United States District Court, N.D. California
ORDER GRANTING IN PART AND DENYING IN PART MOTIONS TO DISMISS SECOND AMENDED COMPLAINT RE:
DKT. NOS. 130, 132, 133, 134
WILLIAM H. ORRICK, District Judge.
Plaintiffs Rheumatology Diagnostics Laboratory, Inc. ("RDL"), Pacific Breast Pathology Medical Corporation ("PBP"), Hunter Laboratories, Inc. ("Hunter"), and Surgical Pathology Associates LLC ("SPA") bring suit against defendants California Physicians' Services, Inc., d/b/a Blue Shield of California ("BSC"), Blue Cross and Blue Shield Association ("BCBSA"),  Aetna, Inc., Quest Diagnostics Incorporated, and Quest Diagnostics Clinical Laboratories, Inc. The plaintiffs' Second Amended Complaint ("SAC") alleges violations of the federal Sherman Act and California's Cartwright Act, Unfair Competition Law, and Unfair Practices Act. It also alleges intentional interference with prospective economic advantage. Dkt. No. 122. The defendants move to dismiss the plaintiffs' SAC. Dkt. Nos. 130, 132, 133, 134.
Based on the parties' briefs and arguments, and for the reasons below, the Motions to Dismiss are GRANTED in part and DENIED in part.
For purposes of the Motions to Dismiss, the Court accepts as true the following factual allegations in the SAC.
I. THE PARTIES AND RELEVANT MARKETS
The plaintiffs are all "engaged in the commercial reference laboratory business" in California. SAC ¶¶ 11-14. Plaintiff RDL offers Specialty Rheumatological Diagnostic Testing across the country. SAC ¶ 11. Plaintiff PBP offers Specialty Breast Pathology Testing throughout California. SAC ¶ 12. Plaintiff Hunter previously offered Routine Clinical Laboratory Testing throughout Northern California and Advanced Lipid Testing across the country. SAC ¶ 13. Plaintiff SPA offers Surgical and Clinical Pathology throughout California, as well as Anatomic Pathology Testing. SAC ¶ 14. SPA was affiliated with Hunter, which used to send its biopsy and cytology specimens to SPA for pathology interpretation; approximately 50 percent of SPA's revenue depended on Hunter. SAC ¶ 14.
Defendant Quest is also a provider of clinical laboratory services and competes with the plaintiffs, operating in all five relevant markets alleged in the SAC. SAC ¶¶ 2-3, 18-20. Defendants Aetna and BSC are health insurance companies that serve customers throughout California. SAC ¶¶ 15-17. Defendant BCBSA licenses the "Blue Cross" and "Blue Shield" names to health insurance companies across the country ("Blue Plans"), such as BSC, and Blue Plans are governed by the "Blue Card policy" or licensing agreement. SAC ¶¶ 4-6. 92 percent of primary care physicians are "in-network" with Blue Plans. SAC ¶ 6.
BCBSA is owned by its members and the 38 Blue Plans fund it. SAC ¶ 30. "Blue Cross and Blue Shield insure approximately 32% of the U.S. population." SAC ¶ 29. More than 91 percent of providers and 96 percent of hospitals in the United States contract directly with Blue Plans, which insure more Californians than any other insurer. SAC ¶ 29. "Historically, each Blue Plan has been permitted by the terms of the Agreement to contract with independent clinical labs located within or outside of the BluePlan's state or territory." SAC ¶ 30.
The SAC alleges five product and geographic markets:
The Routine Clinical Laboratory Testing market is the market for routine chemical analysis of bodily fluids ordered by physicians for outpatient diagnosis and analysis. SAC ¶ 27(a). It is a high-volume market where tests are performed by automated equipment. Results are typically reported electronically within 24 hours after the physician ordered the test. Physicians prefer to use diagnostic labs near the site of the specimen to avoid air transport and to ensure timely results. Consequently, the relevant geographic market for Routine Clinical Laboratory Testing is regional, and here, it is the "Northern California region, " which runs from Fresno, California, to the Oregon border. Quest, with an estimated $562 million in annual revenue, has an estimated 76 percent market share of physicians' offices. SAC ¶ 125. Hunter had a market share of approximately three percent in 2012, and LabCorp has a 16 percent market share. SAC ¶ 125.
