California Is Lab Industry’s Bellwether Again

IT’S NO COINCIDENCE THAT two recent lab industry developments are centered around lab companies in California. Repeatedly that state has proven to be a valuable bellwether of lab industry trends for the nation.

On the lab regulatory front, state officials from the California Department of Health Services (CDHS) have sanctioned Specialty Laboratories, Inc., based upon regulatory deficiencies observed during visits to its laboratory facility in Santa Monica in June and October, 2001. Based on their findings, and subsequent negotiations with Specialty Labs to develop an acceptable Plan of Correction, the Centers for Medicare and Medicaid (CMS) is sanctioning Specialty Labs and revoking its CLIA-88 license because of deficiencies under CLIA regulations.

As of press time, neither state nor federal lab regulators have issued public statements concerning the Specialty Labs matter. This makes it hard to determine whether there is a broader message to the lab industry behind the sanctions leveled against Specialty. But action to revoke a public lab company’s CLIA-88 license, particularly one as well known as Specialty Labs, is a sign that laboratory regulators are assuming a tougher stance toward identified violations of public laws and regulations. Since California regulates clinical laboratory operations more tightly than most other states, actions taken by CDHS and CMS against Specialty Labs may be an early market signal of a change in enforcement policy by regulators.

The other development is the acquisition of Unilab Corporation by Quest Diagnostics Incorporated. (See articles here and here.) By purchasing Unilab, Quest Diagnostics is buying dominant market share of the “physicians’ office segment” of lab testing in California. Pooled with its existing lab operations in California and its clout with managed care plans, Quest Diagnostics is poised to dominate the Golden State. With antitrust regulators likely to approve the deal, since they judge market share by the total lab testing pie (adding hospital inpatient testing, physicians’ office laboratory [POL] testing, and physicians’ office referral testing together), it is a sentinel event in the evolution of the nation’s competitive marketplace.

On both counts, the two events in California reveal that government regulators—one group monitoring lab operations, one group monitoring anti-trust behavior—are signaling the type of directions they will tolerate for the nation’s clinical laboratories.