“Lowest-Priced” Chickens Came Home to Roost

IN READING THE INTELLIGENCE BRIEFINGS on reference/esoteric laboratories in this issue, I found it interesting that American Medical Laboratories (AML) is no longer an independent lab company serving this market segment and that, of the four remaining independent lab companies focused exclusively on reference and esoteric testing, the only firm not operating in the black is Specialty Laboratories, Inc.

These two outcomes fulfill a prediction made almost six years ago by THE DARK REPORT. In the August 30, 1999 issue of THE DARK REPORT, our headline was “Reference Labs Intensify Battle for Send-out Tests.” We predicted that hospital laboratories would benefit as competing reference labs offered both lower pricing and enhanced IT services to woo new clients. In particular, we noted that AML, as a vigorous new entrant into the national reference/esoteric testing marketplace, would aggressively use low prices to capture new reference testing clients. AML would be the same type of low-price competitor as Specialty Laboratories, Inc. had been in earlier years, once it had, like AML, declared that it wanted to be a full-fledged national provider of reference and esoteric testing.

Another prediction made at that time was that a laboratory company relying on aggressively-discounted test prices to attract new clients would be challenged to generate enough revenues to earn profits and run a top-quality operation. Such laboratories are spending significant amounts of money to maintain an extensive sales and marketing pro- gram. Then add the cost of enhanced IT services. Because new clients would enjoy discounted pricing, it would make it tough for such laboratories to both recover the sales/marketing cost to acquire a new client and generate enough operating margin to sustain normal business activities.

Granting the truth of the above statement, is there any surprise that American Medical Labs, facing the need to raise capital, sold itself to Quest Diagnostics Incorporated in 2002? Or that, of the four national reference/esoteric labs covered on pages 12-14, the only one losing money at this time is Specialty Labs? This is a useful validation of THE DARK REPORT’S prediction almost six years ago. It’s also a reminder to hospital lab outreach programs that pricing does matter. It takes adequate pricing to support the financial margins required to operate a high-quality laboratory.