MOST OF THE LAB INDUSTRY is watching the impending acquisition by Quest Diagnostics Incorporated of SmithKline Beecham Clinical Laboratories (SBCL).
This big news overshadows the steady gains made at Laboratory Corporation of America in its efforts to return to financial stability. After several years of financial struggle, the company is showing improved financial performance for the first quarter of 1999.
More importantly, LabCorp is returning to the marketplace with several new strategic sales programs. It seems to validate THE DARK REPORT’S prediction that, as the three blood brothers regain financial strength, each will increase its sales and marketing activities against other laboratory competitors.
Competition For Business
Further, LabCorp’s new products demonstrate how competition for business in the marketplace causes laboratory customers to expect a higher standard of service and quality. These new products also demonstrate that improved turnaround time and added value information (not just test results) can help laboratories acquire new clients.
For first quarter 1999, LabCorp showed a revenue increase of 7.8% over the same period in 1998. Net revenues were $417.9 million versus $387.7 in first quarter 1998.
LabCorp officials said that 4.4% of the revenue increase was attributable to increased prices for laboratory testing. The remaining 3.4% increase was from a larger volume of specimens.
LabCorp has stated that it will not bid for laboratory testing using prices based upon marginal cost. Assuming it followed that principle, a 4.4% gain in pricing for first quarter provides evidence that such a business strategy can work in today’s healthcare marketplace.
New Added Value Services
Laboratory executives should pay particularly close attention to recent announcements by LabCorp concerning its product offerings. LabCorp, like Quest and SBCL, has enough financial strength to introduce new added value laboratory services to the market.
The most interesting development was the joint announcement last month by LabCorp and PCS Health Systems that the two firms had signed a contract with the Mail Handlers Benefits Plan. The two companies will provide laboratory testing and pharmacy services to the one million members of the Mail Handlers Benefits Plan.
This is significant because it marries laboratory testing with pharmacy services. PCS is a multi-billion dollar pharmacy benefits manager owned by Rite Aid Corporation. PCS had joined with LabCorp in 1997 to form a laboratory benefits program.
PCS formerly handled LabOne’s LabCard™ program as a third party administrator. (See TDR, March 18, 1996.) Under this program, LabOne offered lab tests to self insured employers at discounted fee-for-service prices. By showing their LabCard to physicians, beneficiaries could get lab testing done without the need for a copay, deductible, or out-of-pocket payment.
Combine Lab And Pharmacy
PCS later joined forces with LabCorp to develop a similar program, now called “Performance Lab.” Both companies wanted to combine benefits for laboratory testing and pharmacy services under a single administrative umbrella.
What is particularly interesting about this venture is that both parties want to convert primary data—laboratory test results and pharmacy prescriptions— into useful information. They recognize the value in matching laboratory results with prescriptions ordered by the physician for the patient.
Both companies believe such cross-matching of information can identify patients who are not being properly treated. By combining lab results with prescriptions, they can possibly identify patients who are being under-treated or getting inappropriate medication for their condition.
Demonstrate A Benefit
As with all new marketplace experiments, it will take some time for the two companies to collect data, convert it into added value information, and demonstrate a significant benefit in matching laboratory results with prescriptions. But it represents another forward step in the development of the integrated clinical environment toward which the market is evolving.
The second marketplace initiative is LabCorp’s announcement last week of a drugs of abuse testing program that can deliver results “in less than one
hour.” The program, which LabCorp calls “RAdar (for Rapid Assessment of Drug and Alcohol Results), will use Roche’s TesTcup® technology. This is described as a “self-contained, integrated collection and testing device that provides results in minutes.”
Although initial positive results still will undergo a confirmation at one of LabCorp’s SAMSA-accredited laboratories, it does introduce a new factor into the intensely competitive market for drugs of abuse testing.
Taken together, these two marketing programs announced by LabCorp should be recognized by laboratory executives as “raising the bar” for laboratory services. Regardless of whether both programs are discernibly better today than other services offered by competing labs, they do elevate the expectations of customers.
Ordering/Reporting Systems
Remember when commercial laboratories first introduced PC-based lab test ordering/reporting systems into physicians’ offices in the early 1990s? Once customers recognized the benefit of such a system, it became necessary for any competing lab to offer the same type of PC system if they were to compete for the business.
That is why it is important for laboratory executives to view these marketing initiatives by LabCorp, and similar product launches by Quest and SBCL, as a sign that the market is forcing clinical laboratories to add tangible real value to a simple test result if they are to retain and increase their customer base.
Said in another way, THE DARK REPORT wants its clients and readers to recognize that the market is dynamic. Any lab which sits still and only offers the same laboratory services it did five years ago will find itself at a competitive disadvantage. It is essential for regional and hospital-based labs to innovate and develop added value services if they are to remain competitive and financially viable.
Interesting Facts About LabCorp
Managed care contracting and hospital alliances are two issues of concern to laboratories throughout the United States.
During 1998, LabCorp held approximately $90 million in capitated contracts. This represents about 6.7% of its $1.61 billion revenues in 1998.
During 1998, LabCorp developed 58 new “strategic alliances” with hospital labs. These involve a variety of service relationships. Based on past numbers provided by LabCorp, THE DARK REPORT estimates that these alliances represent less than $80 million in annual revenues. Combined with existing “strategic alliances,” LabCorp probably generates about $150 million per year from its hospital alliance program.
For those interested in revenue per requestion, LabCorp says that managed care represents between 35% and 45% of its accessions in 1998, and generated between $10 and $40 per requisition. Commercial clients are the source of between 20% and 25% of total accessions, with revenues of $15 to $25 per accession.
Intense Battle For Clients
As LabCorp, and the other two blood brothers restore their focus on sales and marketing, competing labs can expect a more intense battle over new client accounts. The financial struggles and internal distractions of 1996, 1997, 1998 are passing.
Regional laboratories should recognize that competitive success in the future rests on offering their clients innovative laboratory testing services which add value.
