"Newmaker Interview"

Market Changes Lead LabCorp To Follow New Strategic Direction

LabCorp is building expertise in genomic and esoteric testing to differentiate itself in the market

CEO SUMMARY: When formed in 1995, Laboratory Corporation of America faced a financially-hostile marketplace for lab testing services. However, strategic planning retreats in 1997 and 1999 were pivotal in redirecting this billion-dollar lab behemoth toward financial stability. During 2000, its share price soared as LabCorp posted strong gains in revenue and profit. Here’s a look at the strategic business changes which fueled the rebirth of the nation’s second largest laboratory testing company, as well as a peek at how LabCorp expects to differentiate itself from competitors.

“LabCorp must change and serve its customers in profoundly different ways than was common for labs in the 1990s.”
—Bradford T. Smith

EDITOR’S NOTE: The following is an interview conducted recently in New York City by Editor-In-Chief Robert L. Michel with LabCorp Executive Vice President Bradford T. (Brad) Smith.

EDITOR: I’m curious about the management strategies unfolding at Laboratory Corporation of America. Brad, what makes LabCorp a different company in 2001 than, say 1995? How does LabCorp differentiate itself today from competing laboratories?

SMITH: Those two questions strike at the heart of the progress we’ve made since the mid-1990s. In hindsight, it seems like healthcare trends that emerged in the early 1990s hit the lab industry hardest in 1996 and 1997. At LabCorp, the timing was doubly tough, because 1996-97 were the years immediately following the merger of the two lab companies which created LabCorp. We were in the midst of integrating the distinct corporate cultures and business systems.

EDITOR: Was the LabCorp we see today shaped by those challenges?

SMITH: Yes. Groundwork for the current financial resurgence of LabCorp was laid in Orlando, Florida at a corporate strategic retreat in the fall of 1997. It was a time when both LabCorp and the general lab industry were facing daunting financial challenges. After considering different ways we could redirect our company, we decided to focus on the role of diagnostic lab testing within the American healthcare system.

EDITOR: So LabCorp’s strategic focus at this retreat was to reassess how the healthcare system used lab testing and find opportunities for LabCorp to serve those needs?

SMITH: That’s generally correct. From a business perspective, we believed LabCorp’s future success would be directly linked to how well we served the needs of each segment of the healthcare community. To be successful, we realized LabCorp must change and learn to serve its customers in profoundly different ways than was common for laboratories during the 1980s and 1990s.

EDITOR: Could it be said, then, that the vision at LabCorp was to focus on delivering “added-value” to lab test users? How did the strategic business plan evolve from this vision?

SMITH: Not easily. I can simplify the intense discussions and debates that occurred at Orlando with this business metaphor. We were searching for effective ways to respond to the widespread decline in prices for lab tests. We framed that problem by asking this question: What is the relationship between the “real value” of a test to the end user, the level of reimbursement for that test, and the cost for the lab to produce that test?

EDITOR: Basically, you wanted to know if the end user of the test would be willing to pay more for a quality lab test result. If so, would that amount be more than the lab’s cost to perform the test?

SMITH: Correct. At the Orlando retreat, we used this example. In 1997, many female patients would pay, say $10 for a Pap smear every two years, but would then go out and spend $30 for a haircut every few months. It was our conclusion that once consumers were educated about the ‘real value’ of the lab test, consumers would generally be willing to pay more for a lab test.

EDITOR: That’s a reasonable assumption. But how did this assumption shape the new business strategy for LabCorp?

SMITH: In 1997, we assumed that pricing for lab tests was unrealistically low and would have to begin increasing during 1998, 1999, and beyond. This would be very positive for LabCorp. The arithmetic is compelling. LabCorp accessions more than 64 million patients per year. Increase the average revenue per requisition by $1 and LabCorp generates an additional $64 million annually! That’s money we can use to invest in new technology and better services.

EDITOR: Interesting. Your sense that prices for lab testing would begin increasing in 1998-99 gave you confidence that sufficient capital would be available to fund LabCorp’s new strategic business plan.

SMITH: In simplest terms, this was the specific insight which guided us. In Orlando, we agreed on three primary business strategies for LabCorp. First, we would become more sophisticated in our application of management tools. This would lead to improvements in both productivity and quality.

EDITOR: That also means a program of educating the staff at LabCorp on how to use unfamiliar management tools and concepts.

