CEO SUMMARY: In the first six weeks since its exclusive national contract with UnitedHealth became effective, Laboratory Corporation of America has made major gains in several key markets. It has also begun to share the details of its three-phase strategic plan to maximize the leverage it gets from its 10-year pact with UnitedHealth.
IN JUST A FEW SHORT WEEKS, Laboratory Corporation of America has radically destabilized the status quo between itself and Quest Diagnostics Incorporated.
On January 25, Quest Diagnostics told financial analysts that, by December, it expected to lose literally all its UnitedHealth business (7% of revenues) and all the business it had with Horizon Blue Cross and Blue Shield of New Jersey (1% of revenues). Collectively, these two lost contracts represented $500 million of revenues for Quest Diagnostics in 2006.
Seizing The Opportunity
LabCorp expects to pick up the lion’s share of this business. If it does, then it will have triggered one of the largest shifts in market share seen in the laboratory industry in the past 20 years—and it will have accomplished this feat in a relatively short period of time.
If there is a downside to LabCorp’s managed care contract strategy, it is likely to be linked to the level of pricing LabCorp accepted in exchange for exclusivity and a 10-year contract with UnitedHealth. As noted on pages 5-6, Quest Diagnostics’ CEO has publicly questioned his competitor’s ability to provide satisfactory service at a contract price which Quest Diagnostics considered unacceptable during its negotiations with UnitedHealth.
LabCorp recognizes this challenge. “We are in a very tough pricing environment,” stated LabCorp CEO David P. King at an investor conference in January. “The UnitedHealth contract presented us with a singular opportunity. It gave us an exclusive relationship with the nation’s largest health insurer, when measured by revenues, and the nation’s second largest, when measured by covered lives.”
On the other hand, LabCorp’s CEO has consistently stated that LabCorp expects to maintain adequate profit margins on the pricing it agreed to accept from UnitedHealth. It has even provided a measurement tool, stating it will sustain its current level of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization.) The truth of that assertion will be demonstrated during the next 18 months, each time LabCorp reports its quarterly financial performance.
LabCorp also faces the challenge of converting this short-term shift in market share into long-term gains. Linchpin to this strategy is its exclusive national laboratory services contract with UnitedHealth. LabCorp’s strategy is to use this contract as the “growth driver” for expansion into new regional markets and to increase market share in existing markets.
Contract Has Three Stages
LabCorp intends the UnitedHealth contract to be a growth driver in three stages. In stage one, LabCorp considers that it has gained exclusivity with UnitedHealth in the markets served by Oxford Health Plans, Pacificare Colorado, Neighborhood Health Partnership in Florida, and Mid Atlantic Medical Services, LLC (MAMSI) in Maryland and Virginia, along with its status as the sole national laboratory for UnitedHealth.
In stage two, LabCorp intends to establish additional regional networks of laboratories to serve UnitedHealth patients. “Over time, we will broaden the networks to bring more and more UnitedHealth providers into network status,” explained LabCorp CEO David P. King at a recent investor conference. These networks are likely to follow the business model of the Oxford network. This would place LabCorp in a primary position.
New Laboratory Networks
It is also a clever way, in coming years, for UnitedHealth and LabCorp to bring regional laboratories into provider networks with reimbursement arrangements that are more favorable to UnitedHealth. Over the long term, this factor could further disrupt existing managed care contract practices for laboratory services, particularly if UnitedHealth gains substantial benefits from expanding the Oxford laboratory network concept to other regions and other national payers take steps to implement similar arrangements.
In stage three, LabCorp hopes to use the networks and standardized laboratory data to develop ways for laboratory testing to contribute to enhanced healthcare outcomes. LabCorp hopes it can work with UnitedHealth to use the principles of evidence-based medicine to develop more effective treatment plans.
The scale and scope of LabCorp’s business strategy and ambitions are revealed by its remarkable accomplishment. Between October 3, 2006, and January 1, 2007, it opened 400 new patient service centers (PSCs) across the United States. It also hired 1,200 new employees. This new staff is involved in sales, provides phlebotomy services in PSCs and other locations, handles expanded courier routes, and processes the increased volume of specimens arriving in its laboratories.
Seizing The Opportunity
Laboratory administrators and pathologists should note that LabCorp’s primary objective is to leverage the infrastructure it is now creating to serve UnitedHealth. It wants to expand throughout the country.
“Our greatest strength [from the UnitedHealth contract] has been in New York and Florida,” stated King to a gathering of financial analysts and investors. “We view this [UnitedHealth] as not just opportunities in the Northeast, but as a national opportunity—an opportunity for which we intend to take full advantage.”
LabCorp can certainly create that opportunity if LabCorp, in the second stage of its UnitedHealth contract strategy, succeeds in creating Oxford-like lab networks in other parts of the country. That would give it powerful leverage in those regions.
Viewed from the first six weeks of the UnitedHealth contract, LabCorp has certainly surprised many critics. Its success also recalls one of the most famous advertising campaigns of the 1960s, when Avis Company’s “We’re Number Two—We Try Harder” drew lots of attention away from industry leader Hertz Corporation. At this point, LabCorp has shifted attention away from its larger rival. It may still be number two in size, but it has certainly served notice that it won’t be a passive competitor.