CEO SUMMARY: Expect a battle royale for hospital reference and esoteric testing by the handful of labs that offer such testing to hospitals throughout the country. With the merger of Quest Diagnostics Incorporated and SmithKline Beecham Clinical Laboratories now a fact, competitors are already swarming into hospital labs with offers of better service and improved prices for send-out work.
COMPETITION FOR SEND-OUT testing is heating up as at least six different lab companies intensify their efforts to capture new business. This increased competition is good for hospital laboratory administrators.
During 1999, two events directly intensified the competition for hospital laboratory send-out testing. One is the acquisition of SmithKline Beecham Clinical Laboratories (SBCL) by Quest Diagnostics Incorporated on August 16, 1999. The other is the stated goal of American Medical Laboratories, Inc. (AML) to become a national reference laboratory provider.
Each of these two events is triggering a different cascade of consequences. In the case of the merger of Quest and SBCL, many hospital lab clients of both companies are concerned about the negative impact the merger may have on their particular laboratory operation.
Combined, the Quest/SBCL combination has about 45% of the hospital send-out market in the United States. Thus, any operational problems at the “new” Quest Diagnostics have the potential to impact a disproportionately large number of hospital laboratories throughout the country.
Second, there are a number of hospital laboratory administrators and medical directors who’ve had a clear preference for either Quest or SBCL. They are not pleased to find themselves dealing with the “other” lab company as a result of the merger.
It is too early to determine whether Quest Diagnostics will see a significant turnover among its hospital laboratory clients as a result of the acquisition. However, since news of the Quest/SBCL merger became public last February, competing reference labs tell THE DARK REPORT that their phone lines have sizzled with calls from Quest and SBCL clients interested in exploring the benefits of changing their reference laboratory arrangements.
The second development in 1999 which intensifies competition for hospital laboratory send-out work is the desire of American Medical Laboratories to transform itself from a routine and regional hospital reference testing provider into a company with national ambitions.
AML expanded its sales force in both 1998 and 1999. There are now sales representatives making calls on hospital laboratories in all areas of the United States.
The effect of this development will be to “raise the bar” on the minimum acceptable package of lab tests and support services offered to hospital labs by national reference laboratories. This identical phenomenon has already happened twice to the lab industry.
The first time was when ARUP Laboratories entered the national arena in the late 1980s. The second time was in the 1990s when Specialty Laboratories blossomed beyond its traditional esoteric test menu into a full-service provider of reference and esoteric testing.
In each case, the newcomer had to offer a better value proposition than its existing competitors if it was to acquire new business. As a result, competing labs were forced to upgrade their value packages if they were to retain their existing client accounts.
QUESTION: What types of reference or esoteric testing will see the fastest growth in coming years?
Everyone wants to look into the crystal ball and predict which areas of laboratory testing will be fastest-growing. Who better to answer this question than Laboratory Corporation of America, which played an early role in championing PCR testing?
“At LabCorp, we divide esoteric testing into the areas of ‘basic’, such as tumor markers, and ‘high-end’, such as genetics, molecular diagnostics and resistance testing,” said Pamela Sherry, Vice President for Investor Relations at LabCorp.
“Basic esoteric testing is growing by 1% to 7% per year,” she observed. “Our high-end esoteric testing is growing much more rapidly. Depending on the specific tests, year-to-year changes in volume can range from 8% to 30% on a sustained basis.”
Basket of Services
As a result, hospital laboratories enjoyed a greater basket of services, offered at virtually the same test pricing as before the new competitors entered the marketplace.
THE DARK REPORT predicts that the same thing is about to happen during the next 24 months. The arrival of AML on the national scene, combined with any “discomfort” resulting from the Quest/SBCL merger, will cause all reference laboratories to richen the total mix of lab testing prices and support services they offer clients. This process is already under way, but will take another year to become recognizable.
Moreover, this developing trend means that group purchasing organizations (GPO) will lose relevance as part of this process, although this consequence will not be obvious for some time. The reason is simple.