The Anatomic Pathology Laboratory Testing market consists of labs that analyze tissue samples for diagnosing disease. SAC ¶ 27(b). The relevant geographic market is the Northern California region. Quest is estimated to have a market share over 30 percent, and SPA has an estimated market share of less than three percent. LabCorp also participates in this market. SAC ¶ 126.
The Specialty Rheumatologic Laboratory Testing market is the market for highly specialized testing ordered by rheumatologists for diagnosing and treating autoimmune disorders and diseases. SAC ¶ 27(c). The relevant geographic market is the entire United States. Upon information and belief, Quest has an estimated 47 percent of the market and LabCorp has an estimated 23 percent. SAC ¶ 127. RDL estimates that its market share is approximately 25 percent. SAC ¶ 127.
The Advanced Lipid Testing market is the market for highly specialized testing to diagnose and treat coronary heart disease. SAC ¶ 27(d). The relevant geographic market is the entire United States. Hunter estimates that it has less than one percent of this market, of which Quest is a participant. SAC ¶ 128.
The Specialty Breast Pathology Testing is the market for highly specialized analysis of breast biopsy tissue for diagnosis and prognosis of breast cancer. SAC ¶ 27(e). Physicians in California typically order breast pathology tests from labs throughout California. The relevant geographic market is California. Quest is a market participant, but PBP is not. SAC ¶ 129.
II. THE BCBSA-QUEST AGREEMENT
Changes to the "BlueCard" policy, announced in May 2010, but implemented around October 2012, created barriers preventing smaller specialized labs from providing services to patients across the country. SAC ¶ 28. This conduct affected Hunter in the Advanced Lipid Testing market and RDL in the Specialty Rheumatological Laboratory Testing market. SAC ¶ 28.
In the past, labs submitted claims for services provided to Blue Card members from another state to the Blue Plan where the performing lab is located. SAC ¶ 31. The local Blue Plan then worked with the member's own Blue Plan to adjudicate the claim, and the member's cost-sharing amount was calculated at the in-network rate based on the performing lab's provider status with the Blue Plan to which the claim was submitted. SAC ¶ 31.
Now, under changes supported by Quest, the performing laboratory must submit claims to the patient's Blue Plan even though the lab may not be an in-network provider for that particular Blue Plan. SAC ¶ 32. If the patient is not insured where the laboratory services were performed, then the Blue Plan in the laboratory's region will not adjudicate the claim. Thus, BSC refuses to accept claims for Blue Plan patients from outside of California for tests the plaintiffs perform. SAC ¶ 32.
This change is "foreclosing markets across the United States to specialized labs and foreclosing access to current clients, " as well as creating "staggering administrative costs." SAC ¶ 33. "[I]t is impossible for independent laboratories such as Plaintiffs to obtain in-network status with each BluePlan" with patients that might be served by those laboratories, especially because the "vast majority of BluePlans have been denying applications" from out-of-state laboratories, if they even respond at all. SAC ¶ 33. Quest "acts in concert" with BCBSA "to prevent competitors from gaining in-network status." SAC ¶ 34. Because of their size, only Quest and one other national laboratory-LabCorp-are able to join all Blue Plan networks across the country, and hundreds of specialized laboratories lose business to them. SAC ¶¶ 34 & 38. This forecloses approximately 94 percent of the market to specialty labs in California since those labs are only able to obtain in-network status with Blue Plans in California. SAC ¶ 38.
Under the new Blue Card policy, when an out-of-network laboratory submits a claim to the relevant Blue Plan, the Blue Plan "commonly pays the patient directly, " rather than the laboratory that has obtained the assignment of benefits from the patient." SAC ¶ 35. Paying the patients directly confuses them, and patients often spend the money without realizing that they were supposed to forward it to the laboratory. SAC ¶ 35.
Under the policy change, claims cannot be made electronically, nor can providers electronically check on the status of submitted claims. SAC ¶ 36.