SMITH: True. Second, we agreed to measure a variety of business variables which directly impacted our customers and our business. For example, we now regularly measure cash collections, days sales outstanding (DSO), and the quality of several service functions, including courier, customer service, billing, and specific aspects of laboratory testing.

EDITOR: This strategic initiative gave you the ability to accurately monitor progress toward your goals. And the third strategic initiative?

SMITH: Third, customer satisfaction became a key strategic priority for LabCorp. We viewed this as a departure from the prevailing standard within the lab industry, where active and regular measurement of physician client, patient, and payer satisfaction about the lab’s performance is not done in a regular and rigorous manner.

EDITOR: This is consistent with the requirements of management systems such as ISO-9000, which require a company to regularly measure the satisfaction of its customers, then implement corrective action to fix deficiencies.

SMITH: That’s right. At LabCorp, we now measure customer satisfaction regularly. It helps us to identify work processes that need to be improved, but it also helps us learn about new ways we could serve our customers.

EDITOR: Interesting. In 1997, all three of those strategic business priorities would have not only immediate, but lasting impact on the operational performance of LabCorp.

SMITH: Very true, because in 1997 LabCorp was still working to unify different systems and cultures. The Orlando strategic retreat helped our management team line up behind a common vision for the company. With the three strategies of better management, better measurement, and better evaluation of customer satisfaction, managers and staff throughout LabCorp could work toward common purpose.

EDITOR: What was the next milestone in LabCorp’s road back to financial stability?

SMITH: That would be in fall of 1999, when we held our second strategic business retreat in Pinehurst, North Carolina.

EDITOR: What was different at this strategic retreat?

SMITH: Two years had passed since the gathering in Orlando. During that time, the financial situation at LabCorp had improved steadily.

EDITOR: Among other things, your assumption that a variety of factors would lead to improved pricing for lab tests had indeed come true in 1998 and 1999.

SMITH: Yes, and the positive impact of improved lab test pricing was amplified by significant gains in operational improvements. LabCorp was better at all the business functions needed to acquire specimens, perform tests, report the results, and bill payers. At the Pinehurst retreat in 1999, we wanted to use these operational improvements as the foundation for the next cycle of change within the company.

EDITOR: What important decisions were made at the 1999 strategic planning retreat?

SMITH: Not surprisingly, one easy decision was to maintain our basic strategic plan established in 1997. We would continue using sophisticated management tools, accurately measure performance against goals, and be guided by customer satisfaction.

EDITOR: What were the new elements to LabCorp’s business strategy?

SMITH: There was plenty of debate about what should be LabCorp’s next strategic priority. Over time, an interesting consensus emerged. Given all the potential business models, we decided that LabCorp should be a national laboratory company. It should offer lab testing services that leverage our unique capabilities in genomic and esoteric testing to specifically support this business model.

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EDITOR: Help me understand better what this business model means, given other options.

SMITH: Sure. One of the debates which dominated the retreat at Pinehurst was that classic laboratory question: Are we a laboratory or are we an information company? We decided to define ourselves as a laboratory, for an interesting reason—somebody actually has to perform the laboratory test to create the information used within the healthcare system.

EDITOR: That’s a recognition that LabCorp expects the healthcare system will continue to reward the lab which performs the bench test necessary to create diagnostic test information.

SMITH: Certainly, but it doesn’t mean that LabCorp is ignoring the value which information can bring to the company. To the contrary, we see LabCorp as a laboratory [creating lab test results] that supports improved patient care through better use of information. This is reinforced by our leadership in genomic and esoteric testing.

EDITOR: These are interesting insights. Effectively, your business strategy is to leverage your size to pursue business opportunities unavailable to smaller lab organizations, and emphasize your laboratory roots.

SMITH: Yes, so long as this strategy incorporates two things true about LabCorp today. One, we define ourselves as a lab with expertise in genomic and esoteric testing. Second, we have an existing delivery channel to physicians’ offices. These resources support two main business strategies that LabCorp is pursuing. One involves clinical trials and what we might define as “cutting edge diagnostic technology.” The other involves helping doctors manage their diagnostic activities in more sophisticated ways. Let me explain both of these.

EDITOR: Please continue.

SMITH: LabCorp sees the clinical trials business as an integral part of our business strategy to be a leader in genomics and esoteric testing. This is because much diagnostic technology is actually developed to support new therapies. Our participation in clinical trials often leads to follow-on business that can be substantial.

EDITOR: Do you have an example?

