Quest and LabCorp are the two major reference labs in the country. A recent article discussed how the business strategies of the two may be diverging after years of their pursuit of a similar path (see: Quest, LabCorp forge divergent paths through M&A). Below is an excerpt from the article:
Quest Diagnostics and Laboratory Corporation of America (LabCorp) battle vigorously for market share in the diagnostic lab industry. And in recent years, both companies have made significant strides in expanding their businesses by partnering with hospitals. But Quest has concentrated on acquiring health systems' labs, while LabCorp has focused on acquisitions that shore up its technology and the sophistication of its diagnostic services. Experts say the companies are on distinct paths that will shape the future of the industry's giants, who rank far above any other competitors. Quest's strategy will grow its core business of diagnostic services, while LabCorp's efforts are steering the company toward a future beyond clinical labs. Madison, N.J.-based Quest has focused on acquiring health systems' laboratory outreach businesses, which are labs that perform services for customers outside of the health system, often for patients seeking a lab order from a personal physician or a provider at a different health system. Quest has engaged in lab services deals with seven systems in the past two years, some of which have included outreach businesses....When Quest manages a hospital's lab, it moves 20% to 30% of tests off-site to its own centralized facilities. Hospital labs perform these services at two to five times Quest's cost. The company can shave as much as 20% of a hospital's lab costs....
Companies such as LabCorp and Quest have more sophisticated technology than most hospital labs and they tend to have more experience negotiating with both private and federal payers, who are paying less for lab tests these days. For many hospitals, labs are an increasingly unattractive service line amid growing cost and utilization pressures. Shortly after being appointed CEO in 2012, Steve Rusckowski identified a need for Quest to refocus on core diagnostic information services....Quest's focus on acquiring outreach businesses' rather than hospitals' full lab operations is likely due to the fact that many hospitals aren't interested in giving up control of their inpatient lab operations, despite cost and utilization challenges. A limited number of health systems will outsource those services to companies like Quest. By comparison, LabCorp has branched outside of the core laboratory space and invested significantly in clinical trials and drug development with its $5.7 billion acquisition of Covance, as well as other specialty businesses....Burlington, Vt.-based LabCorp has absorbed competitors, including Pathology, a lab known for its women's health services, and LipoScience, which makes specialized cardiovascular diagnostic laboratory tests.
For what it's worth, my opinion about these divergent paths is that LabCorp will be more successful. This is based largely on what I perceive to be the business plan of most hospital systems. They are facing tremendous pressure to merge and grow larger in the face of payer demands for increased quality and decreased costs (see: Competing for kids: Children's hospitals face challenge from emerging megasystems; Anthem Sues Express Scripts; "Big Medicine" Players Squabble among Themselves). I have referred to this phenomenon in previous notes as the emergence of Big Medicine (see: Physician Private Practice Declines; the Last Barrier to Emergence of "Big Medicine").
As hospital systems growth larger, they may be increasingly reluctant to sell their lab outreach businesses to Quest and realize short-term profit. This has been appealing to some hospitals in the past. Instead, the large integrated delivery systems may find it beneficial to build large, centralized pathology/clinical lab units. They would, of course, keep smaller diagnostic centers in place at each hospital for urgent and less complex testing. In so doing, they gain some of the economies of scale that Quest and LabCorp offer but still retain organizational control over their labs. Such an insourcing trend would work against the strategic interests of Quest.
In a previous note, I suggested that some hospitals may be interested in outsourcing their diagnostic work including pathology, the clinical labs, and radiology (see: Value-Based Healthcare Will Drive Outsourcing of Hospital Diagnostic Services). While I think that this approach would work for some hospitals, it does pose some risks. This is the "golden age of diagnostics" (see: INTEGRATED DIAGNOSTICS & INTEGRATED DIAGNOSTIC SERVERS: THE PERSPECTIVE OF A PATHOLOGIST)." Outsourcing such a critical part of the healthcare enterprise could degrade the central mission of hospitals, which is treating the very diseases that are being diagnosed.
As noted above, LabCorp is investing heavily in clinical trials, drug development, and speciality lab businesses. Many of the hospital centralized labs I describe above would probably be unable or unwilling to compete with ultra-specialized labs such as those in the molecular pathology and cancer genomic fields. The only limits to the success of LabCorp in competing with highly specialized labs is whether the company, because of its large size, would be unable to compete with the small and more specialized labs. It can usually compete with such labs on the basis of cost but can it compete on the basis of quality?