The independent laboratory sector—all of the laboratory sectors, for that matter—are dominated by Quest Diagnostics and LabCorp. These two major players have also continued to buy up other laboratory companies. In 2005, Quest Diagnostics acquired LabOne, which in the Washington G-2 Reports 2005 Laboratory Industry Strategic Outlook was ranked as the number-three independent laboratory after Quest and LabCorp. In July of this year, Quest closed on the acquisition of Focus Diagnostics.

In 2005, LabCorp reported $1.39 billion in gross profits and $386.2 million in net earnings. After adjusting for the acquisitions of MDS Labs, Redding Pathologists Labs, Clinical Labs of the Black Hills, US Labs, and Esoterix, their growth was 3.6% with revenues of $1.65 billion.

Quest Diagnostics reported $5.5 billion in net revenues and $546 million in net income. Adjusting for acquisitions, Quest grew 5.2% to $2.7 billion (adjusting solely for the acquisition of Omega Medical Laboratories, not LabOne).

In 2004, Quest Diagnostics increased its average revenue per employee by 4% to $132,813. Quest raised its average annual revenue per major lab facility by 9% to $147.8 million per year. Its patient service centers averaged $851,000 in annual revenue, up 15%.

LabCorp, in 2004, increased its average revenue per employee by 3% to $134,268. It generated $96.4 million per major lab facility, up 2%, and its patient service centers averaged $878,000, up 14% from 2003’s average of $767,000.

Although critics argue that the growth on the part of the two major players results in poor service as well as lost specimens and test results, by the most common financial benchmarks, the larger commercial labs are becoming more productive and efficient. Based entirely on those numbers, LabCorp slightly edges out Quest Diagnostics on the basis of efficiency.

Between 2000 and 2006, Quest grew its reported income an average of 17%. However, 2000 was the year they acquired SmithKline Beecham Clinical Labs, when they reported 55.1% growth. Excluding acquisitions, Quest’s revenue grew by an average of 5.8%, slightly below the national average growth of 6.8% (or a four-year CAGR of slightly less than 5%). From 2001 to 2003, Quest showed a small or even negative growth rate in test volumes. However, this has increased significantly in 2004, 2005, and 2006, with a median growth rate of 5.0% and an average since 2000 of 3.1%. Although their price per requisition dropped in 2002, 2004, and 2005, it appears to be increasing in 2006 to 4.0%.

Although Quest shows a positive growth rate in test volumes, they still are strongly focused on acquisitions, in particular the acquisition of LabOne in 2005 and the acquisition of Focus Diagnostics in July 2006 for an estimated $185 million in cash. Focus Diagnostics generates around $65 million in annual revenue and has over 1,200 infectious disease tests in their test menu.

Quest shows increased organic growth in 2004, 2005 and 2006. A possible explanation for this is an intentional focus on growing esoteric testing, helped along significantly by the acquisition of LabOne and Focus Diagnostics. In addition, Quest launched a colorectal cancer test ("InSure") in August 2003, a Circulating Tumor Cell Kit in August 2003, and in March 28, 2006, the first of its Leumeta cancer test assays, which may be an alternative to bone marrow assays. This emphasis on molecular-based esoteric testing kits, Washington G2 Reports believes, in addition to acquisitions of LabOne and Focus Technologies, which have expertise in esoteric testing, is driving their internal, organic growth that may continue in the future. One estimate suggests the troika of Insure, the Circulating Tumor Cell Kit, and Leumeta may generate $325 million of revenue for Quest in the future.

In addition, Quest launched its Care 360 Connectivity Solution in February 2005. This Web-based physician connectivity initiative promises to streamline patient ordering, results, and billing, as well as pay-for-performance program requirements and accountability. Quest currently receives 45% of test orders via Care360, and transmits 75% of their test results using this system. In addition, they have increased its focus on training and investing in its sales force and increasing sales efforts in high-growth areas like esoteric testing.

From 2000 to 2006, LabCorp grew its reported income an average of 12.4%. However, excluding acquisitions, LabCorp’s annual revenue growth averaged 6.8%, identical to the average growth of the national lab industry revenue growth. LabCorp has been inconsistent in its test volume growth with a high in 2000 of 7.6% and a negative drop of -2.4% from 2002 to 2003. This was followed by an increase of 1.1% from 2003 to 2004. 2005 showed a mild 1.1% increase in test volumes with a stronger projected increase in 2006 of 3.2%. Price per requisition, despite a modest 1.3% increase from 2003 to 2004, remains strong in 2005 (6.8%) and 2006 with a projected increase of 4.7%.

LabCorp also has a large focus on growth via acquisitions, notably U.S. Pathology Labs (Feb 3, 2006) and Esoterix (May 11, 2005). LabCorp has acquired 15 major businesses in the last 10 years. In January 2003 LabCorp acquired Dianon Systems, which they are using as a model to restructure their corporate structure, indicating they believe the Dianon model provides higher quality customer service and increased efficiency. LabCorp hopes to increase their business with a focus on genomic and esoteric testing and increased reimbursements, especially with managed care organizations. They have brought on the PreGen Plus test for colorectal cancer and OvaCheck for HPV and ovarian cancer. In 2002, 23% of revenues came from genomic, esoteric, and cancer testing, which has increased to 32% with the acquisition of U.S. Labs and Esoterix.

