NERA Economists' Role in FTC v. Laboratory Corporation of America, et al.

The Situation

LabCorp's acquisition of Westcliff Medical Laboratories in 2010 was the first transaction in which the US Federal Trade Commission (FTC) went to court seeking a temporary restraining order and preliminary injunction since the 2010 Horizontal Merger Guidelines were issued.

At the time of the transaction, LabCorp and Westcliff were clinical laboratories that provided laboratory testing services to physicians and physician groups. Both companies had laboratory facilities and patient service centers in Southern California. Both labs also had contracts with physician groups, including independent practice associations (IPAs), in Southern California. Westcliff, however, was in the midst of bankruptcy proceedings. In May 2010, LabCorp entered into an asset purchase agreement to purchase substantially all of Westcliff’s assets.

The FTC focused on the potential for the transaction to raise the prices paid by physician groups and IPAs in Southern California. In Southern California, many physician groups and IPAs care for patients who have health insurance coverage through a health maintenance organization or HMO. HMOs typically pay physician groups for the health services that they provide to their members (i.e., insured lives) on a fixed payment basis (e.g., per member per month). In turn, many, but not all, physician groups contract with laboratory providers for laboratory services on a fixed payment basis. The FTC alleged that in the market for laboratory testing services sold to physician groups and IPAs in Southern California on a capitated basis, the transaction would reduce the number of significant competitors from three to two, with the result being higher prices and inferior service.

NERA's Role

NERA was retained to consider and analyze a broad range of issues, including relevant market definition, market shares and concentration, the potential for the transaction to harm competition, the prospect that entry would maintain competitive pricing, and the likely efficiencies and cost savings of the transaction. NERA Senior Vice Presidents Dr. Thomas McCarthy and Dr. Lawrence Wu submitted a declaration on behalf of LabCorp, and Dr. Wu provided deposition testimony on these issues.

The Result

The Honorable Andrew J. Guilford of the United States District Court for the Central District of California heard oral arguments on the issues. In February 2011, he issued an order denying the FTC’s request for a preliminary injunction. In his decision, Judge Guilford cited extensively to Dr. Wu's testimony and to the declaration filed by Dr. McCarthy and Dr. Wu. They found that there were many labs that provided clinical lab services to physician groups in Southern California on a capitated basis. They also used econometric methods to analyze Westcliff's recent entry into capitated contracting and found that LabCorp did not respond by bidding more aggressively or lowering its prices. In addition, they found that the transaction would create efficiencies from both cost and supply savings. These facts were central to Dr. McCarthy and Dr. Wu's conclusion that the transaction would not harm competition.