Hospital GPOs are organized primarily to bundle purchasing volume from their members and negotiate a very low price based on that large volume. This purchasing strategy works best when the product being purchased is like a commodity, such as immunology assays or electrophoresis tests.
But THE DARK REPORT believes this approaching wave of reference laboratory competition will not emphasize volume-based discounted pricing. Rather, reference labs will build additional support services into their basic test price matrix.
For example, hospital labs which want more sophisticated information system linkages will get those services in their reference lab RFP. In contrast, hospitals seeking help in building their outreach program will get those particular services bid into their particular RFP.
This means that reference laboratories will offer their hospital clients a customized basket of testing, prices, and services. It’s actually an individually tailored package of support services which are of particular value to one specific hospital client, but not to other hospitals.
The organizational structure of a GPO makes it very difficult for the GPO to negotiate a customized package of reference lab testing services for individual member hospitals. For this reason, THE DARK REPORT believes that most GPOs will lose some of their ability to drive down lab test prices, because price alone will cease to be the main value proposition used by its hospital members when choosing a reference laboratory.
QUESTION: Will price or service be more important in selecting a reference/esoteric lab?
Free market principles are working to improve the value of reference and esoteric testing services available to hospital laboratory administrators. But will price be the crucial element of the RFP?
“During my many years in the business, hospitals have traditionally looked at price as the most compelling element when deciding upon a reference laboratory,” observed Jack Bergstrom, Executive Vice President at American Medical Laboratories in Chantilly, Virginia.
“That has changed in 1999. We’ve begun to see a clear swing towards an RFP weighted between low prices for testing, combined with services such as information linkages or operational help, including support for the hospital lab’s outreach program,” noted Bergstrom.
“It’s my bet that reference labs will not rely on a strategy of offering rock- bottom prices and not much else. Rather, cost pressures on reference labs will encourage them to bundle testing and relevant services for that client into a single contract package, priced so that the client gets additional value from non-testing services,” he concluded.
Difficulty For Premier, Inc.
Clients and readers of THE DARK REPORT will recognize that this scenario creates the most difficulty for Premier, Inc., which is ardently striving to enforce high compliance with its national reference laboratory contracts.
As the value equation of individual hospital lab-reference labs shifts away from lowest price and toward customized service packages, Premier’s national contracts, based primarily upon a low price, will be less competitive than the individual “service packages” negotiated independently by its member hospital labs. Premier will have to find a new method of bringing value to its member hospital laboratories.
Another important consequence of this new cycle of intensified competition will be increased customer expectations. Simply stated, hospital lab administrators will expect their reference laboratory to offer more value than in past years.
Are customer expectations changing among hospital laboratory administrators? THE DARK REPORT believes there is evidence that expectations are already moving higher.
For example, during most of the 1990s, hospital laboratories requested timely, cost-effective CPU-CPU information links between their computers and those of their reference laboratory provider. Despite the importance of these links to customers, reference laboratories generally did a poor job of delivering such links.
Up to now, such links generally took thousands of dollars to program, required significant input from both the reference lab and the hospital’s IS team to implement, and required months, if not years, to accomplish. As a result, many hospital lab customers accepted the fact that CPU-CPU links were more of a wish than a reality.
This interconnectivity issue has never been satisfactorily solved. Low expectations by hospital lab administrators about a reference lab’s performance on this point perpetuated the status quo.
For example, Mayo Medical Laboratories, beginning in 1995, made it their major marketing strategy to sell regional laboratory networks. Among the items Mayo promised to deliver to the network in its RFP sales package was its proposed “MayoNet” information system. MayoNet was to provide single-entry data interconnections between the Mayo lab and all hospital labs participating in the network.
Almost five years later, the Mayo-sponsored regional lab networks are still waiting for a single-entry information system link. Of course, just about every other non-Mayo regional network lacks a single entry network as well. Information links between labs is a problem which has eluded a solution.
