Veterinary diagnostics giant sues multiple practitioners

VCA Antech alleges breach of extended lab service contracts

Published: March 09, 2012
By Edie Lau

Photo by Mark Rightmire
Antech Diagnostics, the laboratory services arm of VCA Antech, with headquarters in Irvine, Calif., is taking veterinarians to court around the country in disputes over long-term service contracts.
Antech Diagnostics is suing clinics and veterinarians around the country in a disagreement about extended service contracts, a sign of escalating competition in the arena of veterinary laboratory diagnostics.

The company has filed at least eight suits in federal court since May 2011 involving contracts that each would have reaped revenues for the company ranging from $234,000 to $798,000 over the course of four to seven years.

Antech is the laboratory services arm of VCA Antech, a dominant player in veterinary medicine as the owner of some 585 animal hospitals in North America and more than 53 laboratories. Among other holdings, VCA also owns Sound-Eklin, a supplier of diagnostic imaging equipment and practice-management software; and MediMedia Animal Health, owner of Vetstreet, an online marketing and client-communication service. Last month, Vetstreet merged with ThinkPets, another client-communication service.

The contracts in dispute commit clinics to using Antech Diagnostics for laboratory services and to purchase a minimum dollar amount in services annually from the laboratory. In return, a participating clinic is awarded with incentives including cash, discounts, free lab work, radiology equipment or a combination. The cash typically is provided in the form of loans that are forgiven if a clinic meets its contractual obligations. Veterinarians in private practice say such agreements are common.

All of the clinics being sued ended their relationships with Antech before their respective contract term expired for a variety of reasons. For example, some allege that the laboratory company’s service was unacceptably poor; others were motivated to leave after receiving a more attractive offer from Antech’s chief competitor, Idexx.

In a discussion about the suits on the Veterinary Information Network (VIN), an online community for the profession, some veterinarians suggested that their colleagues were naive to think they could break a contract without consequences.

Dr. Colin McHugh, a clinic owner in North Carolina, wrote: “If your business breached the terms of the contract, why would you think they wouldn’t come after the money owed?”

In interviews and court documents, defendants indicated they believed they could end the agreements early by refunding Antech the financial incentives they’d received. Some attempted to do so but were sued anyway. One practitioner, speaking on condition of anonymity after being advised by legal counsel not to comment publicly, said a lawyer reviewed the contract before the signing and had found no potential problems.

Claims and counterclaims

Antech is seeking in the suits to recover not just the financial incentives but all the revenues the clinics would have paid had they maintained their contracts to the end. For example, in a suit against Chadwell Animal Hospital, LLC, of Abington, Md., the company claims damages of $40,844 in the form of “loyalty rebates” on laboratory fees that Chadwell received, plus $273,000 Chadwell would have paid had the clinic stayed with the lab for the full term of the contract. Chadwell had agreed in December 2009 to buy at least $78,000 in laboratory services from the company annually for four years, for a total of $312,000. Chadwell pulled out of the agreement after less than one year.

Chadwell owner Dr. Keith Gold maintains that having to repay the rebates is a reasonable consequence of breaking the contract, but for the company to demand future revenues on services that won’t be rendered is unreasonable and not part of the contract. “It’s not all profit,” Gold said in an interview. “There are costs (to VCA Antech for providing the services).”

Agreeing with that point, U.S. District Court Judge James K. Bredar, in a memorandum opinion filed Nov. 30 in the case, noted that “Plaintiff’s chance of actually recovering that amount appears remote.”

The contracts themselves neither explicitly nor unambiguously specify the penalty for early termination, judging from contracts submitted to court as evidence in two other cases. Unlike Chadwell, the clinics bound by those contracts accepted cash in the form of forgivable loans in the amounts of $35,000 and $40,000.

Those contracts use identical language to say that in the case of default, the loan will be due and payable, minus any portion previously forgiven and pro-rated in the year of the default so that the clinic owner receives credit for the time during which he or she complied with the agreement.

The contracts say nothing about the clinic owing Antech the balance of the revenues it would have paid over the life of the contract. Neither does it state that repayment of the loan or other financial incentives would fully discharge the clinic of its contractual obligations.

VCA Antech representatives did not respond to VIN News Service requests for comment. Reached by telephone on March 2, Michael Everett, vice president of the legal department, replied, “That’s not my area.” Asked to whom questions should be directed, Everett said he did not know. He offered to take a message and have someone return the call. The call was not returned as of a week later.

Rivalry ‘cut-throat and brutal’

A lively rivalry between veterinary laboratories, particularly the giants Antech and Idexx, has existed for years but appears to be escalating, observers say. “I think it’s more intense now than five years ago without a doubt,” said Dr. Jim Klaassen, a former chief medical officer at Antech and now CEO of Phoenix Central Laboratory, an independent company in Washington serving clinics in the Northwest. “They’re duking it out.”

Dr. Gary Block, owner of a specialty referral hospital in Rhode Island, put it this way: “The competition for veterinary business is shockingly cut-throat and brutal.”

