OVER IN NORTH CAROLINA, one of those good, old-fashioned southern feuds is under way.
Like the fabled feud between the Hatfields and the McCoys of years past, Spectrum Laboratory Network and Laboratory Corporation are in a full-fledged shoot-out over market share of physicians’ office testing in the Tar Heel State.
This feud is instructive in a variety of ways. THE DARK REPORT believes it illustrates a number of truths about both the potential of hospital laboratory outreach programs and some of the intrinsic business weaknesses that dog the national laboratory companies.
Moreover, this ongoing feud involves personalities that shape it in interesting ways. The human side of this story may be just as important as the business lessons it teaches.
Hospitals Own Spectrum
Spectrum Laboratory Network is a lab- oratory joint venture owned by three hospital systems, Moses Cone Health System, High Point Regional Health System, and Novant Health System. Based in Greensboro, North Carolina, Spectrum is located just 25 miles from LabCorp’s headquarters in Burlington.
In the past two years, Spectrum’s laboratory outreach program began to grow rapidly. Because Spectrum is in LabCorp’s “backyard,” most of its revenue growth has come from physician’s offices formerly served by LabCorp. Spectrum states publicly that net collected revenues from outreach testing will reach $47 million for 2002, so its growth has been substantial.
Few Knew About Spectrum
Until recent months, Spectrum’s continued attacks on LabCorp’s home markets were little known outside of North Carolina. This all changed on October 3 when LabCorp announced it would fall about 2% short of revenue expectations for third quarter. Following that disclosure, LabCorp’s stock price dropped by almost 33%.
To put this in better perspective, within 24 hours of LabCorp’s disclosure that it would fall about $10+ million short of third quarter revenue estimates, the market value of its outstanding stock fell by $1.7 billion! Not surprisingly, Wall Street investors deluged LabCorp with calls and questions. (See TDR, October 7, 2002.)
LabCorp officials attributed the revenue shortfall to business lost to a hospital outreach program in North Carolina and identified Spectrum Laboratory Network by name. This created instant fame for Spectrum, which found itself also deluged by tele- phone calls from financial analysts attempting to understand LabCorp’s revenue problem.
For its part, LabCorp has acknowledged that its service level in North Carolina had failed to keep pace with Spectrum’s on such measures as turnaround time, the network of patient service centers, and in-office phlebotomy services. Spectrum’s use of discounted pricing in North Carolina, a client-bill state, was also viewed to be a factor.
Win Back Business
Having made Spectrum famous on Wall Street, LabCorp realized that, to restore lost credibility, it must win back the physicians’ office business it lost in to Spectrum in North Carolina. To accomplish this, LabCorp has launched what it calls “Project Hurricane.”
In the short term, LabCorp has transferred sales reps from other regions into North Carolina. These sales reps have been given special pricing packages and the ability to offer expanded services to win back lost clients. In the long term, LabCorp is recasting its sales management and field sales team covering that region. LabCorp also says it will add patient service centers and put more phlebotomists into physicians’ offices.
Trading Same Clients
Long-time veterans of the commercial laboratory marketing wars of pre-1994 era know what this means. LabCorp and Spectrum will begin trading client accounts. However, new accounts will generate less profit because: 1) of the more aggressive use of discounted pricing; 2) additional expenses incurred to service these new accounts; and, 3) additional sales and marketing costs to close and set-up new accounts.
This establishes the business background for the ongoing marketing war unfolding between Spectrum and LabCorp. But it’s the people involved that make the “Hatfield and McCoy Feud” an apt metaphor.
Spectrum’s surging outreach program is not an accident. It is directly linked to the arrival of its new CEO, Nate Headley. Headley was an executive at National Health Laboratories during its go-go days. Through most of the 1990s, he served as CEO of Physicians Clinical Laboratories, Inc. (PCL). Based in Sacramento, California, PCL was a publicly-traded lab until it went into Chapter 11 bankruptcy in November 1997.
