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BLOOD—Sherman Oaks Blood Firm Sues American Red Cross

Call it a blood feud. A Sherman Oaks blood supplier is suing the American Red Cross, charging the organization with unfair business practices. In a lawsuit filed in U.S. District Court in Los Angeles, Hemacare Corp. claims the Red Cross competes unfairly, charging prices for its blood supplies that are below cost, obtaining exclusive contracts that prevent hospitals from seeking blood supplies at better prices and “bundling” the prices of its different products so that hospitals must purchase all of their blood from the Red Cross in order to get the best price. The Red Cross has responded to the complaint, calling the allegations without merit and claiming that many of the charges in the lawsuit are factually incorrect. “Our mission is to provide blood and save lives,” said Marc Jackson, a spokesman for the American Red Cross. “It is not to pay a healthy dividend to our shareholders.” Hemacare, believed to be the only publicly held company of its kind in the U.S., says, the revered image of the Red Cross as a do-gooder notwithstanding, blood is a business and the Red Cross constitutes an unfair monopoly that restrains trade. The company sued the Red Cross in 1995 for bundling its blood pricing in California and, while the agency admitted no wrongdoing, it did make certain changes in its blood delivery procedures. Hemacare, which is now accusing the Red Cross of bundling its blood products in some parts of the country, contends the not-for-profit company operates under the same guidelines as any for-profit business and should be held to the same business standards. The Red Cross generated $1.5 billion in revenues from its biomedical services groups nationally in the fiscal year ended June 30, 2000. “In the U.S., the way we have organized the business, 99 percent of the blood supply comes from 100 (mostly Red Cross) blood centers and the way they finance their activity is by selling blood to the hospital,” said Alan Darlington, chairman of Hemacare. Founded in 1978, Hemacare took advantage of technological advances that made it possible to draw platelets separately from red blood cells. Previously, blood suppliers would collect a pint of blood and then separate it into red blood, plasma and platelets. But the old process meant that about six donors were needed to get just one unit of platelets, which are used for major surgeries and cancer therapies to aid in blood clotting. Because the new technology meant a unit of platelets could be drawn from a single donor instead of six, it has reduced the risk of disease from transfusion, making so-called single donor platelets the preferred choice of many hospitals and physicians. The collection process for single donor platelets is more time-consuming and labor-intensive, and the cost of entry, along with stringent government requirements, has acted as a deterrent for most of the private sector. At the same time, single donor platelets have become the medical version of a high-end product with greater profit potential than higher volume red blood cell services, persuading Hemacare to move into the field. “Platelets have been priced at a premium; we’re entrepreneurs and we saw an opportunity,” Darlington said. Since it opened, Hemacare has grown to a $20 million company. Publicly traded over the counter since 1986, in the most recent fiscal year ended Dec. 31, 2000, the company reported net income of $1.36 million or 16 cents per share, up 29 percent from $1.05 million in 1999. Hemacare executives say that because they are smaller and they don’t have a large centralized bureaucracy like the Red Cross, they can manage the collection and distribution of blood more cost-effectively and save hospitals money on platelets. Despite those advantages, their growth has been stymied because of the way the Red Cross prices its products and conducts its business. “We keep going into hospitals and saying, ‘Here’s a program that will save you $500,000 a year, and they look at us and say, ‘That’s great, but if we use you, it will cost us more,'” said Darlington. Hemacare claims that, in some markets, the Red Cross charges prices below its cost for single donor platelets. The company also claims that the Red Cross bundles its blood products so that hospitals must buy all their blood from the Red Cross in order to get the most advantageous pricing. And it charges that the Red Cross requires hospitals to sign exclusive contracts in order to receive the lowest prices on its red blood cells. Since Hemacare is too small to service all of a hospital’s blood needs, the executives charge, hospitals often have to settle for paying higher prices on platelets than those charged by Hemacare. “The reality is when you approach a hospital you can predict the blood utilization with a big degree of accuracy,” said Darlington. “And when the Red Cross cuts a volume deal, they’re precluding anybody else from offering the hospital a deal that would save them any money at all.” Not so, say Red Cross executives. The agency says its platelets are priced well above its cost. And although it has under-priced its red blood, Red Cross executives say they have been increasing red blood cell prices and will continue to do so. “We have historically erroneously under-priced our red cells,” said Dr. Peter Page, Southern California Region executive director for the American Red Cross Blood Services. “In recent years, we have increased our pricing to approach recovering our costs. They (Hemacare) don’t have a responsibility to the community to provide ongoing red cells, which is the real challenge because it’s red cells the country has been short of.” Red Cross officials claim their pricing policies are dictated by their costs, and it is more cost-effective to deliver blood of all types in larger volumes. “Our costs per unit are less when we provide more products to the same delivery address,” said Page. “The more they buy from us, the cheaper it is, and it doesn’t matter whether they buy from someone else or not.” The agency says it follows a separate four-tiered pricing structure for red blood and for platelets. “So if a hospital buys both, that doesn’t make any difference,” Page said. “The red cell price is the red cell price depending on how many they buy. The platelet price is the platelet price depending on how many they buy.” Page also points out that in numerous audits, there has been no evidence that the agency is bundling its products. The Red Cross enters into contracts with its hospital clients in order to ensure that it will have sufficient blood supply for their needs, said Page. But if a hospital wanted to buy additional blood from any other source, it is free to do so. “Our primary commitment is to those who have developed an expectation to rely on us,” said page. “The hospitals we have contracts with may also get blood from other sources, and that’s just fine.”

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