The new policy "harms competition in the Specialty Rheumatological and Advanced Lipid Testing Markets to the benefit of" Quest because physicians steer business to Quest away from out-of-state specialty labs, which are out-of-network and thus more expensive. SAC ¶ 37. The policy "effectively forecloses competition from hundreds of specialty laboratories." SAC ¶ 37. It "drive[s] the BluePlans into nearly exclusive arrangements with [Quest] (and Labcorp) for specialty and molecular tests" because specialty labs in one physical location cannot contract with 38 Blue Plans to maintain in-network status even though they may perform services from several local Blue Plan areas. SAC ¶ 38. "This forecloses a substantial share of the market, (approximately 94%) to specialty labs in California, as they are only able to obtain in-network status with the BluePlans in California." SAC ¶ 38. A majority of Blue Plans will not contract with labs outside their area, will not add additional labs, and a few have exclusive contracts with Quest. SAC ¶ 38. RDL unsuccessfully attempted to get in the Blue Plan networks of many states and has had to hire more employees to deal with the new policy's reimbursement changes. SAC ¶¶ 41-43. Hunter has been similarly unsuccessful in trying to get in Blue Plan networks or new clients. SAC ¶¶ 48 & 51.
Distinguished labs "are seeing dramatic reductions in revenue due to this change as they are out-of-network for over 90% of BluePlan regions, " and customers and providers complain that labs like RDL, which is allegedly higher quality, are being kept out of network. SAC ¶¶ 38 & 44. Hunter's "HunterHeart program" - "a nationwide program" which relies on in-network processing through the BlueCard program - has lost over 90 percent of its clients outside of California. SAC ¶ 45. BSC's termination of Hunter in 2009 led to a decrease in its surgical pathology volumes, as did Aetna's termination of Hunter on September 15, 2012. SAC ¶ 53.
In a June 2012 investor presentation, the CEO of Quest, Steve Rusckowski, stated that health insurers "want to narrow their networks" and "there should be more consolidation in the volumes around fewer suppliers of laboratory testing services and that plays nicely into what we are all about and what this industry is all about." SAC ¶ 25. He further states, "We do have an opportunity with some of our health plan partners to help them narrow the network. We're working together with the health plans to get more volume and they see an opportunity in their cost structure, and we see an opportunity with our volumes to do that with them." SAC ¶ 25.
Quest "acted in concert" with BCBSA "to promote the exclusionary change in BlueCard Policy." SAC ¶ 56. Members of the American Clinical Laboratory Association ("ACLA"), which represents clinical laboratories, expressed concern about the Blue Card change, so the ACLA drafted a letter to BCBSA protesting it. SAC ¶ 56. However, Quest, the largest contributor to ACLA's funding, vetoed the letter. Quest thus "manipulated a trade association to exclude competition from independent regional labs and indirectly to harm patient care" even though it "was well aware of the anti-competitive nature of the change in policy and the devastating effect it would have on competitors." SAC ¶ 56. Quest knew that the policy change meant that no independent lab could compete with it because only Quest and Labcorp have a "physical national presence." SAC ¶ 56.
Similarly, in response to an April 5, 2012, letter from the California Clinical Laboratory Association to BCBSA expressing concern about the policy changes, BCBSA responded that the laboratories should contact Jim Barkach "to discuss national partnership Agreements." SAC ¶ 57. However, Barkach never responded to the repeated phone calls and emails from the CEO of Hunter or Michael Snyder, the CEO of a company that negotiates insurance contracts for laboratories nationwide. SAC ¶ 57. When Snyder reached Barkach on his personal cell phone, Barkach said that "no laboratories could match the deal' that [BCBSA] had with [Quest]" and hung up. SAC ¶ 57.
