New Players May Alter Who Buys & Who Orders Lab Tests

Three distinct trends represent new sources of disruption to clinical labs

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CEO SUMMARY: This first installment in our series describes why market forces are at work to create a new player in healthcare that will transform the lab testing marketplace as we know it today in two ways. First, a new category of primary care providers has the potential to eventually order as many lab tests per year as are reimbursed by the Medicare program. Second, if the first prediction comes true, these new primary care clinics will also become the nation’s biggest buyers of lab analyzers and lab tests. That would be both a threat and an opportunity for today’s largest IVD companies. 

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FIRST IN A SERIES

IN THE NEAR FUTURE—EVEN WITHIN AS FEW AS FIVE YEARS—the clinical laboratory industry can expect to be confronted by a very different marketplace than it currently serves. 

This will happen because at least three primary forces now becoming visible will bring about a radical restructuring of today’s clinical laboratory market, which currently operates along the same principles as during the 1970s and 1980s. In those decades, two factors revolutionized the clinical laboratory industry. 

One factor was the automation of routine lab testing. The second factor was the emergence of public corporations that launched or acquired clinical labs and began a five-decade long process of lab consolidation that continues even today. 

Today, 50 years later, the consequences on the lab testing marketplace of these two factors is easy to see. Labs of almost any size have lots of automation and nationally, the duopoly of publicly-traded Labcorp and Quest Diagnostics dominates the scene. 

But today’s clinical lab marketplace will be upended by three powerful forces that are already visible to keen observers. The three forces are: 

• The emergence of a new class of buyers for clinical laboratory tests that will grow to become dominant. 

• A flood of ever-smaller and faster lab analyzers and test kits that incorporate new and transformative diagnostic, digital, and AI technologies. These are specifically engineered for use in near-patient settings and to produce low-cost, speedy results at a competitive price per test. 

• The new preferences of Millennials who—as patients—demand access to medical services and health information in radically different ways than earlier generations. 

The Dark Report is first to recognize these developments and present them to our clients and regular readers. Clinical laboratory administrators and pathologists can use the information that follows to guide strategic planning in their respective labs and pathology groups. 

This series of intelligence briefings will describe each of the three new market forces in detail. In this first installment, we address the pending arrival of a major new class of buyers of clinical lab tests. Typically, payment for the biggest proportion of lab tests have been government and private health insurers. However, that will change as these new buyers establish their clinical operations in every region of the United States.

The next installment in this series will deal with the second market force we predict to be transformational. That market force will be propelled by a new class of in vitro diagnostics (IVD) companies that offer smaller and cheaper analyzers that can deliver lab test results of comparable accuracy to today’s centralized clinical laboratories. 

As noted earlier, these new diagnostic tests and analyzers will be designed for use in near-patient and point-of-care settings, will use much smaller sample volumes, will deliver results in minutes, and—in many cases—will do these tests cheaper than if they were performed in a large regional core lab.

The third installment of this series will take up how the different needs, interests, and preferences of Millennials, as well as the Gen Z generation now entering the workplace, are in the earliest stages of reshaping how healthcare is delivered and how individual patients access medical services. 

As they age, a large proportion of Millennials will prefer seeing their primary care physicians virtually. They will monitor their exercise and biomarkers with wearable devices. They will use smartphones and the Internet to access their patient health records and research their health conditions. 

Lab Sample Collections

Those clinical labs and pathology groups that adapt to these different needs and preferences of Millennials and Gen Z will thrive. But to do so, they will need to develop different ways to collect lab samples from patients who used virtual exams to consult with their physicians. 

Millennials will also value clinical laboratories that digitally deliver not just lab test results, but also provide their patients with the full clinical and health implications of their lab test results. 

The possibility exists that a fourth powerful force for change—Amazon—can disrupt today’s clinical lab marketplace all by itself. Since the onset of the pandemic, it has built its own network of CLIA-certified complex laboratories for COVID-19 testing of its one million employees. 

The Dark Report will use the fourth installment of this series to assess Amazon’s clinical lab testing activities and the different ways it can be expected to leverage the clinical laboratory facilities it built and operates today. Because of Amazon’s track record at disrupting several different industries in the past 25-years, we must consider its potential to upend the lab testing marketplace as we know it today. 

