New DAT Law, Competition Heat Up Phoenix Market

One lab serving price-sensitive patients says Theranos’ ultra-low test prices are tough to match

CEO SUMMARY: In Arizona, Theranos supported a new state law this year that allows patients to order lab tests without a doctor’s order. Since the law took effect, that law and the ultra-low prices offered by Theranos are drawing away some cash-paying customers from one lab company that has operated in Phoenix for 26 years. It is still too early to gauge whether Theranos is grabbing market share from other labs in the Phoenix area and whether it can to build market share by promoting extremely low pricing.

TWO FACTORS ARE HEATING UP the clinical laboratory market in Arizona. One factor is the new law allowing consumers to order any clinical laboratory test and the other is Theranos, the new lab company.Last year, Theranos launched operations in Arizona. It now has phlebotomists in 41 locations, mostly in Phoenix Walgreens stores. (See TDR, April 20, 2015.)

On July 3, the new state law, “Laboratory Testing Without Order,” became effective. This law allows consumers to order any clinical lab test without a physician’s order. Before the new direct-access testing law went into effect, Arizona had a law allowing patients to order only 25 basic screening lab tests without a physician’s order.

Theranos advocated the new law’s introduction. When Gov. Doug Ducey signed the bill into law, he did so at the new Theranos laboratory in Scottsdale. During the signing ceremony, Ducey stood with the bill’s sponsor, state Rep. Heather Carter (R-Cave Creek), other lawmakers, and Theranos CEO Elizabeth Holmes.

The law’s supporters say it empowers consumers by letting them order their own tests without having to wait for a physician visit. It also protects physicians and other health care providers from legal liability because physicians do not need to interpret results of tests they do not order.

One disadvantage of the new law is that if any specimen has to be sent to a reference lab in any other state, the laws in that state may prevent these tests from being processed because there is no physician authorization with the referral.

Both the arrival of Theranos and the new DAT laws have stirred up the lab testing marketplace. For example, since the law went into effect, LabXpress, a company that caters to walk-in customers and thus now competes directly with Theranos, has lost more than 50% of its cash business volume, stated LabXpress President Scott Farrell.

Farrell had hoped to see an increase in volume when more patients sought lab tests because of the new DAT law.

“However,” he noted, “we have not seen any increase in test volume as a result of this law. In fact, we’ve actually seen a decrease of more than 50%.

Price-Sensitive Patients

“After the Affordable Care Act became effective in 2014, LabXpress had an increase in lab test orders,” stated Farrell. “This was because, in part, we serve patients who are price sensitive and the ACA health plans have high deductibles that patients must pay.“That did not happen with the new Arizona DAT law,” he continued. “Since it took effect in July, our lab test orders dropped off sharply.

”For LabXpress, the entry of Theranos has made it difficult to compete on price. Theranos says its prices are 50% lower than those of Medicare and it posts those prices online. LabXpress also posts its prices online but they are not as low as those of Theranos.

“It is impossible for any lab that operates patient service centers, pays for couriers, operates a modern lab facility, and maintains an information system to recover the cost of testing by charging just half of Medicare,” noted Farrell.

Getting Lawmakers’ Support

The drop in lab test orders came from walk-in customers and from orders from physicians’ offices, said Farrell. “Many patients are sensitive to price today,” he stated. “Walk-in patients and those who come to LabXpress from doctors’ offices are particularly concerned about the price of tests.

“Since our founding in 1989, we’ve had not only walk-in customers, but also patients referred to us by our physician clients,” explained Farrell. “We have sales people calling on the doctors’ offices and those doctors have been sending us lab test orders for years.

“Our sales reps tell us the doctors say, ‘We’re sending our lab test orders to Theranos now because they are much lower in price than you are,’” noted Farrell. “These are patients who pay cash and may also have high deductibles.

“In the past, doctors didn’t care about the price of lab tests, but they do now because their patients care about price,” he added. “If patients can’t pay, then they can’t get tested and doctors care about that. For years, our doctors sent lab tests to us because we were the low-cost provider, competing almost exclusively against LabCorp and Quest Diagnostics.

“In fact, we introduced the concept of discount laboratory testing in 1989 and we introduced direct access testing in Arizona which was eventually copied nationally,” said Farrell.

Quality Is a Tough Sell

“For all those years, we dominated in this market for cash-paying patients,” Farrell added. “But we’re no longer the lowest-priced lab and so now we will compete on quality and personal service of lab testing such as providing same-day results on the majority of lab tests.

“The problem with trying to promote quality lab testing is that cash-paying patients assume testing is a commodity product and all quality is the same,” he said. “They expect the results are accurate and equivalent regardless of price.

“But now we’re hearing from some doctors that patients, when using some low-price labs, are getting results that are out of line,” Farrell said. “That’s why we are emphasizing to doctors that patients need to know the quality of their lab testing.”

LabXpress has about 50 employees, most of whom work in the clinical lab in downtown Phoenix. LabXpress also has six patient service centers in the Phoenix area, one in Tucson, and one in Prescott Valley. The company does several million lab tests per year.

Contact Scott Farrell at 602-273-9000 or SFarrell@psisite.com.

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