Federal Judge Lets Trial Proceed in Case against Quest

Plaintiffs say Quest used predatory pricing to win market share, drive out competitors

CEO SUMMARY: Four California labs have charged that Quest Diagnostics engaged in predatory pricing in a case filed originally in November 2012. After the lawsuit was amended last summer and fall, U.S. District Judge William H. Orrick III heard various motions in the case. On February 6 he ruled that the case could proceed against Quest Diagnostics on allegations that the lab company engaged in predatory pricing. The case could go to trial at about this time next year, according to lawyers for the plaintiffs.

IN CALIFORNIA, A FEDERAL DISTRICT COURT JUDGE has ruled that a lawsuit claiming predatory pricing and filed by four laboratory companies against Quest Diagnostics Incorporated can move forward.

This is a legal case that has the potential to be disruptive to certain of the long-established business practices of the nation’s largest public laboratory companies. Allegations in the lawsuit involve how the defendant lab company has used discounted pricing for laboratory testing and how it contracts with managed care companies. The plaintiff laboratories claim that these practices violate certain California and federal laws.

The original lawsuit was filed in November 2012. (See TDR, December 10, 2012.) The plaintiffs amended the complaint on August 9 and again on November 18, 2013, in the U.S. District Court for the Northern District of California.

Following the filing of the amended complaint, U.S. District Judge William H. Orrick III considered various motions in the case. On February 6, Orrick ruled that the case could proceed against Quest Diagnostics, based on allegations that the national lab company engaged in predatory pricing, according to an article published about the case by Law360.com.

“This is a significant development because now we know we can move forward with the portion of the case that deals with below-cost pricing,” said Anne Marie Murphy, a Principal with the law firm of Cotchett, Pitre & McCarthy LLP, which represents the plaintiffs. “usually some narrowing of the issues is to be expected and that’s what happened here. But we’re pleased we can now move forward with the case against Quest Diagnostics.”

Four Lab Plaintiffs

The four plaintiffs in this case are all laboratories in California. They are Rheumatology Diagnostics Laboratory, Inc., Pacific Breast Pathology Medical Corporation, Hunter Laboratories (when it was owned by Chris Riedel), and Surgical Pathology Associates Partnership. The defendants on the amended complaint were Quest Diagnostics Incorporated, California Physicians’ Services (doing business as Blue Shield of California), Aetna Inc., and Blue Cross and Blue Shield Association.

In the amended complaint filed in August, the plaintiff labs charged that the defendants violated three California laws: the Cartwright Act, the unfair Competition Law, and the unfair Practices Act. They also charged that defendants committed intentional interference with prospective economic advantage, negligent interference with prospective economic advantage, monopolization or attempted monopolization; bilateral conspiracies to restrain trade and monopolize; and bilateral conspiracies to monopolize or attempt to do so.

According to Law360.com, during a hearing on February 5, Orrick said he was considering throwing out the claims that the defendants engaged in antitrust activity. The labs had failed to show that the insurers had agreed to go along with a conspiracy scheme, the article reported.

Conspiracy Claims Tossed

When Orrick issued his ruling on February 6, he eliminated the conspiracy claims against the health insurers but retained the plaintiffs’ claims against Quest Diagnostics alleging violations of the unfair Practices Act and the unfair Competition Law, noted Law360.com.

But it was an important development that Orrick did not dismiss the case entirely, as Quest had requested for a second time, Law360.com reported. In fact, Orrick criticized Quest Diagnostics for raising the same arguments it had made earlier when it said the case should be dismissed entirely. The fact that Orrick decided to leave in place the plaintiff labs’ arguments against Quest is significant, said eric Buescher, a principal with Cotchett, Pitre & McCarthy.

“The judge had already determined that the plaintiffs had sufficiently alleged that Quest Diagnostics was offering services in California that are priced below costs,” added Buescher. “He was very clear in stating that he had no interest in reviewing that decision or relitigating that issue. It is time for this case to move forward on that issue.”

In the amended complaint, the plaintiffs contended that Quest’s actions represent a threat to competition, healthcare providers, and patients. The plaintiff labs claimed that Quest Diagnostics systematically contracts with physician groups on a loss-leader, below-cost capitated basis, court documents show.

Use of Discounted Prices

The amended complaint stated that “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 the 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.

“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,” said the amended 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),” it adds.

Pricing and Contracting

Clinical lab executives and pathologists across the country will recognize the business practices described in the lawsuit. The named defendants have engaged in these controversial pricing and contracting practices for decades. In the amended complaint that was filed in August, the four plaintiff laboratories charged that:

1) The Blue Card Association conspired with Quest to suppress competition through exclusionary changes to the BlueCard policy;

2) There is evidence of loss-leader, below-cost contracts;

3) Aetna conspired with Quest to exclude 400 regional labs from Aetna’s network in exchange for discounts;

4) That Aetna and Quest have implemented bonus pool agreements;

5) Blue Shield of California accepted a 10% discount on lab testing from Quest in exchange for the exclusion of Westcliff and Hunter Labs from in-network status;

6) Quest has illegally waived out of net-work co-payment or deductible obligations for competitive advantage; and

7) Defendants’ conduct limits competition and increases Quest’s monopoly power.

Only the charge of loss-leader, below-cost contracts is moving forward. Orrick eliminated the other six charges in his latest ruling, parts of which are redacted.

Setting Date for Jury Trial

Murphy said that the next step in the case will be a status hearing on March 4 at which time Orrick may set a date for the jury trial, which is likely to begin next year.

Following the judge’s ruling on February 6, the claims against the health insurers were dismissed and only Quest Diagnostics remains as a defendant. In its statements about this case, Quest Diagnostics has said that it believes the allegations are untrue and that it will vigorously fight this lawsuit.

Can Chris Riedel Prevail Once More in Court?

IF THERE IS ONE GADFLY who regularly challenges the business practices of the nation’s two largest public lab companies in state and federal courts, it has to be Chris Riedel, the former owner of Hunter Laboratories, Inc., of Campbell, California.

Riedel filed a whistleblower lawsuit in 2005 claiming that seven lab companies, including Quest Diagnostics Incorporated and Laboratory Corporation of America, violated California law by charging certain clients less than they charged Medi-Cal, the state’s Medicaid program. (See TDR, April 6, 2009.)

A series of settlements resulted from this lawsuit. In 2011, Quest Diagnostics entered into an agreement with the state attorney general and paid $241 million as one part of its settlement. LabCorp entered into a similar agreement with state officials and paid $49.6 million. (See TDRs, February 7 and June 13, 2011.)

Hunter has also filed whistleblower lawsuits against the national labs for similar violations of state Medicaid laws in as many as seven other states. The lawsuits in Virginia and Georgia have been unsealed and are continuing. (See TDR, September 30, 2013.)

For more than three decades, public lab companies have used deeply-discounted, loss-leader lab test pricing and exclusive contracts with health insurance companies to capture and defend market share from competing laboratories. Few federal or state enforcement actions have successfully challenged these practices. It was unusual when Riedel filed his whistleblower lawsuit in California and, with the state attorney general as a co-plaintiff, gained settlements and several hundreds of millions of dollars in recovery for the Medi-Cal program.

The question is whether Riedel’s lawsuit against Quest Diagnostics now proceeding in California will end with a favorable outcome for him and his fellow plaintiffs.

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