This means Nate Headley is an experienced hand at marketing commercial laboratory services to physicians’ offices, particularly in California, where the marketing battles were extremely intense. It also means that some LabCorp executives and Headley served together at National Health Labs years ago.
Human Face To Every Feud
Each side of the feud has a human factor. On the Spectrum side, Headley probably wants to give his former NHL colleagues within LabCorp a good run for their money—healthy competition like Army playing Navy in football every year. On the LabCorp side, it’s now a serious goal to regain lost market share and restore credibility with Wall Street.
What will make the LabCorp vs. Spectrum feud interesting to watch in future months is how the human elements play on top of the business dynamics. At a minimum, THE DARK REPORT can identify these useful business lessons:
1)Spectrum’s expanded market share of physicians’ office testing demonstrates that a hospital lab outreach program has several competitive advantages over the national lab companies when all things are equal. It demonstrates that if the outreach services are better, physicians respond enthusiastically to a local lab option.
2)Spectrum’s strong growth rates and recognized service advantages (as acknowledged by LabCorp) show the importance to a hospital lab outreach program of a chief lab executive who understands how to organize a professional sales and marketing campaign that is complemented by good lab testing operations.
3)Spectrum’s success at expanding market share reveals the vulnerability of the national labs in markets where they’ve held a monopoly share with little competition. Essentially, when physicians in North Carolina were
offered a credible choice, they opted at high rates for the local hospital lab outreach program.
4)In many regions, the national labs have reduced service levels down- ward. The evidence of this in North Carolina is LabCorp’s statement that it must add patient service centers and put more phlebotomists in physicians’ offices if it is to match Spectrum’s service infrastructure.
5)Aggressive low pricing for lab tests in a client bill situation is destructive to all laboratory competitors. If this happens in North Carolina, over time, either LabCorp or Spectrum may find themselves the market share victor—but the profit margins from that book of lab testing business may be so low as to barely cover the costs of pro- viding such testing.
Presbyterian Lab Outreach
For long-time clients and readers of THE DARK REPORT, competition in North Carolina between LabCorp and an aggressive hospital outreach program is deja vu. During the first half of the 1990s, Presbyterian Laboratory Services of Charlotte, North Carolina, was the aggressive competitor, stealing big chunks of LabCorp’s business in Charlotte. (See TDRs, October 27, 1997 and November 17, 1997.) However, Presbyterian Laboratory Services lost much of its support from administration when Presbyterian Health became part of Novant Health System in the mid-1990s.
For the present, the feud between LabCorp and Spectrum Laboratory Network is now a high-profile affair. Both Wall Street and the laboratory industry are watching. As both labs devote more resources to defending their existing client base and enlarging their share of the market, the risk is that this may become a Pyrrhic victory for
the eventual winner.
LabCorp-Spectrum Battle Offers Useful Insights
AS THE BATTLE IN NORTH CAROLINA between Spectrum Laboratory Network and Laboratory Corporation of America unfolds, it provides several valuable insights about the physicians’ office testing segment.
1.Spectrum, as a hospital lab outreach program, demonstrates that such pro- grams have several competitive advantages over national labs when service levels are at least equal.
2.Spectrum’s lab outreach program has been around for years, but had languished. Upon the arrival of a strong management leader, these same resources were deployed in support of a professional sales and marketing program. Experienced management leadership was a missing ingredient.
3.Spectrum’s success illustrates how vulnerable the national labs can be in regional markets where they’ve faced little effective competition.
4.LabCorp’s declaration that it will add patient service centers and other service infrastructure in North Carolina is a clue as to how service levels have been allowed to erode in areas where the national labs hold large market shares and face little competition from local labs.
5.North Carolina is a client bill state. Going forward, both LabCorp and Spectrum may overuse discounted pricing to protect and increase market share and make the resulting business marginally profitable for all laboratory competitors.