Idexx communications manager Elisabeth “Betsy” Richards declined to comment.

Some animal hospital owners have taken advantage of the rivalry by playing the companies off one another, such as by seeing what one lab might offer, then asking its competitor if it will beat the deal.

Veterinarians report that the companies offer — in exchange for their long-term business — cash upfront, discounts, rebates, free lab work for pets of employees, equipment and practice-management software. They’ve also been known to place boarded specialists in practices belonging to lucrative clients and more.

In some instances, the companies reportedly have built reference laboratories on the premises of large referral hospitals, paying for the equipment and staff. The laboratories serve other hospitals as well but the proximity gives the host hospital easy and immediate access to laboratory diagnostics.

Not all deals are that lavish. Gold, owner of Chadwell Animal Hospital, said he had been a long-time Antech customer when the company offered what he described as a “nonchalant” contract: rebates of 17 percent in return for a four-year commitment. Gold recounted: “I said, ‘Sure, I wasn’t planning on doing anything else, anyway.’ ”

Shortly afterward, Gold said, he learned with dismay that Antech was owned by VCA. Gold expressed concern about VCA expanding its domain through aggressive purchases of animal hospitals, including some in his vicinity, and acquisitions in other segments of the industry. He said he realized that by doing business with Antech, he was putting money in the pockets of his competition.

Owing to his concern, Gold said he decided he should take his business to Idexx if possible. He said he asked Antech representatives how he could end the contract early and was told he would need to refund rebates he’d received.

“They came in a few times to try to talk us into staying with them; offered us tons of money. It became a hard sell,” he said. “I didn’t like it.”

Had he been told right away that he'd be sued for lost future revenues, he would have dropped the subject, Gold said:  “We didn’t want to get sued. We would have stayed in the contract, absolutely.”

By the time the lawsuit hit, though, the relationship had soured irreparably. “I’m going to fight them,” Gold declared. “I’m not going to give them money because they’re threatening us. It’s extortion. ... I’d rather pay my lawyer than pay them.”

Gold added that he’s received letters from VCA repeatedly offering to buy his practice, one as recently as two months ago. He does not believe the attempt to buy the clinic has anything to do with the lawsuit. “They’re so big, it’s unrelated, I’m sure,” he said. “It’s creepy anyway. ... Corporate veterinary medicine is trying to take over.”

Other practitioners had different reasons for walking away from VCA Antech. For example, Dr. Jeff Rothstein, owner of Progressive Pet Animal Hospitals, P.C., which operates nine clinics in Michigan, maintains that it was Antech that breached the contract by overcharging his hospitals.

According to a counterclaim by Progressive Pet, Antech was supposed to provide at no charge any lab services ordered over the agreed-upon minimum each month. In its response to the counterclaim, Antech acknowledges that it miscalculated Progressive’s “cap rates,” resulting in more than $20,000 in excess charges to Progressive Pet.

Progressive Pet attorney Joseph Yamin told the VIN News Service that Rothstein discovered the discrepancies after Idexx approached him with an offer.

“When he signed up with Antech, Antech promised him they would provide the best deal of anybody and that they would maintain that best deal,” Yamin said. “So when Idexx came to my client, my client looked at the Idexx offer and said (to Antech), ‘You guys said you would match anything. Here’s what they’re doing, are you willing to match that?’

“They negotiated with him,” he related. “In order to do an apples-to-apples comparison, he looked carefully at what they were doing. That’s when he discovered they were failing to give him proper credit.”

Yamin said Antech attributed the overcharges to a clerical error and sought to complete the negotiation before reimbursing Rothstein. “To this day, they haven’t given him back his money,” he said.

Ethics of agreements questioned

The suits have raised questions — and some eyebrows — over the nature of the contracts themselves. Some veterinary practitioners compare them to transactions that occur routinely in business. “It’s not a whole lot different from a number of things we deal with in regular life,” said McHugh, the practitioner in North Carolina, likening them to gym memberships, memberships in discount retail clubs and cell-phone service agreements. “They give you something as a hook to get you to sign up,” he said.

Others in the profession find such agreements distasteful, bordering on unethical. “It amounts to paying somebody to be your customer and locking them in for five or seven years,” said Klaassen, the former Antech official now at Phoenix Central. “I think it says something if you have to buy somebody and then threaten them with lawsuits to keep them.”

Klaassen noted that as a much smaller company, Phoenix cannot afford to match the discounts offered by its corporate competitors. Even if it could, he said he would be loath to do so. “I want veterinarians to be my client because I’m the best choice rather than because they’ve signed a contract,” he said.

He considers the upfront cash tantamount to a bribe. Pantomiming a salesperson’s pitch, Klaassen said: “You can have $100,000 to remodel your clinic, buy a new Mercedes, take a trip with your spouse, whatever you want, Doc, we’ll — wink, wink — call it a loan.”

