luke’s problem with the Idaho merger case; by acquiring physician groups, the hospital would get de facto exclusivity on the referrals and close out other [competing] hospi- tals.” (See TDR, February 24, 2014.)

Similar to the tactic of a lab company getting a health insurer to exclude competing labs in exchange for lower lab test prices “hospitals of course do this too, by telling insurers that they have to leave other hospitals out of a network,” added Hansen. “This is a borderline practice… [and depending on the specifics of each contract or agreement, is] not going to be de facto or per se illegal.”

As both experts in antitrust law noted above, health insurers regularly negotiate contracts with one provider that exclude that provider’s competitors. Whether such deals violate federal and state antitrust and antibusiness laws depends on multiple and complex factors.



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