Removing Lab Players From the Chessboard

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IN 1997-98, CEO Ken Freeman of Quest Diagnostics Incorporated made a keen insight about the commercial lab marketplace. At that time the three blood brothers—Laboratory Corporation of America, Quest Diagnostics, and SmithKline Beecham Clinical Laboratories (SBCL)—dominated the national market for physicians’ office testing. Freeman’s observation would be prophetic. He noted that, in any industry dominated by three large companies, market forces would soon reduce that group to just two.

Because each of the three blood brothers was laboring to restore financial stability in 1997-98, each was potentially vulnerable to consolidation. On May 13, 2002, I wrote a piece called Survivor: Story of the Nation’s Largest Lab Firm. It described how, since 1997-98, Freeman successfully guided Quest through the ensuing market shake-out to emerge as the nation’s largest lab firm.

This fine management achievement seems to have another dimension, however. Beginning this January, acquisitions removed American Medical Laboratories and Dynacare from the market. Unilab is under merger agreement and may also disappear as an independent lab company. As THE DARK REPORT did research to understand the significance of these acquisitions and their impact on the lab industry, it uncovered an interesting pattern involving the three biggest lab acquisitions done by Quest Diagnostics in recent years.

In the late 1990s, SBCL aggressively used low prices to protect and expand its share of physicians’ office testing. In 1999, Quest bought SBCL. During the past few years, AML emerged as an aggressive price discounter in the market for hospital send-out testing. This January, Quest bought AML, announcing the deal just days before AML was to sign a national reference testing contract with Premier at some eye-popping low prices and terms. (See pages 9-13.) In California, Unilab has used its willingness to do capitated, full-risk contracts with IPAs to keep lab prices in that state at uncomfortably low levels. This April, Quest Diagnostics announced an agreement to buy Unilab.

Is it coincidence that, three times in the last three years, Quest Diagnostics acquired a sizable lab competitor which was the aggressive price discounter in one segment of the lab testing market? Or is this an intentional strategy to remove key competitors from the market, exactly the type of antitrust behavior characteristic of a classic corporate oligopolist? Certainly Quest’s actions in the coming years will reveal the true motives behind its apparent drive to remove low-pricing lab competitors off the chessboard.

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