Klaassen doesn’t begrudge clients who’ve left Phoenix to accept incentives from Antech and Idexx. “Veterinarians are struggling in this economy; some are,” he said. “They think, ‘I could really use $84,000’ or whatever the figure is. Or ‘Three months of free lab work? Oh my god, I did $2,000 a month with Phoenix Lab, I could use that $6,000.’ ”

He added that Phoenix has at times regained the business of clinics that completed their contracts with the large companies and were dissatisfied by the service.

Some practitioners who have declined to sign extended laboratory services contracts say they have been able nonetheless to negotiate with the companies for favorable terms such as discounts.

“I currently am using Antech and I do get very competitive rates on them, but I’m sure I could get more competitive numbers if I locked into them for five years. Digital X-ray, ultrasound, they own a software company; I could get all sorts of stuff if I wanted, but there is a price,” said Dr. Robert Knapp, a clinic owner in Columbus, Ohio.

Knapp said the value of any incentive Antech gives to a clinic, “they’ll get it back over time. ... I think the contract is definitely one-sided. It’s going to favor them. The upside is that if you’re a clinic that needs digital X-ray or some piece of equipment, if you want to get in bed with them for three years or five years, it’s a way to get the stuff.”

In addition to a certain loss of freedom, the contracts pose a danger in their potential to influence a veterinarian’s medical judgment, some practitioners acknowledged.

“There is a potential that if you’re at the end of the month and you’re short $500 on a quota, are you going to do 15 more biopsies or something to get the number up that maybe wasn’t (medically) indicated?” Knapp said. “Ethically, I’d like to say, ‘No, we wouldn’t,’ but I know realistically, some would.”

Like Knapp, McHugh, the clinic owner in North Carolina, has declined to do contracts with the laboratory services companies and for similar reasons. “Very few things in life are free,” he said.

As well, “There’s an ethical aspect that aligns with it,” McHugh said. “Most of these things deal with you being able to forecast that you’re able to conduct your medicine in the same way for the next five years. ... Suppose somebody signs up to use laboratory services for Test X so many times a month for five years. What happens if we found out two years later in a research journal that Test X is not that effective, and Test Y, which is cheaper, is the better one?”

Or suppose, McHugh said, the economy stumbles, causing business to falter. “Could that influence your decision-making process (about which cases call for laboratory diagnostics)? I think it can. I think it’s a legitimate concern,” he said

The American Veterinary Medical Association Principles of Veterinary Medical Ethics state that “Veterinarians should not allow their medical judgment to be influenced by agreements by which they stand to profit through referring clients to other providers of services or products” and that “The medical judgments of veterinarians should not be influenced by contracts or agreements made by their associations or societies.”

The principles also state: “Veterinarians should disclose to clients potential conflicts of interest.”

Asked whether any of those principles apply to the extended laboratory-services contracts, the AVMA did not respond. However, Dr. Sylvie Cloutier, a past president and current officer of the Society for Veterinary Medical Ethics, pointed to the AVMA ethics principles in noting that the agreements “can be ethically challenging when they create opportunities for self-referral in which patients’ medical interests can be in conflict with veterinarians’ financial interests.”

Cloutier said the best way for a veterinarian to address a potential conflict of interest is to disclose the lab-services agreement to clients. However, the Antech contracts contain a confidentiality clause that precludes clinics from disclosing not only the terms of the agreement but its very existence.

In human medicine, federal laws prohibit kickbacks to practitioners who participate in government health-care programs including Medicare, according to information provided by the American Medical Association.

Those laws don’t apply to veterinary medicine, which is regulated state-by-state. In California, for example, such contracts per se are legal in that veterinarians are not prohibited from negotiating for best prices, which could involve committing to a single provider for certain services, according to the California Veterinary Medical Board (CVMB) .

CVMB Executive Officer Susan Geranen, after consulting with legal staff, provided this comment: “That the practitioner can negotiate a reduced fee is not axiomatic that the practitioner will then order unnecessary tests; rather, that the practitioner has negotiated for certain services means that he can reduce his fees to the customers. A practitioner willing to order unnecessary tests will do so regardless of the cost.”

However, Geranen said, the confidentiality clause would be illegal under California rules because veterinarians are required to disclose the actual price charged by the laboratory. (None of the practitioners being sued by Antech in the cases identified by the VIN News Service is located in California.)
Moreover, California veterinary licensees would be obligated to share the reduction in fees with clients, as they are prohibited under the state business and professions code from profiting from clinical laboratory charges.

In sum, Geranen said, “There’s not a conflict (of interest) for them to look for the best deal unless they’re not passing it onto their clients. They have to pass the benefit of that negotiated discount on to the customer to stay compliant with the law.”

She concluded: “The point is, they have to use caution when entering into any of these contracts. They need to act with caution and to think about their professional obligations to their clients and to their profession.”

Editor's note: This story has been altered from its original. In the first paragraph, the word “feud” was changed to “disagreement” to more accurately convey that the disputes developed relatively recently.

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