BCBSA and Quest "have conspired to prevent Plaintiffs and other small laboratories from even negotiating or discussing the opportunity to continue providing service to [BCBSA's] members on an in-network basis." SAC ¶ 58. The new policy "pursuant" to BCBSA's "agreement with Quest functions as a boycott of Plaintiffs" because Blue Card plans nationwide "instruct physicians to utilize only in-network diagnostic services and pay in-network providers ( i.e., [Quest]) more and in a different manner than the newly out-of-network Plaintiffs." SAC ¶ 58. The Blue Plans "have been very overt in their efforts to cut off business to labs" like Hunter "and to instead steer business to" Quest, its "partner." SAC ¶ 59. The SAC attaches a letter from Blue Cross Blue Shield of Florida to physicians who use Hunter, stating that services provided to out-of-state labs will be treated as out-of-network. SAC ¶ 59, Ex. 6. Thus, out-of-pocket expenses to patients may be higher and the physicians should refer to in-network labs, "such as Quest Diagnostics." SAC ¶ 59. Because 92 percent of primary care physicians are in Blue Plans, "a substantial share of the relevant market is effectively foreclosed to hundreds of specialized laboratories across the United States. SAC ¶ 6. These changes have driven business away from smaller independent labs to Quest. SAC ¶ 60.
III. BELOW-COST SALES
A "requisition" is a group of tests, ordered at one time, for a single patient. SAC ¶ 61. Because one patient may have multiple tests, a requisition usually includes two or three lab tests. SAC ¶ 61. Quest's Securities and Exchange Commission ("SEC") filings contain information allowing for a "simple calculation of fully-allocated cost per requisition, " which ranged from $30.79 in 2004 to $42.53 in 2011, increasing at a "generally consistent pace." SAC ¶ 61. Because of the higher cost of labor, real estate, and other costs in California, the cost of performing laboratory tests for patients in California tends to be higher than the national average. SAC ¶ 62. Thus, Quest's "average cost per requisition in California will be slightly higher than the amounts reported in its SEC filings." SAC ¶ 62.
Quest "routinely and knowingly provides its customers in California with capitated contracts that result in revenues far below its reported costs." SAC ¶ 63. In one example from 2005, James Clayton, the contracting manager for Physicians Medical Group of Santa Cruz, told Hunter that his group entered into a five-year exclusive capitated contract for laboratory services with Quest. SAC ¶ 63. The rate was $0.45 per member per month which, based on standard utilization rates, amounts to less than $5.00 in revenue per requisition - less than 20 percent of Quest's average cost per requisition. SAC ¶ 63. Quest's average revenue per requisition on its capitated contracts are "far below" its average costs as reported to the SEC, and "there are no cost savings that could possibly allow the capitated contracts [Quest] enters into to be profitable." SAC ¶ 64.
Quest heavily discounts services to providers and IPAs. SAC ¶ 66. Quest's own reports show that its revenue from these sources is "far below [Quest's] costs as reported in its SEC filings." SAC ¶ 67. Quest enters such agreements "to force and keep competition out of the market, " and it "recoups its losses by illegally inducing the referral of higher-paying pull-through' government and other business." SAC ¶ 67. One Quest report "shows that in most cases [Quest's] capitated rates are so low that [Quest] loses money on them." SAC ¶ 68. While Quest "lost money on the discounted capitated rates paid" by "almost every [IPA] customer, " it "made up for those losses with the [fee-for-service] pull-through business, which is paid for by the government and other third-party payers." SAC ¶ 69. Of the 68 IPA customers listed in that report, Quest reported a loss on the capitated rates of 46 of those customers, whereas it reported "substantial profits on the pull-through business" of all 68. SAC ¶ 70. From 2004-2008, Quest's SEC filings "show that [its] revenue per requisition on its capitated accounts is far less than its average cost per requisition, " but "there is no significant cost-savings associated with capitated accounts that would allow these rates to be profitable." SAC ¶ 72.
Indeed, in addition to below-cost capitated rates, Quest "routinely offers  below-cost" fee-for-service rates to physicians and clinics that are billed directly. SAC ¶ 73. Quest's annual 10-K filings with the SEC reflect that Quest lost money on such clients for at least the last nine years. SAC ¶ 74. From 2004-2008, Quest lost even more money on capitated contracts. SAC ¶ 74.
In 2009, both a suit filed by the State of California and a federal qui tam suit alleged that Quest's capitated contracts were priced below cost to "pull through" government business in violation of federal and state kickback laws. SAC ¶ 75. After the suits became public, Quest stopped reporting ...