CEO SUMMARY: In the boxing world, prize fights between heavyweight contenders always grab the world’s attention. The same is true in the lab industry, where the current fight between the industry’s two heavyweights has the potential to reshape several important aspects of the national market for lab testing services. This boxing match started on January 1, when the exclusive national contract between UnitedHealth and LabCorp became effective.
ROUND ONE IN THE CURRENT FIGHT for the heavyweight championship of the laboratory testing marketplace appears to have gone to Laboratory Corporation of America.
At the end of January, executives of Quest Diagnostics Incorporated acknowledged that their company has already lost 50% of its UnitedHealth lab testing business. Further, they told Wall Street investors that, by year’s end, they are likely to lose all the UnitedHealth business.
These statements translate into some remarkable numbers. At the end of 2006, revenue from UnitedHealth comprised 7% of Quest Diagnostics’ $6.3 billion in annual revenue. Thus, in the first four weeks after LabCorp’s exclusive national lab testing contract with UnitedHealth took effect (beginning January 1, 2007), Quest Diagnostics has lost the equivalent of approximately $220 million in annual revenue!
This is a significant development for the entire laboratory industry. The switch of $220 million per year in lab business from one laboratory to competitors in the space of just 30 to 60 days is, to the knowledge of THE DARK REPORT, without precedent in the laboratory industry over the past 20 years.
The primary beneficiary of this situation is LabCorp. It has a favored contract position with UnitedHealth and is believed to be gaining most of the business that is leaving Quest Diagnostics. Also benefiting from this situation are local laboratories that hold regional contracts with UnitedHealth. They tell THE DARK REPORT that they are adding a substantial volume of UnitedHealth business.
It is likely that the laboratory industry has embarked on a cycle of change that will take several years to unfold. There are at least four ways in which the status quo will change.
Managed Care Contracting
The biggest effect will be seen in managed care contracting. LabCorp’s unprecedented, 10-year exclusive contract with UnitedHealth is likely to be just the first. It is believed to have negotiated a similar, exclusive contract with Horizon Blue Cross Blue Shield of New Jersey. If it is willing to trade low prices and a large financial guarantee that it will move leakage back into the network, it may win other exclusive contracts with the nation’s largest health insurance companies.
Of course, Quest Diagnostics will have a competitive response to LabCorp. It can be expected to become an aggressive bidder against LabCorp for these same contracts. It will not concede this business without a tough fight.
Which brings up the second way that the status quo will change. Should Quest Diagnostics and LabCorp end up in a slugfest over big managed care contracts, payers can be expected to win lower prices. If they do, it will put regional laboratories in a financial squeeze, assuming that they are able to maintain network status with these payers.
Entry Into New Cities
Third, by intent, LabCorp is using the UnitedHealth contract to expand in communities and regions where it historically has had little or no presence. Such expansion will make LabCorp a tough, new competitor in these communities. It plans to build an extensive, nationwide network of laboratories and patient service centers.
Fourth, the UnitedHealth contract is already triggering new growth strategies between the two blood brothers. For example, Quest Diagnostics announced that it is looking to expand in the Pacific and in South America. It also announced plans to enter the point-of-care testing business and then, within days, acquired HemoCue of Ängelholm, Sweden.
It is important for lab directors and pathologists to understand that the UnitedHealth contract sets forces into motion that will change the status quo for years. LabCorp took a bold step with its willingness to accept lower pricing and to offer UnitedHealth a $200 million incentive that it could bring leakage under contract.
Should LabCorp be willing to extend similar terms to other large health insurers, such as WellPoint, Aetna, Cigna, and Humana, Quest Diagnostics will certainly respond competitively. After all, Quest is now in a position in which it must defend its existing managed care contracts. It will also be motivated to strip managed care contracts away from LabCorp as a way to regain market share.
Unruly And Unpredictable
That’s why the competitive market for lab testing services will be unruly and unpredictable in the near future. Regional laboratories and pathology group practices will need to stay alert for threats to their existing sources of specimens.
To provide understanding of how Quest Diagnostics and LabCorp view the current situation, THE DARK REPORT offers an analysis of each company’s public comments and strategies on the pages that follow. Keep in mind, also, that UnitedHealth has been an active participant in this market upheaval. It is willing to require patients to pay out-of-pocket when the physician sends lab tests out of network. It is also willing to take punitive action against physicians who fail to cooperate by using network laboratories.
Finally, consider this: if Quest Diagnostics and LabCorp are in the midst of a 15-round championship fight, then round one goes to LabCorp. But, with 14 rounds to go, it is too early to judge the outcome.