June 18, 2012

Legal Hurdles Mount for Lab Corp and Quest

The U.S. Department of Justice (DOJ) and the Federal Trade Commission (FTC) recently released their Annual Report for Fiscal Year 2011 under the Hart-Scott-Rodino Antitrust Act. In brief, the Hart-Scott-Rodino Act allows the DOJ and FTC to block transactions believed to be harmful to competition and consumers. The Annual Report reviews the enforcement activities undertaken by these federal agencies during the prior year.

Under the power granted by the Hart-Scott-Rodino Act, the DOJ and FTC identify and intervene early in transactions viewed as anticompetitive. This means that a relatively small number of challenged transactions require litigation. For instance, of the 17 transactions challenged in 2011 by the FTC, only three matters required court action.  While healthcare transactions are becoming an increasingly common target for these challenges, the number of hospital mergers reviewed last year under the Hart-Scott-Rodino Act were essentially the same as the prior year. Thus, it appears that the DOJ and FTC are now reviewing a wider array of transactions in the healthcare industry.

One of the three transactions that required litigation by the FTC in 2011 was Laboratory Corporation of America’s acquisition of rival clinical laboratory, Westcliff medical laboratories, Inc. The FTC issued an administrative complaint alleging that Lab Corp’s acquisition of Westcliff would violate antitrust laws and lead to higher prices and lower quality lab testing services in the Southern California market. The FTC sought to stop this transaction from proceeding but their request for injunctive relief was denied by the U.S. District Court for the Central District of California. Although the FTC was unable to enjoin this transaction and ultimately opted to withdraw its challenge, the FTC’s actions against Lab Corp are significant for the lab industry.

The largest players in the national laboratory market – Lab Corp and Quest Diagnostics Inc. – are now facing real scrutiny. Although Lab Corp won the skirmish over the Westcliff acquisition, its practices were deemed anticompetitive by the FTC. In addition, in November 2011, U.S. Senators Charles Grassley, the Ranking Member of the Senate Judiciary Committee, and Max Baucus, the Chairman of the Senate Finance Committee, announced that they sent letters to Quest, Lab Corp and three large heath insurance companies requesting documents regarding discounted lab test pricing arrangements. Reports have suggested that Quest and Lab Corp are being investigated based on excessive Medicare billings over a 10 year period of time based on a long standing business practice that continues today. The practice in question is known in the industry as a “pull through” arrangement, in which it is alleged that the lab provides discounts on its testing services to insurance companies in exchange for the insurance companies funneling in-network doctors to a single, exclusive lab for all of their testing. It is alleged that the lab then offsets the discounts by billing the government (Medicare and Medicaid) at higher rates. Lab Corp and Quest and also facing various lawsuits throughout the country based on allegations of “pull through” arrangements and other practices. While it is unclear at this point where this will lead, the seriousness of the scrutiny facing Lab Corp and Quest has the potential to bring major changes to the laboratory industry.

We will continue to report on these and other important legal developments relevant to the laboratory industry.

This post was contributed by Kurt Bratten.