More Consolidation: Where Will It Lead?

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I CERTAINLY DID NOT FORESEE ALL THE LAB ACQUISITION ACTIVITY that occurred during 2002. Compared to recent years, both Quest Diagnostics Incorporated and Laboratory Corporation of America have been on a buying spree this year.

Quest Diagnostics acquired American Medical Laboratories in April and has an agreement to acquire Unilab Corporation, pending a decision by the Federal Trade Commission. LabCorp bought Dynacare and has now signed an agreement to acquire DIANON Systems, subject to share-holder approvals and regulatory reviews. There have also been several acquisitions of smaller, private labs throughout 2002.

In simplest terms, it means the biggest labs are getting bigger and the smaller labs are shrinking in number. In May, THE DARK REPORT wrote about how the two blood brothers now hold a national oligopoly in the physicians’ office segment, along with regional monopolies in selected cities throughout the United States. (See TDR, May 13, 2002.) How this will affect the marketplace for laboratory testing services has yet to be seen.

As I survey the nation’s healthcare system, I think the clinical laboratory industry may be the first clinical segment to have such a dominant oligopoly at the national level. By my guess, combined, LabCorp and Quest Diagnostics control upwards of 70% of the national market for lab specimens originating in physicians’ offices. By comparison, in the hospital segment, HCA and Tenet Healthcare, combined, only own about 9% of the nations’ hospitals.

Anatomic pathology may be next in line to undergo extensive consolidation. LabCorp’s purchase of DIANON is a direct statement that it intends to compete more aggressively for tissue specimens that originate in physicians’ offices. This has traditionally been a captive market for local anatomic pathology group practices. Meanwhile, AmeriPath has quietly continued to scoop up three to six pathology practices each year. It now employs 400 pathologists. Local pathology groups that fail to respond to this marketplace trend may find themselves extinct because of their failure to adapt to a changing environment.

All of this consolidation activity raises a critical business question: is the competitive marketplace now tilted in favor of larger labs, with their economies of scale? There are examples of regional labs and pathology “super-groups” which are doing well. But can they sustain this success against competition from our industry’s ever-growing billion-dollar oligarchs?

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