FTC to Require Divestiture as Condition of Clearing Quest Diagnostics, Inc.'s Acquisition of Unilab Corporation

Stating that the $827 million acquisition of Unilab Corporation (Unilab) by Quest Diagnostics, Inc. (Quest), as proposed, likely would be anticompetitive and lead to higher prices for clinical laboratory services in Northern California, the Federal Trade Commission today announced a proposed consent order that would conditionally allow the transaction to proceed, provided the companies divest certain assets to Laboratory Corporation of America (LabCorp).

According to the Commission, the transaction as proposed would have resulted in the combination of the two leading lab testing firms in Northern California and increased the possibility that the combined Quest/Unilab could unilaterally raise prices. The threat of price increases would have been greatest to independent physician associations (IPAs) and other physicians groups that depend on the unique rivalry between Quest and Unilab to minimize healthcare costs, the FTC said.

Under the terms of the proposed order, Quest and Unilab are required to divest to LabCorp 46 patient service centers (PSCs); five stat, or rapid response, laboratories; all of Quest's - and one of Unilab's - Northern California contracts with physicians groups; and all related assets necessary for the provision of clinical lab testing services to such groups, including customer lists and information. According to the Commission, with these assets and their experience as a provider of laboratory services throughout the United States, LabCorp will be able to replace competition that would be lost as a result of the proposed acquisition.

"Quest and Unilab are the predominant independent clinical laboratories serving IPAs in Northern California. In the absence of this strong consent order, their combination would have decreased competition and increased healthcare costs to the detriment of IPAs and, ultimately, to the detriment of consumers," said Joe Simons, Director of the FTC's Bureau of Competition.

Quest, headquartered in Teterboro, New Jersey, is the largest supplier of clinical lab testing services in the United States, with 2002 revenues of approximately $4.1 billion. It is the second-largest provider in California. It has a nationwide network of approximately 1,350 patient service centers (PSCs), about 30 principal labs in metropolitan areas throughout the United States, and about 100 smaller stat laboratories. In California, Quest has three full-service testing laboratories, eight stat labs, and about 126 PSCs. One of Quest's full-service laboratories, five of its stat laboratories and about 76 of its PSCs are located in Northern California.

Unilab, based in Tarzana, California, is the largest supplier of lab testing services in California. In 2001, the company had revenues of approximately $390 million. Unilab has three full-service laboratories in San Jose, Sacramento, and Los Angeles, as well as about 39 stat laboratories and about 386 PSCs. In Northern California, Unilab operates two full-service laboratories, 23 stat laboratories, and about 230 PSCs.

In California, managed health care plans often delegate the costs of providing medical services for their enrollees to physicians groups. Pursuant to capitation agreements, physicians groups may receive a set per-member-per-month (PMPM) payment from health plans to provide all medical services, including clinical laboratory testing services, to patients of these health plans. The physicians' groups generally then pursue capitation agreements with lab testing firms to limit their risk.

IPAs and other physicians' groups require lab testing suppliers that have the infrastructure of PSCs, stat labs, and full-service testing labs to serve all of their physician members. A lab testing supplier that already has infrastructure in the area served by the physicians' group is likely to be able to service that group contract at a lower cost than a new entrant to the area.

In its complaint, the FTC alleged that Quest's acquisition of Unilab, as proposed, would be anticompetitive and in violation of Section 7 of the Clayton Act and Section 5 of the FTC Act. According to the Commission, the relevant market for examining the transaction is the sale of laboratory testing services to physicians groups in Northern California.

The Commission believes that the sale of clinical laboratory testing services to physicians groups is the relevant product market in which to analyze the competitive effects of the proposed acquisition. The relevant geographic market or area in which to assess the competitive impact of the proposed acquisition is Northern California.

The proposed acquisition, the Commission's complaint stated, would have substantially increased concentration in the clinical laboratory testing services market. As a result of the proposed merger, the combined firm's share in that market would have exceeded 70 percent.