TREND ONE: New Clinical Lab Test Buyers

The new class of buyers for clinical laboratory tests will be include the large national and regional corporations that operate primary care clinics and medical care “hubs” in their retail stores. 

Three types of national retailers will be prominent in this trend. One will be the pharmacy chains, including CVS, Walgreens, RiteAid, and others.

The second will be national retailers, particularly Walmart and Target. Third will be national and regional grocery stores that include pharmacies. The biggest of these supermarket chains include Kroger, Albertsons, and Publix. 

Each of these corporations have plans to incorporate full-service primary care clinics in some of their retail stores and may already be building and operating their first such clinics. Typically, the primary care clinic is located next to the pharmacy counter. In some cases, retail chains are building stand-alone primary care clinics located on the same properties as their retail stores. 

The interest of retail chains in adding primary care services to existing retail stores did not happen overnight. It grew out of the 15-years experience these corporations gained from operating “walk-in clinics” (sometimes called “rapid clinics”) within their network of retail stores. 

In fact, one way to characterize and describe this coming new class of buyers for clinical laboratory tests is to review how the novel concept of the walk-in clinic was created about 15 years ago. Owners and operators of this unique, new type of medical service provider are the direct evolutionary precursors—and will be part of the coming new class of clinical laboratory test buyers. 

Minute Clinics Was First

Long-time clients and regular readers of The Dark Report will remember how MinuteClinics (originally launched in 2000 in Minneapolis-St. Paul as QuickMedx) began an expansion in 2004 that introduced the walk-in clinic as a novel category of healthcare provider. 

Today, it is estimated that more than 11,000 walk-in clinics are in operation throughout the United States. During the past decade-and-a-half, this new type of medical provider moved past the proof-of-concept stage. 

Widespread consumer acceptance of walk-in clinics now makes them the launching pad for retailers to expand them into full service primary care clinics. These national retail chains will begin operating full-service primary clinics in their retail pharmacies and stores. 

As developed by QuickMedx/MinuteClinics in 2000, the walk-in clinic concept was simple. It was often described as the “nurse practitioner (NP) in the box.” The walk-in clinic typically was located next to the pharmacy counter in drug stores, grocery stores, and chains like Target and Walmart. It was a walk-up service. 

Walk-in clinics would generally diagnose and treat about 40 common medical conditions, most of which would require a prescription that the NP could provide. These conditions ranged from ear infections and strep throat to colds, flu, and the administration of immunizations.

The price for the visit was cheap—typically as low as $40—and was generally paid in cash by the consumer. Wait times to see the NP were short and if consumers could not immediately see the nurse practioner, they were given pagers. That allowed them to shop in the store until the NP was available. (Incidentally, retailers who hosted these walk-in clinics liked that consumers would shop while waiting to see the nurse practictioner. This boosted sales at the store.)

The concept of the walk-in clinic was an immediate success with retailers. MinuteClinic quickly placed its rapid clinics in a number of Target stores and CVS pharmacies. CVS was so impressed with the performance of these walk-in clinics that it acquired MinuteClinic in 2005 for a price of about $170 million. 

Currently, CVS operates almost 10,000 retail pharmacies in the United States. Between its retail pharmacies and the pharmacies it operates in Target stores, it has about 1,100 walk-in clinics.

Competitors to MinuteClinic appeared almost immediately. For example, Walgreens quickly introduced what it calls the Healthcare Clinic and currently operates 413 such walk-in clinics in its stores in the United States.

Customer Acceptance

By watching how consumers used the medical services of walk-in clinics, and experiencing a worthwhile increase in associated sales in those retail stores—not just in filling more prescriptions (a lucrative business line in its own right)—but in sales of other products, these national and regional corporations recognized the opportunity to move into clinical care in a bigger way. 

A related trend that reinforces consumer acceptance of walk-in clinics is the explosive growth of urgent care centers. This care concept first emerged in the 1970s. As recently as 2005, there were under 1,000 urgent care centers in the United States. However, according to data provided by FierceHealthcare, that number grew rapidly over the past 15 years and there were 9,616 urgent care centers operating in 2020. (See sidebar below.)

Urgent care centers differ from walk-in clinics in important ways. They are typically located in stand-alone facilities. They offer extended hours and are open on weekends. They are staffed with physicians and physician assistants and usually provide a full range of clinical services that include on-site imaging and laboratory testing. Urgent care centers typically accept insurance and charge standard prices for office visits and other services. 

