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Quest Diagnostics is a monopoly, schemed with insurers, California suit alleges

Three patients in California claim the company has taken over most outpatient diagnostic services in the region.

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Laboratory giant Quest Diagnostics is facing allegations that it unfairly worked with payers and physicians to create a monopoly in one the nation’s largest markets.

Three patients in Northern California are suing Quest Diagnostics, claiming the company has taken over most outpatient diagnostic services in the region by acquiring would-be rivals, inducing doctor referrals and colluding with payers like Aetna and Blue Shield of California to stifle competition.

[Also: Fitch Ratings bullish on for-profit healthcare]

Colleen Eastman, Christi Cruz and Carmen Mendez, filed the federal antitrust lawsuit and class action complaint against Quest in U.S. District Court in San Francisco. Lawyers for Eastman, Cruz and Mendez argue that Quest billed them at unfair, above-market prices that their health plans passed onto them through increased outpatient payment obligations.

Lawyers for the patients also wrote in the suit that Quest has “paid kick-backs to medical providers in the form of dramatically below-cost billings,” schemed with “two major private health insurers to suppress its competition,” and “acquired its competitors for plan/outpatient billing in order to eliminate their competition.”

“The various antitrust allegations in the complaint are nearly identical to allegations asserted in a related case that were dismissed by two different federal judges," said Quest spokesperson Denny Moynihan. "The company denies any wrongdoing and looks forward to vigorously defending itself.”   
 
Founded in 1967 as Metropolitan Pathology Laboratory in New York, the modern Quest became a public company in 1997 in a spin-off from the Corning conglomerate. Since then, Madison, New Jersey-based Quest has become the nation’s largest medical testing company, outcompeting hospital labs and independent facilities in regions like Northern California.

A history of conflict

In 2003, Quest acquired California’s largest lab firm, UniLab, boosting its Northern California market share from 17 percent to 53 percent. Today in all parts north of San Francisco, the company has a 70 percent share of the outpatient lab market — a dominance that has resulted in “price injury” and “lack of competitive choice” for potentially millions of patients, according to the lawsuit
          
Covered by health plans that contract with Quest, patients like Eastman, Cruz and Mendez have faced ever-higher out-of-pocket costs for outpatient lab services through “increased deductibles, co-payments, co-insurance, and actuarial processes that set pre-paid plan premiums,” according to the lawsuit.

The patients allege that over the past decade, Quest has colluded with Aetna, the region’s fourth largest commercial insurer, and Blue Shield of California, the region’s third largest, and strong-armed physicians for referrals.

In 2008, according to the lawsuit, Quest gave Blue Shield of California a 10 percent price discount in exchange for an agreement to remove two of Quest’s competitors from its network in Northern California. One of the labs, Westcliff Medical, soon went bankrupt.

Under the agreement, Blue Shield members who used the remaining lab, Hunter, would pay more out-of-pocket. Quest sales representatives allegedly warned physicians of their patients new burden if they didn’t use Quest, and promised to drive Hunter into bankruptcy “just like Quest did to Westcliff,” according to the lawsuit.

Both Aetna and Blue Shield assist Quest by refusing to pay its competitors directly, the lawyers said. “Blue Shield often sends payments for out-of-network testing to the patients and does not tell the competitors if and when this has been done.” Quest’s competitors find it difficult to collect payments, and their administrative and bad debt costs have soared, according to the lawsuit.

Since 2000, Quest has had a preferred national provider contract with Aetna, and in 2011 the lab company sought an exclusive nationwide contract that would have required Aetna to force laboratories that competed with Quest out of the Aetna network, according to the lawsuit. Aetna did not terminate all competing laboratories, but did place about 400 rival labs out-of-network, including Hunter and Western Health Sciences Medical Laboratory in Northern California.

The lawsuit also alleges that Quest works with the insurers to control physician referrals  —  pointing to CEO Stephen Rusckowski’s response when prompted by a Wells Fargo analyst to explain lower-than-expected volume in a 2012 earnings call.    

“It is a leakage issue, and specifically the plans are aligned with us on trying to drive a narrower network,” Rusckowski, then still new to the company, said. “And yes, they have been reluctant in the past, you call it cracking the whip with physicians. But let me share with you, they've already taken some actions to be able to put some of these physicians that we believe there's an opportunity on notice.”
       
According to the lawsuit, physicians have faced manipulation and retaliation from payers working with Quest, including threats of contract withdrawal.

“Aetna has gone so far as to harass physicians and patients not to use out-of- network Quest competitors even where Aetna patient contracts allow such use,” the lawsuit said. This “threatens the livelihoods of physicians,” the lawyers said, and “creates a dangerous conflict between the physicians’ judgments as to what is best for their patients and their economic interests.”
    
The three patients and their lawyers are seeking a trial jury and damages for them and other affected patient.

This is not the first legal challenge the diagnostics giant has faced.

Just two years ago, a group of rival California labs, including Rheumatology Diagnostics Laboratory, Pacific Breast Pathology Medical Corp. and  Hunter Laboratories, filed a similar lawsuit accusing Quest Diagnostics, Blue Shield and Aetna of a conspiracy to monopolize the market. That case is still ongoing. Last February, a federal judge rejected the allegations of unlawful incentives to limit rivals but let the case proceed on the allegations of predatory pricing.
  
In 2009, Quest pled guilty to providing incorrect and faulty parathyroid test results and paid a criminal fine of $40 million and civil fines of $262 million to the federal government. That same year, regulators forced the company to issue a recall over inaccurate Vitamin D tests.

Quest, as well as peers like Laboratory Corporation of America, are also being subject to new competition. Last year, the company embarked on a $700 million cost-reduction campaign as merging health systems employing their own physicians started pulling away business.

For hospital systems and the likes of Quest, there is also the specter of Theranos, an audacious startup company whose finger prick blood test is being pitched as an accurate, quick and cheap option for both physicians and patients who want to order those tests. Theranos’ hundreds of tests are priced at half of Medicare’s reimbursement, and are gradually becoming available across the country in a partnership with Walgreens.

Twitter: @AnthonyBrino

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