SMITH: Yes. LabCorp did clinical trials with Genentech Inc. in support of the drug Herceptin. Within days following FDA approval to market Herceptin, related diagnostic tests developed by DAKO, with the help of LabCorp, were also approved for clinical use.

EDITOR: Do clinical trials take LabCorp outside the United States?

SMITH: Certainly. Clinical trials is an international business. You may be aware that LabCorp opened a lab in Belgium. This allows us to unify both test protocols and the information management required to support clinical trials.

EDITOR: LabCorp recently acquired an esoteric laboratory in Los Angeles—National Genetics Institute—does this relate to your clinical trials and esoteric strategies?

SMITH: It actually supports both. National Genetics Institute was intimately involved in the major clinical trials and studies done on Hepatitis C. Dr. Andrew Conrad at NGI is actively doing studies on breast cancer and melanoma for pharmaceutical companies.

EDITOR: Are the relationships with Virco Group, NV and ViroLogic, Inc. related to your goals in esoteric and genetic testing?

“One, we define ourselves as a lab with expertise in genomic and esoteric testing. Second, we have an existing delivery channel to physicians’ offices.”

SMITH: Definitely. You probably know that LabCorp was an early leader in HIV genotyping and phenotyping. Our work with Virco is directed toward using diagnostics to match the right therapeutic solutions for the patient as early as possible. The relationship with ViroLogic involves work in phenotyping.

EDITOR: Genomic and esoteric testing have been a fast growing segment within LabCorp in recent years, correct?

SMITH: Yes. One of the fastest. If you look at the revenues, LabCorp is probably earning more dollars in genomic and resistance testing than any other clinical company.

EDITOR: Moving forward in genomics and esoterics, what clinical areas are a priority for LabCorp?

SMITH: We are active in infectious and genetic diseases and oncology. I’m sure clients of THE DARK REPORT understand the opportunities that exist in these fields. Such laboratory tests improve diagnosis, therapy, and patient monitoring. In the area of oncology, population demographics will fuel a demand for lab tests supporting easier detection and monitoring for various types of cancer.

EDITOR: Would you discuss LabCorp’s plans for helping physicians manage their diagnostic activities?

SMITH: This is the other business strategy which we are emphasizing and draws heavily upon information management technology. It is the logical extension of performing the test, then adding value to the physician from the lab test data.

EDITOR: Explain how LabCorp intends to accomplish this, please.

SMITH: As you know, the demands upon a physician’s time are increasing. At the same time, there’s a steady flow of new diagnostic information entering the marketplace. Physicians need help in managing the way they order lab tests, evaluate the results, and act upon that knowledge. LabCorp sees an opportunity to help physicians get more value from the lab tests they order for their patients.

EDITOR: More specifically, what are ways that LabCorp could generate added-value for these doctors?

SMITH: We see several potential services. One of the most exciting is the ability to give physicians a way to look at their patients’ test results and compare it to how other physicians have treated patients with similar test results.

EDITOR: That sounds like a “best practices” arrangement…

SMITH: …yes. We’ve seen the value of this type of service in HIV geno- and phenotyping as well as viral load testing. During recent years we’ve worked closely with many of our referring physicians and developed some very productive “data sets” that measurably improve healthcare outcomes. This pioneering work tells us that LabCorp is certainly positioned to do more with helping physicians match lab test results and outcomes data.

EDITOR: Brad, you mentioned oncology as an area of emphasis for LabCorp. Given the nationwide network of anatomic pathology resources that LabCorp has assembled, how will LabCorp structure its anatomic pathology offerings?

SMITH: We are a full-service oncology laboratory. We provide oncology services in routine testing, such as tumor markers, genetic testing, and anatomic pathology. We believe that closer collaboration between clinical testing and anatomic pathology is the future.

EDITOR: Does that mean LabCorp will emphasize anatomic pathology services?

SMITH: Yes, but in a focused way. We want to match the needs of our referring physicians with the right pathology solution. In some cases that may mean using our in-house pathologists. In other cases we may draw upon outside expertise. It is also important to remember that anatomic pathology cases generally represent a more serious health condition for the patient. These cases are accompanied by more acute health concerns, a wider variety of testing needs, and other similar issues. That is why LabCorp intends to maintain a balance between in-house and external anatomic pathology expertise.

EDITOR: Brad, your comments about the management strategies at LabCorp are certainly appreciated by clients and readers of THE DARK REPORT. Thanks for your time today!

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