Quest & LabCorp Show Gains In Mid-Year Financial Reports

Dominant influence in revenue growth is impact of better pricing for lab testing

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FOR THE FIRST SIX MONTHS OF 2001, improved pricing for lab testing services was the strongest contributor to revenue growth at both Laboratory Corporation of America and Quest Diagnostics Incorporated.

One important consequence of this development is that competing laboratories, including hospital lab outreach programs, are also enjoying the benefits of better pricing. It’s another sign that the widespread “loss-leader”? pricing tactics of earlier years now comprise a steadily diminishing portion of the total “book”? of laboratory managed care contracts in the United States.

During the first six months of 2001, revenues climbed to $1.814 billion at Quest Diagnostics. This was a gain of 4.62% over the $1.734 billion the company generated during the first half of 2000.

Six-Month Revenue Growth

Quest Diagnostics reports that “excluding the effect of testing performed by third parties under our laboratory network management arrangements in 2000,”? its net revenues increased 7.5% over the same six-month period in the previous year.

Quest Diagnostics indicates that average revenue per accession increased 8.0% as a result of “improved pricing on managed care business, a shift in test
mix to higher value testing, and a shift in payer mix to fee-for-service reimbursement.”? During this same period, clinical testing volume only increased 1.1% “after adjusting for business contributed to unconsolidated joint ventures”? [involving Quest’s partnerships in Phoenix, Indianapolis, and Dayton].

Strong Growth At LabCorp

LabCorp posted a healthy 13.8% increase in revenues for the first six months of 2001. Net sales were $1.075 billion, compared to $945 million for the same period of 2000.

LabCorp reported that improved pricing was responsible for 7.3% of the increase (like Quest, attributed to price increases, a shift in test mix to higher-value tests, and more fee-for-service business). But, in contrast to Quest, LabCorp’s different business strategy contributed to a higher growth rate in specimen volume, totaling 6.5%.

In recent years, one primary business strategy at Quest Diagnostics has been to digest its acquisition of SmithKline Beecham Clinical Laboratories (SBCL). Integrating the two billion-dollar organizations has been a challenging task. To the credit of Quest CEO Ken Freeman and his management team, this chore has unfolded with a high degree of success, particularly when judged against the almost universally poor results achieved by virtually all post-acquisition lab consolidations done during the commercial lab consolidation wave of 1986-1995.

Internal Versus External

In contrast, even as Quest Diagnostics was turning its focus inward, toward effective integration of its two national lab systems, LabCorp, during these same years, concentrated on an external business strategy. It needed revenue growth to help it service and amortize its sizable debt. That is why LabCorp’s rate of growth in specimen volume has consistently exceeded that of Quest Diagnostics in recent years. LabCorp’s external strategy called for considerable resources to be put into sales and marketing as the vehicle to increase revenue and create more cash flow to handle its debt.

LabCorp’s major milestone during the past 14 months has been its successful financial restructuring, culminating in the 10-for-1 reverse stock split in May 2000. (See TDR, June 19, 2000.) This gave the company a strengthened balance sheet, and provided it with the capital resources needed to launch further rounds of system integration.

Costly To Shutter Labs

Restructuring is a costly process. When a lab facility is closed, there are sizable expenses for severance, liquidation of equipment, and termination of the lease. For instance in the two years following the spin-off of Quest Diagnostics from Corning Corporation, it wrote down more than $80 million as it closed down lab facilities and revamped its national service infrastructure.

Following the 1995 merger of the former Roche Biomedical Labs and National Health Labs, LabCorp’s management lacked the balance sheet and resources necessary to effect a rigorous consolidation and integration of the two national lab organizations.

With its newly-strengthened balance sheet, LabCorp is continuing to implement further internal integration. LabCorp reports restructuring charges of $17.7 million for the first six months of 2001 as a result of this activity.

Over at Quest Diagnostics, the interesting new initiative is a recently- announced agreement to participate in a laboratory benefits program with AdvancePCS, the pharmacy benefits manager. Called “AdvancePCS’s Performance Lab™”?, it allows members to use their pharmacy benefit card to obtain laboratory tests.

PCS Learned From LabOne

Long-time readers of THE DARK REPORT will recall that LabOne’s successful LabCard™ program was originally administered by PCS. However, several years ago, while PCS was still owned by Eli Lily & Co., it suddenly stopped servicing LabOne’s program and announced that it would establish its own lab benefits card program. PCS initially announced that LabCorp would be its partner in this effort.

Long-time readers will also recall that one of the reasons PCS wanted to develop a lab test benefits program is that it intended to begin matching clinical lab test results with prescription orders. It expected to uncover patients who had not been properly diagnosed, or who were not given the appropriate prescription. Because Quest Diagnostics wants to generate added value from its data base of lab test results, its new arrangement with PCS will help both companies pool laboratory test results and prescription data in interesting ways.

The agreement between AdvancePCS and Quest Diagnostics also demonstrates that combining pharmacy orders and lab test data is seen as a source of added value to clinicians and other healthcare entities. For that reason, expect to see other companies attempt to combine prescription data with lab test results.


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