CEO SUMMARY: Having scooped up a number of mid-sized laboratory companies in recent years, Laboratory Corporation of America is working to integrate these operations and continue to expand its market share. In a recent conversation with financial analyst Bill Bonnello of Wachovia Securities, LabCorp executives discussed a variety of topics and trends in the laboratory testing market.
THERE’S A TRANSITION UNDERWAY in the executive suite at Laboratory Corporation of America. On January 1, 2007, David P. King will succeed Thomas P. Mac Mahon as Chief Executive Officer.
To learn more about David King’s thinking about the laboratory marketplace and any new directions for LabCorp, Wachovia Securities Financial Analyst Bill Bonnello recently traveled to Burlington, North Carolina. There he met with David King, as well as Brad Smith, Executive Vice President of Corporate Affairs; Brad Hayes, CFO; and Scott Fleming, Director of Investor Relations.
Bonello came away from this meeting with several interesting insights, ranging from LabCorp’s wish to expand into new regional markets to its perspectives on trends in managed care contracting for laboratory testing services. For clients and readers of THE DARK REPORT, these insights provide a general sense of some directions LabCorp is likely to take when David King assumes his new duties as CEO.
“LabCorp expressed a clear interest to expand into several major urban markets,” noted Bonello. “Although it is open to using lab acquisitions as a way to enter these markets, LabCorp discussed its preference for a different approach.
“During the meeting, LabCorp was adamant that they wouldn’t build a draw site network in a market before gaining managed care contracts,” recalled Bonnello. “One reason is that Wall Street investors don’t have the patience to see such a growth strategy take shape and deliver growth.
Alternative Points Of Entry
“So, LabCorp’s general approach would be to use lower-cost entry strategies. It would create a presence in these new markets by tapping alternative channels,” he continued. “These could be drug stores, sites within retail walk-in quick clinics, or ventures involving local healthcare providers or health systems.”
Bonnello speculated that one urban market likely to be on the LabCorp’s expansion list is the New York City metropolitan area. “Not only does New York City have a large population, but the metro area includes the New Jersey and Connecticut areas that are also quite populous. LabCorp’s existing resource in this market is its laboratory in Raritan, New Jersey.”
Managed Care Trends
Another subject discussed was current trends in managed care contracting for laboratory testing services. “It is LabCorp’s view that the nation’s largest health insurance companies are taking aim at laboratory testing costs, in a serious way that is different from earlier years,” noted Bonello. “Laboratory testing costs were not a major issue until recently. There are a couple of reasons for this.
“First, the amount of money being spent on laboratory testing has increased in recent years,” he observed. “More tests, more utilization, and greater costs all contribute to a higher lab spend. This increase in the cost of laboratory testing has attracted the attention of executives in the largest health insurance corporations.
“Second, most payers have addressed the budget-busting aspects of rising costs in prescription drugs and imaging. That makes increases in lab testing costs the next priority,” added Bonnello.
More Spent On Lab Tests
“Third, there has been a significant amount of consolidation in recent years as the largest health insurers increased the number of covered lives by acquiring smaller managed care companies,” he said. “In absolute terms, the aggregate amount of money now spent on laboratory testing in these big insurance companies has become a very large number. When a payer spends $1 billion per year on lab testing, any reduction in that number represents significant savings.”
LabCorp’s executive team told Bonnello that large managed care companies are now more willing to take active steps to control the lab spend. “These include tactics like refusing to pay out-of-network claims (or paying at reduced rates, or sending payment directly to the patient rather than the laboratory), restricting physician’s ‘client billing’ arrangements for lab testing, and even penalizing physicians for continuing to use laboratories that are out of the network,” stated Bonello.
“What is different now is that these big managed care firms are demonstrating a willingness to take difficult and unpopular steps to trim back the amount of money they spend to reimburse for laboratory testing.”
“It was indicated that WellPoint and United Health Group are examples of two large payers which have become more focused on controlling their spending on laboratory tests,” he added. “Certainly the tactics listed above have been around for many years. What is different now is that these big managed care firms are demonstrating a willingness to take difficult and unpopular steps to trim back the amount of money they spend to reimburse for laboratory testing.”
Returning to the subject of growth and acquisitions, LabCorp’s executive team indicated that they continue to be extremely interested in pursuing acquisitions that would be “science focused.” “LabCorp has a definite interest in acquiring laboratory companies that provide anatomic pathology services,” observed Bonello. “Labs that provide high-end diagnostics and esoteric testing would also be attractive to LabCorp.
“I did not see the same enthusiasm for acquiring companies to gain access to technology or intellectual property,” he added. “My conclusion is that LabCorp wants to concentrate on adding tests to their menu that have clear clinical value, supported by the types of clinical studies that would generate increased acceptance of the new diagnostic technology by clinicians and payers.”
Another topic that will be of particular interest to anatomic pathologists and their group practice administrators is LabCorp’s view that digitization of anatomic pathology (AP) images is likely to be the next trend in the profession. “Certainly the conversation on this point was quite general and centered around several futuristic ‘what ifs’,” recalled Bonello. “What I found fascinating was their speculation on how digitization of AP would stimulate changes in the marketplace.
AP Cases Come to U.S.
“One future scenario that LabCorp discussed was that digitization would make it possible to provide advanced diagnostics from a centralized location,” he continued. “However, the thinking was not that this would lead to the outsourcing of anatomic pathology professional services to countries with lower costs, such as India or China.
“To the contrary, LabCorp could make an argument that digitization would allow physicians across the globe to refer cases to specialized pathology centers in the United States and other developed countries. The goal would be to have world-class pathologist sub-specialists diagnose the cases, since the quality of the outcome would likely be the motivation driving these referrals—not lowering the cost of diagnosis by a few dollars.”
With the major investments LabCorp has made in acquiring anatomic pathology companies in recent years, there was discussion about the current state of the histology business, both in the United States and at LabCorp. In particular, how did LabCorp view the trend of specialist physicians establishing their own pathology labs and retaining their own pathologists to read the processed slides?
Bringing Histology In-House
“The word LabCorp used to describe this segment of the lab testing market place was ‘tough’,” noted Bonello. “The second quarter earnings statement tells the story. LabCorp reported that histology volumes were flat or slightly less, compared to last year’s second quarter. It acknowledges that competition from physicians, such as urologists and gastroenterologists, who are bringing their histology work in house, was a factor.”
Bonnello’s comments presented here are based on a summary of key points he issued to his research clients following his visit to LabCorp headquarters in Burlington. THE DARK REPORT asked him to expand on those points so that readers of THE DARK REPORT could get a sense of the new CEO’s perspectives on the laboratory testing marketplace.
Predictions Made in 2003
LabCorp’s current views of how laboratory medicine may evolve should be reviewed against the remarks made by current CEO Thomas P. Mac Mahon in the interview published in the April 14, 2003 issue of THE DARK REPORT. In the three years since that interview, most of what Mac Mahon predicted for healthcare and the laboratory industry has tracked closely with actual events. For that reason, LabCorp’s views on unfolding trends are likely to be well-informed.