Four California Labs Sue Quest and Three Insurers

Lawsuit alleges anticompetitive practices that violate certain California and federal laws

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CEO SUMMARY: Allegations of anticompetitive and monopolistic behaviors that violate state and federal laws are the basis of a private lawsuit filed by four independent clinical lab companies in California. The defendants are Quest Diagnostics Incorporated, Aetna, Blue Shield of California, and the Blue Cross Blue Shield Association. Plaintiffs claim that the defendants “conspired… to monopolize and otherwise constrain competition in the sale of routine, molecular, and specialty testing services in California.”

IN CALIFORNIA, A NEWLY-FILED LAWSUIT accuses Quest Diagnostics Incorporated, Aetna Inc., Blue Shield of California, and the Blue Cross and Blue Shield Association (BCBSA) of conspiring to monopolize and restrain competition for routine, molecular, and specialty testing services in California.

Plaintiffs allege that actions taken by the defendants have resulted in an unreasonable restraint on competition in violation of federal and California law and that these actions constitute unlawful, unfair, and/or fraudulent business practices under California law. The lawsuit was filed in November.

The Plaintiffs in this lawsuit are four independent clinical laboratories. They are: Hunter Laboratories LLC, of Burlingame; Pacific Breast Pathology Medical Corporation, of Novato; Rheumatology Diagnostics Laboratory Inc., of Los Angeles; and Surgical Pathology Associates of Los Gatos.

THE DARK REPORT believes this may be the first time such a private lawsuit has been filed against a major public laboratory company. More important, it directly challenges some of the business arrangements among public lab companies and national health insurance corporations that effectively exclude or “lock out” other laboratories from having status as contract providers for the health plans.

For this reason, although the suit was filed in California, its progress is likely to be watched by lab administrators and pathologists across the United States. In many regions of the country, certain labs may hold large market shares that involve the use of pricing and managed care network contracting strategies that effectively exclude competing labs in those communities.

The defendants are arguing that a large public lab company and several national health insurance corporations have engaged in behavior that violates federal anti-monopoly and restraint of trade laws—along with violation of certain California state laws. Should the plaintiffs prevail with these claims, it could establish a legal precedent that encourages similar lawsuits by smaller labs and pathology groups who consider themselves harmed by the same alleged types of monopoly actions and restraint of trade tactics described in this California lawsuit.

In response to this lawsuit, the defendants, including Quest Diagnostics, Aetna, Blue Cross Blue Shield Association, and Blue Shield of California, have denied the allegations. Each company says it will vigorously fight the charges contained within this lawsuit.

What adds interest to this case is the fact that one plaintiff is Hunter Laboratories. Its CEO, Chris Riedel, was the original whistleblower in a qui tam case filed in 2005. In his lawsuit, he alleged that seven California laboratory companies violated Medi-Cal laws in how they billed the program. In 2011, this case was settled by the California Attorney General and resulted in payments of more than $300 million by the defendant lab companies. (See TDRs, April 6, 2009; February 7, 2011; and June 13, 2011.)

Financial Resources

Having been awarded a substantial amount of money as the whistleblower in that case, Riedel has the financial resources to vigorously pursue this new lawsuit, even if it takes years to reach a trial or a settlement. Both his legal track record and his financial resources are reasons why lab industry legal experts believe this case must be taken seriously by the defendants.

It is likely that some lab administrators and pathologists will be sympathetic to the arguments of the plaintiffs. Over the years, certain business practices of large managed care plans and large lab companies have directly reduced the access that independent labs, hospital lab outreach programs, and pathology groups have to patients covered by these health plans.

On this point, the lawsuit states that, “In a threat to competition, healthcare providers and patients; defendants Blue Shield of California and Aetna have conspired with defendant Quest to monopolize and otherwise restrain competition in the sale of routine, molecular, and specialty testing services in California.

Discounted Capitated Rates

“Among other conduct, Quest systematically contracts with physician groups on a loss-leader, below-cost capitated basis,” continued the lawsuit. “Quest uses the discounted capitated rates in order to lock out competition, and induce referral of Medicare and Medi-Cal pull-through business, in violation of anti-kickback statutes.

“Quest provides the capitated prices as an inducement to its customers to refer all of their lab testing business to Quest, including Medi-Cal and Medicare business, which Quest charges on a lucrative, fee-for-service basis,” the suit said. “Because Quest’s competitors, including plaintiffs, are unwilling to violate the law by offering such loss-leader capitated rates, Quest’s capitated discounts have the effect of eliminating competition from the markets at issue in this complaint.

“Quest’s loss-leader capitated contracts are specifically designed to injure competitors and destroy competition and violate the Sherman Act, California’s Cartwright Act, and the explicit prohibitions of California Business and Professions Code section 17043 (California’s Unfair Practices Act),” the suit alleged.

The lawsuit further claims that anti-kickback laws are violated in certain business arrangements that Quest Diagnostics has with both Blue Cross and Aetna. On this point, the lawsuit states, “Quest uses discounted capitated rates to lock out Medicare and Medi-Cal pull-through business, a violation of the anti-kickback statutes.