The proposed consent order effectively remedies the FTC's competitive concerns about the proposed acquisition by requiring Quest and Unilab to divest clinical laboratory testing assets in Northern California to LabCorp. These assets include: 1) 46 patient service centers (PSCs); 2) five stat, or rapid response, laboratories; 3) all of Quest's - and one of Unilab's - contracts with physicians groups; and 4) all related assets necessary for the provision of clinical laboratory testing services to such groups, including customer lists and information.

According to the Commission, LabCorp is a well-positioned acquirer of the divested assets for several reasons. It offers more than 4,000 clinical tests, as well as other services that physicians groups require, including patient encounter and result data reporting information technology. LabCorp currently provides laboratory services throughout the United States; it also has a limited presence in Northern California, although it primarily provides clinical reference testing to hospitals and esoteric HIV-related testing. LabCorp has a great deal of experience meeting the requirements of physicians groups in Southern California (especially in California's managed care environment). In addition, LabCorp has the financial resources to buy the assets to be divested and to operate them in a competitive manner.

Under the proposed order, Quest is required to consummate the sale of the assets to LabCorp within 10 days of its merger with Unilab, with the transfer to be completed within six months. If Quest fails to meet these terms, the Commission may appoint a trustee to divest the company's outpatient clinical laboratory testing business in Northern California, or its entire clinical laboratory testing business in Northern California. If Quest transfers some of the assets to LabCorp, but LabCorp abandons its effort to complete the transfer of the rest of the assets, the FTC may require Quest to rescind the transaction and order Quest to divest its Northern California outpatient clinical laboratory testing business to a Commission-approved buyer within six months. If Quest does not do so, the FTC may appoint a trustee to divest either Quest's Northern California outpatient or entire clinical laboratory testing business.

The proposed order contains further provisions designed to ensure Quest's divestiture is successful. First, Quest is required to maintain the viability, marketability, and competitiveness of its clinical laboratory testing business assets in Northern California pending their transfer to LabCorp. Quest also is required to provide transitional services that the acquirer may need until the assets are completely divested and transferred, and is prohibited from interfering with the employment of any workers relating to the divested assets by the acquirer.

In addition, Quest is required to provide incentives for certain employees to continue in their positions until the divestiture and to accept employment with the acquirer. For one year after the assets are divested, Quest is prohibited from soliciting any employees of Quest or Unilab that accept employment offers from the acquirer. Quest also is required to maintain the confidentiality of certain information related to the divested assets. Finally, the FTC has approved the appointment of an interim monitor to assure that the assets are divested expeditiously and in compliance with the terms of the order. The order also contains reporting requirements to ensure Quest's compliance with its provisions.

The Commission vote to accept the proposed consent order and place a copy on the public record was 5-0. The proposed consent order will be subject to public comment for 30 days, until March 24, 2003, after which the Commission will determine whether to make it final. Comments should be sent to: FTC, Office of the Secretary, 600 Pennsylvania Ave., N.W., Washington, D.C. 20580.

NOTE: A consent order is for settlement purposes only and does not constitute an admission of a law violation. When the Commission issues a consent order on a final basis, it carries the force of law with respect to future actions. Each violation of such an order may result in a civil penalty of $11,000.

Copies of the complaint, proposed consent order, and an analysis to aid public comment are available from the FTC's Web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The FTC's Bureau of Competition seeks to prevent business practices that restrain competition. The Bureau carries out its mission by investigating alleged law violations and, when appropriate, recommending that the Commission take formal enforcement action. To notify the Bureau concerning particular business practices, call or write the Office of Policy and Evaluation, Room 394, Bureau of Competition, Federal Trade Commission, 600 Pennsylvania Ave, N.W., Washington, D.C. 20580, Electronic Mail: antitrust@ftc.gov; Telephone (202) 326-3300. For more information on the laws that the FTC enforces, the Commission has published "Promoting Competition, Protecting Consumers: A Plain English Guide to Antitrust Laws," which can be accessed at http://www.ftc.gov/bc/compguide/index.htm

(FTC File No. 021-0140, Docket No. C-4074)