Powerful Economics 

It is important to understand that the impressive growth in the revenue generated by both walk-in clinics and urgent care centers over the past 15 years is why national retail chains now want to put full-service primary care clinics into their retail stores. 

If these national chains make a big push into primary care, they have the potential to originate large volumes of lab tests and they could become the nation’s biggest buyers of lab analyzers and lab tests. The Dark Report did a “back of the envelope” estimate of just how big the test demand could be, shown in the sidebar below. 

Using reasonable assumptions, our analysis showed that if major retail chains put a primary care clinic in just 25% of their stores, and these clinics ordered tests for just 30 patients per day, collectively they would need 278 million lab tests per year. That would approach the 428 million tests reimbursed by Medicare in 2019. Coming installments in this series will assess other factors The Dark Report predicts will drive primary care in retail stores.

Why Companies Like CVS, Walmart, Target, and Kroger Want to Put Full-Service Primary Clinics in Their Stores

number-of-urgent-care-centers-in-the-us

HAVING WATCHED THE EXPLOSIVE GROWTH OF URGENT CARE CENTERS IN THE UNITED STATES SINCE 2005, major retail pharmacy and grocery chains see opportunity in providing the full range of primary care services, including ancillary services like clinical laboratory testing and imaging. The chart above shows how the number of urgent care centers increased by 58%, from 6,100 to 9,616, in just six years. During this same period, retailers were expanding their walk-in clinics at a similar pace. 

 

growth-of-urgent-care-centers

SHOWN ABOVE IS A CHART THAT TRACKS BOTH THE TOTAL ANNUAL REVENUE AND PER ANNUM GROWTH PERCENT of urgent care centers in the years 2003 to 2019. IBIS created the chart and reports that urgent care centers generated revenue of $28.4 billion in 2019. Revenue increased annually at high single-digit rates or better. For retail chains, this is attractive growth with good profit margins. They would like to capture market share in this healthcare segment. 

How Retail Chains’ Purchasing Clout May Position Them as Major Buyers of Clinical Lab Tests in Coming Years

SHOULD THE NATION’S BIGGEST PHARMACY AND GROCERY CHAINS push to open full-service primary care clinics in coming years, they would quickly become a large buyer of clinical laboratory tests. This would be a major disruption to the clinical laboratory industry as it exists today. It also would be disruptive to in vitro diagnostics (IVD) manufacturers, because they would be selling to multi-billion dollar retail corporations that want to standardize instruments, tests, and test methodologies across hundreds and thousands of sites throughout the United States. 

The Dark Report did a “back of the envelope” calculation to illustrate the potential buying power of these retail chains as they expanded the number of primary care clinics they operate. The estimate is below:

Assumptions:

1. 34,000 retail pharmacy and grocery stores = 34,000 total retail stores

2. 25% of these locations open a primary care clinic = 8,500 stores with PC clinics

3. 40 patients per day per clinic (40 x 8,500) = 342,000 patients treated/day

4. 30 patients per day get lab test orders from doctor = 255,000 patients/day with lab orders

5. 3.5 lab tests per patient (3.5 x 255,000) = 892,500 number of lab tests/day

6. Clinics operate six days/week (255,000 x 312 days) = 278,304,000 number of lab tests/year

One way to give context to the lab test buying power represented by the above example is to compare the numbers above with the number of clinical lab tests reimbursed by the Medicare Part B program. 

The Office of the Inspector General’s 2020 PAMA Report includes a table of the top 25 tests which shows price, volume, and total spent by the Medicare program. For the top 25 clinical lab tests by volume, Medicare reimbursed 321,170,000 tests in fiscal 2020. 

These calculations demonstrate that the potential volume of lab test orders from the primary care clinics operated by the major retail pharmacy and grocery chains could reasonably grow to just about equal the yearly number of clinical laboratory tests reimbursed by Medicare.

National Retailers Keep Building New Stores

To understand why the national retail chains could grow into major buyers of clinical lab tests in coming years, it is necessary to understand the number of stores they operate. These numbers are taken from corporate websites and public sources. 

#Stores 

CVS                     9,957

Walgreens         9,021

Rite Aid             1,932

Walmart           4,743

Target               1,868

Kroger              2,742

Albertsons      2,252

Publix             1,239

Total            33,754

Contact Robert L. Michel at 512-264-7103.

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