Substance Abuse Testing Gains Increasing Favor

An overlooked segment of lab testing quietly attracts increased competition

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CEO SUMMARY: Here’s an update to our earlier predictions that clinical laboratories would find substance abuse testing to be a profitable adjunct to clinical testing. Evidence accumulates that competition in the drugs of abuse marketplace is intensifying. While still a relatively small market, opportunities for non-SAMHSA laboratories to build a profitable book of business should only increase in coming years.

TESTING FOR DRUGS OF ABUSE has long been considered a stepchild by clinical laboratories.This is beginning to change, however, as more laboratories reassess the revenue potential from this market segment.

Evidence supporting this conclusion comes from almost every clinical laboratory which offers a serious testing program for drugs of abuse. At LabOne, Inc. in Kansas City, revenues from substance abuse testing are increasing 50% or more per year.

Substance abuse testing…remains on a fee-for-service reimbursement because private employers generally pay for these tests.

One of THE DARK REPORT’s favorite examples of a niche laboratory is Laboratory Specialists of America, based in Oklahoma City. This company only offers substance abuse testing. In 1994, it posted $3.8 million in sales. For 1998, it projects annual revenues of $14.0 million. Acquisitions account for most of this company’s growth.

Substance abuse testing has two advantages over clinical testing. First, it remains on a fee-for-service reimbursement because private employers generally pay for these tests. Unlike capitated clinical testing reimbursement, this more generous reimbursement means additional money to the laboratory.

Second, the growth in substance abuse testing is steady. Utilization is not declining, but increasing. Studies reveal that employers with pre-employment and random screening programs gain measurable benefits through reduced employee turnover, increased productivity, lower disability claims, and lower insurance premiums.

Another sign that clinical laboratories consider substance abuse testing to be a viable growth area is the recent press releases by both Quest Diagnostics Incorporated and SmithKline Beecham Clinical Laboratories. Both laboratories now offer testing to determine whether specimens have been adulterated with nitrites.

“Drug users are always looking, for a way to beat the system,” said Gregory Gallo, Vice President of Sales and Marketing for the Employer Division at Quest Diagnostics. “During the last twelve months, there was a noticeable increase in the number of specimens containing nitrites. An increasing number of users believe that nitrites added to the urine sample will generate a negative result.”

Nitrite Adulteration

“This creates the need to screen samples for nitrite adulteration,” continued Gallo. “We did a pilot program with some national customers last fall. It was well-received and that led us to offer a test panel which includes screening for nitrites.”

“Nitrite adulteration is an example of how the marketplace changes,” stated Yale Caplan, Ph.D., Director of Forensic Toxicology at Quest’s Baltimore laboratory. “Drug test numbers reported to the government showed this to be an increasing problem last year.”

Caplan, who sits on the SAMHSA advisory board for the Human Health Services Department of the federal government, indicated that Quest has set up a basic chemistry test that screens for nitrites. This is included in the substance abuse panels.

Growth Market

Just as smaller laboratories like LabOne and Laboratory Specialists have seen healthy growth in their substance abuse testing programs, so also has Quest Diagnostics. “We consider workplace testing for substance abuse to be a growth market,” noted Gallo. “But if you look at national numbers, the year-to-year increase in aggregate testing is modest. It is typical of a more mature marketplace.”

Workplace substance abuse testing probably totals around $300 million. Other categories include rehabilitation programs, corrections, hospitals, and probation/parole programs. Estimates are that each of the three national laboratories perform about 5 million sub- stance abuse tests per year.

Gallo believes that his company is seeing regular growth in testing volumes in this category for several reasons. “Within the employer division, we have standardized across the country,” he said. “This brings uniformity to our customers. We also have a great program for managing collections and handling billing.”

There is another interesting aspect to workplace testing. “The majority of substance abuse testing comes from private employers who do not require SAMH- SA-certified testing,” said Gallo. “They want the benefits of pre-employment and random screening programs, but do not require SAMSA-certification.”

Central Laboratories

Quest Diagnostics has eight SAMHSA-certified laboratories. In contrast, both LabOne and Laboratory Specialists of America each operate one central laboratory, in Kansas City and New Orleans, respectively. Yet both of these labs successfully offer services on a national basis.

Two other primary competitors in the marketplace are PharmChem, based in Menlo Park California, and MedTox, based in Minneapolis, Minnesota. Each specializes in substance abuse testing and is publicly traded. Both companies have enjoyed regular growth in sales volume.

Compared to clinical testing in the market segments of long term care and home health, where reimbursement is undergoing drastic cutbacks, substance abuse testing remains an attractive option for clinical laboratories seeking to explore niche market opportunities.

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