Change To National Policy

“Quest has worked with BCBSA to change its national Blue Card policy to eliminate ‘hundreds’ of molecular and specialty labs,” alleged the plaintiffs in the lawsuit. “Aetna and Blue Shield of California persuaded Quest to terminate the in-network status of Quest’s competitors and price labs out of the market, the suit charged. Also, Aetna conspired with Quest to eliminate competition from independent regional labs.

“These actions resulted in restraint on competition in violation of federal and California law,” the suit said, “and violate the Sherman Antitrust Act and California’s Cartwright Act (which is similar to the Sherman Antitrust Act), the state’s Unfair Competition Law, and the state’s Unfair Practices Act.”

Blue Card Program Changes

Another national lab industry development figures in this lawsuit. It involves significant changes to the Blue Card program now being implemented by the Blue Cross Blue Shield Association. These changes make it more difficult for many independent laboratories, hospital lab outreach programs, and pathology groups to successfully bill for lab testing services rendered to patients who travel and use their Blue Card benefits in other states. (See TDR, July 16, 2012.)

In their lawsuit, the plaintiffs alleged that “…Quest has worked in concert with BCBSA and member Blue plans to promote a change in the national Blue Card policy that will eliminate from the market hundreds of molecular and specialty labs operating from single locations but marketing across the United States. These labs are the most innovative in the country, developing new tests with major impacts on patient healthcare and long-term health. The change in Blue Card policy will devastate this competitive force.

“The Blue Card Association has conspired with Quest to promote a new, exclusionary licensing agreement that requires labs to submit Blue Card members’ claims to the Blue plan provider in whose region the patient is insured,” the suit said. “The Blue plans must be billed by the lab which performs the test; if the patient is not insured in the region where the lab services are performed, then the plan in the patient’s region will not adjudicate the claim.

Harms Competition

“Implementation of this new policy harms competition by molecular, anatomic pathology, and other specialty labs to the benefit of Quest, as physicians are likely to steer business to Quest and away from what would not be more expensive out-of-network providers under the Blue plans,” the suit said.

“Furthermore, Aetna and Blue Shield of California have been successfully persuaded by Quest to terminate the in-network status of Quest’s smaller competitors in exchange for Quest offering financial and other incentives. These practices have substantially foreclosed substantial distribution opportunities to large portions of the market,” the suit alleged.

“Aetna has also conspired with Quest to eliminate competition within California from independent regional labs. In or about October 2012, Quest and Aetna entered into a contract whereby Aetna agreed to terminate 400 regional contracts across the United States. These terminations have increased Quest’s dominance in multiple regional markets in California,” the suit said.

It was known that Aetna was changing its lab network strategy with the goal of excluding many local and regional lab testing organizations. However, the extent of the lab terminations has not been previously reported.

Lab administrators and pathologists should understand that there are several distinctive features about this lawsuit. First, it does not involve either a state or local government as one of the plaintiffs.

This may be important because of past legal precedent. Historically, government attorneys proved willing to settle cases involving allegations of anti-kick- back activities through the use of settlement agreements and without conducting a trial.

Because this case was filed by private parties as plaintiffs, they may prefer to see this case go to trial. This would allow the case to be judged on its merits. It would also avoid the out-of-court settlement, something that is often sealed from public view.

Second, THE DARK REPORT believes this may be the first lawsuit where laboratory plaintiffs have raised the issues of monopoly behavior and anti-competitive behavior that may be covered by the federal Sherman Act. This in itself presents a different legal threat to the four defendants.

Third, the plaintiff laboratories are also suing under multiple sections of the California state code. Again, this may be the first time that the managed care contracting practices of major payers and the national laboratories are examined for possible violations of California’s statutes governing unfair competition, unfair practices, and similar anti-competitive issues.

A New Legal Challenge

At a minimum, lab administrators and pathologists should recognize that this private lawsuit filed by four independent clinical lab companies represents a new and different legal challenge to how certain lab firms and health insurance companies conduct business among themselves.

Four Plaintiff Labs Cite Eight Causes of Action

IN COURT PAPERS FILED IN NOVEMBER, the four plaintiffs in this case listed eight causes of action against the defendants. The causes of action describe the specific federal and California laws that are alleged to have been violated.

This lawsuit has the potential to be the first important legal test of how these laws apply in the managed care contracting practices of large clinical laboratory firms and health insurance companies:

  • First Cause of Action (against all defendants): Violation of California’s Cartwright Act, Cal. Bus. & Prof. Code sec §16700 et seq.
  • Second Cause of Action (against all defendants): Violation of California’s Unfair Competition Law, Cal. Bus. & Prof. Code sec §17200 et seq.
  • Third Cause of Action (against Quest): Violation of California’s Unfair Practices Act, Cal. Bus. & Prof. Code sec §16700 et seq.
  • Fourth Cause of Action (against all defendants): Intentional Interference with Prospective Economic Advantage.
  • Fifth Cause of Action (against all defendants): Negligent Interference with Prospective Economic Advantage.
  • Sixth Cause of Action (against all defendants): Monopolization or Attempted Monopolization, Section Two of the Sherman Act.
  • Seventh Cause of Action (against all defendants): Bilateral Conspiracies to Restrain Trade and Monopolize, Section One of the Sherman Act.
  • Eighth Cause of Action (against all defendants): Bilateral Conspiracies to Monopolize and Attempt to Monopolize, Section Two of the Sherman Act.

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