LabCorp has also brought out the Thin Prep Pap test imaging system from Cytec and the HCV FibroSURE test for hepatitis C liver fibrosis. Thin Prep accounts for 38% of LabCorp’s liquid-based Pap tests. HPV testing is showing significant growth, growing 80% in the Q1 2006. LabCorp reports they now perform 1.1 million HPV tests annually.

LabCorp is consolidating its customer call centers in hopes of improving customer communication and response. The plan calls for reducing 30 to 40 centers to only two or three. They are also focusing on automated specimen tracking and web-based connectivity, in this case, eLabCorp, which was launched in September 2005. In addition, LabCorp is expanding its sales force.

Quest Diagnostics and LabCorp have similar advantages in the marketplace to any large corporation over smaller independent businesses—deeper pockets and economies of scale. That is to say, they can invest in technology, whether for new tests, automation, or Web-based connectivity in a way that a smaller independent or hospital-based laboratory may not be able to afford. In terms of economies of scale, Quest Diagnostics and LabCorp have the size, depth, and reach to handle national managed care contracts and buy reagents and supplies in numbers large enough to bring the individual costs down. They continue to have contracts with the three largest managed care organizations: United, Cigna, and Aetna.

Washington G-2 Reports believes Quest and LabCorp’s competitive advantages fall into five categories. These are 1) national managed care contracts; 2) superior billing and collection management; 3) lower reagent and supply costs; 4) esoteric testing capabilities; and 5) ability to invest in Web-based connectivity solutions.

In terms of competition for national managed care contracts, Quest and LabCorp are each their biggest competitors. In October 2005, LabCorp began an exclusive laboratory agreement with WellPoint for its Georgia PPO and Nevada HMO/PPO. This comes as an addition to of an agreement with the WellPoint Georgia HMO that was signed in December 2004. Also, effective March 1, 2006, LabCorp will take on WellPoint’s PPO and HMO in Colorado. Quest continues a relationship with WellPoint among many markets, but will not be the preferred provider in Nevada and Georgia due to LabCorp’s new contracts.

In contrast, LabCorp lost Blue Cross/Blue Shield of Florida, a capitated customer, in the third quarter of 2004, and also lost Premier and Novation GPO contracts in the same quarter. LabCorp has shown an increase in revenue from managed care since 2004, when total managed care revenue was $1,247.2 million to 2006, with a projected annual revenue from managed care of $1,492 million.

Both LabCorp and Quest make substantial amounts of their income from managed care contracts. LabCorp’s has shown a slight increase to 41.86% of total revenue, and Quest Diagnostics estimates 50% of their revenue is from managed care contracts. Capitated contracts place a great deal of price pressure on both companies (and the laboratory industry as a whole).

Compared to hospital outreach programs, Quest and LabCorp have far better billing and collection systems. In 2005, Quest reported the average days in accounts receivable (DAR) of 46 days with bad debt, while LabCorp reported a DAR of 52 days with a bad-debt expense. This compares to a hospital outreach average of 69 days or median of 60 days, based on Washington G-2 Reports’ Third Annual Outreach Survey.

63.3% of hospital outreach billing is handled by the individual hospital’s inpatient billing system, compared to 30.2% by administrative staff within the laboratory or 6.5% that turn billings over to an outside billing firm. Because most laboratory tests are relatively small, in the $30 to $40 range versus surgical and hospital stay bills that can range upward of $10,000 per procedure or $2000 per day, hospitals tend to focus on following-up on larger claims. Because Quest and LabCorp and other independent labs aren’t in patient care, per se, they can focus collection energies on their core business.

Both LabCorp and Quest have invested significantly in major Web-based connectivity technology in recent years. As noted earlier, Quest launched its Care 360 Connectivity Solution in February 2005. This Web-based physician connectivity initiative promises to streamline patient ordering, results, and billing, as well as pay-for-performance program requirements and accountability. Quest currently receives 45% of test orders via Care360, and transmits 75% of their test results using this system. LabCorp has invested in eLabCorp, and focused on automated specimen tracking and Web-based connectivity, which was launched in September 2005.

Although Web-based connectivity, especially on the scale needed for companies the size of Quest and LabCorp are expensive, they should increase efficiency in terms of ordering, billing and test results, which should pay for itself in time. It should also help with customer-service issues by streamlining interactions between physicians and the laboratories.

With the increased use of Electronic Health Records (EHR) and Electronic Medical Records (EMR) by physicians offices and hospitals, as well as government-led programs for universal Web-based EHR, Washington G-2 Reports believes it’s only a matter of time before all laboratories, whether independent, physician, or hospital-based, have some form of Web-based connectivity. Any laboratory that doesn’t is likely to find itself at a debilitating competitive disadvantage.

Generally speaking, Quest and LabCorp specimens are picked up at the same time every day from their clients and service centers. This may or may not be the case with hospital outreach systems. Smaller systems sometimes rely on outside courier systems, taxi cabs, and Federal Express or UPS for shipping and transportation, which provides more flexibility than is possible for larger corporate-style laboratories.

October 2006 - Table of Contents

LIR October 2006 (full PDF issue)

Hospital Outreach Programs Hold Their Own Against Key Competitors

Acquisition Is Path to Market Share in Southeast

Measuring Up Against Quest and LabCorp: Inside the Duopoly

Quest Pays $43m for InSure Test Maker

Psychemedics, Orchid Land New Contracts

AMGA Survey Finds Most Medical Groups Still Operating at a Loss

BD to Pay $350 Million for Pap Test Maker TriPath

Laposata Wins G-2 Laboratory Public Service National Leadership Award

Lab Stocks Down 1%; Monogram Loses 13%

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