Judge Issues Split Ruling on Quest’s Motion to Dismiss

Lawsuit filed by uninsured patients alleges Quest overcharged them for their clinical laboratory tests

CEO SUMMARY: There have been significant developments in the case against Quest Diagnostics for allegedly overcharging uninsured patients for clinical laboratory tests. This second section covers the federal judge’s most recent decisions, along with an assessment of how the plaintiffs and the defendent each received favorable rulings.

First of Two Parts: Section Two

IN THE FEDERAL LAWSUIT filed against Quest Diagnostics (Quest) by uninsured patients who claim they were overcharged for lab tests Quest performed, the judge has made several rulings and has allowed the lawsuit to move forward.

This second section in part one of our two-part series covering this case explains the latest developments that specifically involve Quest Diagnostics.

In September, U.S. District Judge Esther Salas addressed issues Quest raised in an earlier motion to dismiss all charges in the lawsuit brought by 19 plaintiffs from 11 states. In her order, Salas denied some of Quest’s motions to dismiss claims in the plaintiffs’ amended complaint and granted some of Quest’s motions to dismiss.

Most importantly, however, Salas found that the plaintiffs alleged sufficient facts to support their theory of unfair trade practices based on excessive pricing.

As mentioned in the previous intelligence briefing, both Quest and Laboratory Corporation of America (LabCorp) face lawsuits in which plaintiffs complain that the companies overcharged them for laboratory testing services by two to three times—and in some instances as much as 10 times—more than what the companies charged consumers whose health insurers fully covered their tests.

Federal Lawsuit

The lawsuit against Quest was filed in U.S. District Court in New Jersey. In that lawsuit, the plaintiffs’ attorney, Robert C. Finkel of the firm Wolf Popper, cited 14 counts under causes of action. In count one, the plaintiffs seek a declaratory judgment based on principles of implied contract, and in count two, they charge breach of implied contract or unjust enrichment on behalf of some plaintiffs.

Counts three through 14 relate to violations of consumer protection laws and of unfair competition laws in Arizona, California, Colorado, Florida, Illinois, Maryland, Michigan, Nevada, New Jersey, North Carolina, and Pennsylvania.

The most important part of Salas’ opinion involves some of the plaintiffs’ consumer-protection claims. The judge dismissed consumer protection charges that plaintiffs from New Jersey and North Carolina brought, but she found that the plaintiffs from the nine other states alleged sufficient facts to support their theory of unfair trade practices based on excessive pricing.

“Plaintiffs allege that the prices billed by Quest were 500% to 1,000% more than the prices paid by 99% of Quest’s customers,” Salas wrote. Therefore, she denied Quest’s motion to dismiss the plaintiffs’ claims based on a theory of excessive pricing.

Implied-in-Fact Contract

On the issue of breach of an implied-in-fact contract, Quest argued that the plaintiffs failed to state a claim for breach of implied-in-fact contract because they did not allege, “that the contract between the parties included an agreement to charge uninsured patients the same rates as insured patients,” she wrote.

On this issue, the judge made an important ruling regarding the plaintiffs’ claims that they did not know what they would be charged before the testing was done. It is important for all clinical laboratories to understand this ruling.

“Quest argues forcefully that plaintiffs’ theory based on a ‘missing’ price term has not only been rejected by the Third Circuit [court], but also by other federal and state courts, each of which concluded that the ‘chargemaster’ rates were incorporated into the parties’ service agreements and were thus properly passed on to un- or under-insured plaintiffs,” she explained.

In its filing in this case, Quest cited case law supporting its argument. Salas countered that the parties in the cases Quest cited had specified prices in their written agreements. In their case against price, plaintiffs argued that they did not know what they would need to pay before the testing was done.

The plaintiffs’ amended complaint, “contains no allegations that plaintiffs had any similar written agreement with Quest,” about the price of the tests, Salas explained. The judge also wrote, Quest did not argue that the amounts billed to plaintiffs were based on a written agreement.

Therefore, the judge rejected Quest’s request to dismiss counts one and two. “Rather, the court finds the amended complaint sufficiently alleges an implied-in-fact contract with a missing term: price,” she wrote.

