Blood Brothers Prepare to Go to the Mat

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LIKE MANY OF YOU, I WAS STARTLED BY THE NEWS that UnitedHealth Group, Inc. was willing to cut Quest Diagnostics Incorporated out of the health insurer’s national contract for laboratory testing services. After all, there are many reasons, like economies of scale, why these two companies should be mutually interested in perpetuating their business relationship.

Nonetheless, it is now an announced fact that, as of January 1, 2007, Laboratory Corporation of America will be the sole national contract provider for UnitedHealth. As that date arrives, it will be a high-stakes game for all three parties. Quest Diagnostics has acknowledged that the UnitedHealth business is about 7%, or $385 million, of its $5.5 billion revenue. That business is going to be vigorously contested.

For its part, LabCorp has told Wall Street that it must spend more than $35 million in additional expenses and capital to put infrastructure into markets where UnitedHealth has beneficiaries and LabCorp has inadequate resources. Further, for it to benefit financially from its new national contract, LabCorp must convince large numbers of physicians who currently use Quest Diagnostics for their UnitedHealth patients to redirect those specimens away from Quest and over to LabCorp.

If you ask me, we are about to see one of the most interesting business battles between commercial lab firms since the 1980s. LabCorp has the challenge of executing its business strategy. It must swiftly build patient service centers and rapid response labs in communities where it currently has little presence. It must hire additional sales reps to call on physicians and convince them to switch. LabCorp must also create regional laboratory networks in selected areas and develop collaborative relationships with local labs in other markets.

Meanwhile, Quest Diagnostics will be doing everything in its power to retain these physicians as clients. Its sales reps will aggressively work to retain the status quo. Quest Diagnsotics is also likely to experiment with some unexpected strategies and tactics to retain this business.

Finally, I predict that there will be more at stake than several hundred million dollars per year of lab testing business. This battle will be over corporate honor. Given human nature, employees at both firms are likely to make this a personal grudge match.

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