But that is about to change. THE DARK REPORT predicts that speedy and cost-effective CPU-CPU links between lab and client will soon become an industry standard for any national reference laboratory.
This will happen as soon as one reference laboratory figures out a way to connect its computer to a hospital’s with a minimum of fuss and expense. Every one of the six national reference labs is racing to develop this solution, get the kinks worked out, and put it into their clients’ laboratories.
QUESTION: How Important Will Test Pricing Be In Selling Reference/Esoteric Tests?
Many businessmen have heard the saying that “the lowest price is not always the cheapest price.”
“For years, both clinical laboratories and reference laboratories have fought this battle,” observed Dennis Monahan, Vice President at ARUP Laboratories. “Most of us have observed situations where price dis- counting led to a decline in the quality of testing and support services offered by that laboratory. We’ve seen struggling labs attempt to retain clients by offering rock-bottom prices.
“That is why I believe that test prices for reference and esoteric send-out work will continue to be a major factor for hospital laboratories, at least in the near future,” he noted. “For example, it is reasonable to expect that intense competition for hospital send-out testing will cause some reference labs to do everything necessary to defend their existing reference business from competing labs. In those instances, a reference lab may decide that it is smart business to use low prices to retain its clients. Across the country, this may keep reference testing prices low for some number of months.
“However, there is a growing interest among many hospital laboratories to have their reference lab help them develop direct interfaces and links with their physician offices,” stated Monahan. “Wherever these factors are important to the client, price will be less of a determining factor in their selection of a reference lab.”
It is only a matter of time before the first “perfect” interconnection software is perfected and put into use. Once this occurs, competing reference labs must match that accomplishment or lose hospital lab business.
This is an example of how lab customers’ expectations are changing. Once they can get a low-cost, effective information system link from one reference lab, they will expect it as the “standard of service” from all reference labs.
With the marketplace for send-out testing about to enter a new cycle of intense competition, hospital laboratory administrators will find themselves with some excellent opportunities to negotiate an enhanced package of reference testing prices and support services.
THE DARK REPORT recommends that hospital labs seeking to revisit their reference and esoteric arrangements should do four things.
First, contact a number of reference laboratories and informally discuss what type of services they are willing to provide if you were to become a client. Compile a comprehensive list of the types of services which are offered.
Second, working from this list, go back to all the reference labs contacted initially. Ask them to show you ways they could help you reduce costs in your lab, improve quality and turnaround time, and add worthwhile services to your laboratory operation. The objective here is, in an open-minded fashion, to have these reference labs identify for you opportunities within your lab to generate efficiencies and enhanced laboratory services.
QUESTION: What Do Hospital Labs Really Want When Selecting Their Reference Lab?
“In today’s environment, we see an increasing number of hospital labs demanding a different mix of services from their reference laboratory,” said Paul F. Byer, President of Specialty Laboratories, Inc. of Santa Monica, California.
“First, they want information connectivity on three levels,” he noted. “They want a direct interface with their reference lab. They want to link all their enterprise labs with the core lab. And, they want to link with the physicians offices and other provider sites within their system.
“Second, I see outreach programs becoming more important,” continued Byer. “Although hospitals have been reluctant to push lab outreach programs, the need to drive revenue is motivating them to enter the outreach market.
“Three, hospital core labs are on the verge of another organizational evolution,” observed Byer. “New assays, new instrument technologies, and the integration of the hospital with outpatient providers will require reference labs to support this coming generation of hospital labs in different ways.”
Compile a “Wish List”
Three, from these two steps, compile a “wish list” of what you would like from your reference laboratory. Then approach your existing reference laboratory and give them an opportunity to respond to these items.
Four, depending on the response from your existing reference lab, determine whether you wish to create a request for proposal (RFP) and entertain serious proposals from other vendors for your reference testing business.
During the next 24 months, there will be outstanding opportunities to shop these six reference/esoteric testing providers and negotiate a winning package. Like the television game show, it’s a good time to declare “let’s make a deal.”