On the question of whether Quest’s charges were unreasonable, Salas wrote that the court had determined that—at least at this stage—Quest’s prices were unreasonable.

The patients who are uninsured or underinsured make up less than 1% of Quest’s clinical lab testing volume, but contribute up to 3% of Quest’s net revenue, the lawsuit showed. The list prices that Quest charges these plaintiff-consumers are “up to 10 times higher than the negotiated rates” that insurers and other third parties pay, it added.

As a result, she denied Quest’s motion to dismiss the plaintiffs’ claims for breach of implied contract-in-fact and she denied Quest’s motion to dismiss the plaintiff’s request for a declaratory judgment regarding that implied contract.

Also in her September opinion, Salas addressed the two theories the plaintiffs alleged in the amended complaint: breach of implied contract and violations of the consumer protection laws. She also addressed the plaintiff’s claims regarding breach of consumer protection laws and the issues related to contracts that are implied in law and implied in fact.

In her 17-page opinion, Salas began by restating the plaintiffs’ arguments and then cited Quest’s arguments that the plaintiffs failed to correct deficiencies in the original complaint, therefore the case should be dismissed with prejudice, meaning permanently.

Here are some of the arguments Quest made in its defense.

Quest argued that the plaintiffs failed to state a claim for breach of implied contract because Quest never agreed to charge the consumers a negotiated third-party rate, nor did it omit the price, Salas wrote. In addition, Quest argued that the plaintiffs failed to demonstrate that the chargemaster rates were unreasonable.

“According to Quest, these defects require dismissal of plaintiffs’ implied-contract claims,” Salas wrote.

Regarding the state consumer-protection claims, Quest argued that the plaintiffs did not make significant changes in its amended complaint versus the initial complaint. Therefore, the consumer-protection claims fail for the same reasons Salas cited in an earlier opinion she made in a case last year.

‘Learned Professional Rule’

Also, Quest argued that the plaintiffs’ request that the court set reasonable rates for lab tests was improper because legislatures or regulators should do so. In addition, the judge wrote, Quest argued that the plaintiff’s claims of consumer fraud and deceptive billing were prevented under a legal theory called the “learned professional rule.” Under this rule, Quest is like hospitals and other healthcare providers that must follow state regulations.

Quest also argued that when the plaintiffs accepted Quest’s clinical lab testing services, they agreed to the prices defined in the chargemaster at the then-existing rates, Salas wrote.

“Quest further points out that the amended complaint does not allege that plaintiffs were denied information relating to the chargemaster rates, but rather that they sought Quest’s services, received those services, and were later displeased with the price,” she added.

Quest also argued that the plaintiffs failed to demonstrate its prices were unreasonable.

In her discussion of state consumer-protection laws, Salas wrote that a plaintiff must show that a deceptive or unfair business practice caused the consumer an actual loss or damage.

However, Quest argued—and Salas agreed—that the learned professional rule prevented the plaintiffs’ claims under New Jersey and North Carolina’s consumer protection laws. Under this reasoning, Salas dismissed with prejudice (meaning permanently) counts three and 13, which relate to consumer protections in New Jersey and North Carolina.

All other claims that Salas dismissed in this case were dismissed without prejudice, meaning the plaintiffs can return to the court with new arguments.

In addition, Salas dismissed the plaintiffs’ consumer-protection claims based on deceptive or fraudulent billing practices, saying the plaintiffs failed to plead the fraud-based claims successfully. She did not find that providing a non-itemized bill, or sending follow-up notices for unpaid bills, amounted to a fraudulent or deceptive trade practice, she added.

She then addressed the issue of breach of an implied-in-law contract, writing that the plaintiffs did not assert a claim of unjust enrichment. Therefore, she granted Quest’s motion to dismiss the claims for breach of contract implied in law.

Case Will Continue

In the most recent development in the case, Quest filed a 171-page answer to the amended complaint on Nov. 8. In that court filing, the lab company denied the allegations the plaintiffs alleged and denied liability. Also, Quest asserted that a class action was not appropriate in this case.

Quest did not respond to a request for comment by our deadline. Details of the case against LabCorp will be covered in a future issue of THE DARK REPORT.

Contact Robert Finkel at 212-451-9620 or rfinkel@wolfpopper.com.

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