HEALTH CARE—Local Firm Sues Red Cross Over Its Business Practices

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A Sherman Oaks company with national ambitions, just four years after settling a lawsuit alleging that the American Red Cross had used illegal practices to protect a virtual monopoly in supplying blood in Los Angeles, is once again taking on the giant nonprofit in federal court.

HemaCare Corp., a for-profit blood company in a health care sector still dominated by nonprofits, is again alleging that the Red Cross is engaging in unfair business practices locally, as well as in New England and the Carolinas.

Those East Coast regions are where HemaCare extended its service after its 1998 purchase of one of its sole remaining for-profit rivals, Coral Blood Services, now a subsidiary.

HemaCare, which is seeking at least $75 million in damages, claims that the Red Cross violated the Sherman Antitrust Act by using its dominant position in the blood industry to under-price its products in Los Angeles, making up the difference where it has no competition.

Meanwhile, on the East Coast, it claims that the Red Cross is employing illegal tactics against Coral, similar to those it allegedly used in Los Angeles prior to a confidential settlement of the original 1995 lawsuit. Those alleged tactics include “bundling” its various blood products together, preventing hospitals from taking advantage of some cheaper individual services that Coral offers.

Blythe Kubina, a Red Cross spokeswoman, said the organization would not discuss the specifics of the HemaCare lawsuit, but denied that it has engaged in any unfair business practices.

“We were surprised by the lawsuit,” Kubina said. “We have been in full compliance with the law, and we will vigorously defend this lawsuit.”

HemaCare officials remain undeterred.

“The essential strategy of the Red Cross is to defend monopolies where they do have a monopoly, and to sell below cost where they don’t have a monopoly,” said HemaCare Chairman Alan C. Darlington. “I am not saying we should get rid of the Red Cross. We are just saying we wish the Red Cross would stop trying to get rid of us.”

Industry responds to AIDS

The lawsuit, filed last month in U.S. District Court in Los Angeles, comes after several years of restructuring in the blood industry.

Prior to the outbreak of AIDS and later price pressures from insurers, the industry had been neatly divvied up into regional monopolies among the Red Cross, community blood banks and hospital blood banks.

Over the past decade the Red Cross, which has close to a 50 percent market share, has been forced by the federal government to spend nearly $300 million to improve the safety of its blood supply by centralizing labs while testing for a host of blood-borne diseases.

Just two years ago, the Red Cross publicly proclaimed its desire to capture up to 65 percent or more of the blood industry market share, though it is no longer making such proclamations publicly.

HemaCare, which operates in 12 states, specializes in providing a blood product called single-donor platelets, which are drawn from individual donors through a process that takes two hours.

It also offers a service called therapeutic aspheresis, in which components of blood are drawn from patients suffering from various blood conditions. Other services include managing hospitals’ blood supplies.

Platelets are a cellular component of blood that controls bleeding, while red blood cells carry oxygen and are transfused after trauma and surgeries.

Cost adjustments

However, the company claims that after the settlement of the 1995 lawsuit which forced the Red Cross to stop bundling its red blood cell products with platelets and other services in Los Angeles the nonprofit allegedly started another illegal practice, dropping its prices below cost.

Darlington is alleging that the Red Cross is now charging less than $400 per unit, or pint, of single-donor platelets in the Los Angeles region, while charging more than $600 in Maine, where it bundles platelets with its monopoly red blood cell product.

Red Cross spokesman Mark Jackson countered that the organization’s average selling price of a unit of platelets tops $400 in the Los Angeles region, though he declined to cite a specific price.

Dr. Douglas Surgenor, former president of the Center for Blood Research, said research he conducted into blood pricing found that arbitrary decisions often play a big role in how blood products are priced.

The Red Cross could very well be playing the game that HemaCare is alleging,” said Surgenor, now retired from the center, which is affiliated with Harvard Medical School. “It’s a matter of setting policy.”

HemaCare services Long Beach Memorial Medical Center, USC’s University Hospital and Norris Cancer Center in Los Angeles, among other hospitals in the region, but still has only a minority market share, Darlington said.

Despite gains in sales and income, its stock price has taken a hit. HemaCare reported net income of $1.1 million for 1999, up from $700,000 in 1998. Its 1999 revenues were $19 million, up from $13.1 million in 1998.

For the third quarter ended Sept. 30, 2000, it reported net income of $301,000, a 13 percent increase from $267,000 for the like year-earlier period. Its third-quarter revenues were $5.4 million, vs. $4.8 million.

Despite the rising profits and revenues, the company’s stock price as of late last week had dropped to just over $1 per share, down from a 52-week high of $3 last February. The company has been delisted from Nasdaq since November 1998, after its stock dropped to less than $1 per share. It is seeking to be re-listed, which would require the stock price to reach $4 a share.

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