In response to my recent note discussing the future strategic direction of Quest and LabCorp (see: Quest and LabCorp Pursue Divergent Strategies; Which Will Succeed More?), I received a comment asking what I thought would be the prospects for reference labs closely tied to academic institutions such as Mayo Medical Labs or ARUP. The question is also relevant for a host of other academic medical center labs that have entered the reference lab space, particularly in the area of molecular pathology and cancer genomics.
Broadly speaking, reference labs compete on the basis of cost, quality, and convenience/efficiency for client hospitals. The meaning of cost and quality in this context is self-evident. The large national reference labs will generally have an advantage in these categories over academic reference labs. To quote my previous note: "...[Quest and LabCorp] tend to have more experience negotiating with both private and federal payers, who are paying less for lab tests these days."
By convenience/efficiency, I refer to the ease of submitting samples to the labs and receiving the test results back electronically and interfaced with the hospital LIS and EHR. These are issues that both Mayo and ARUP have attended to for many years. When these tasks are performed well, they can sometimes offset the lower costs of the two large national labs. I should emphasize here, however, that these latter labs may have lower prices schedules for the standard tests, as negotiated in their contracts with health plans, but may be much less competitive for esoteric tests. They may count on the higher prices for esoteric tests to offset their lower prices for standard tests.
One of the major market advantages offered by labs such as Mayo and ARUP as well as many of the super-esoteric labs, is their possible ability to bring new tests quickly to the market. Here is another quote from my previous note relating to this point: The only limits to the success of LabCorp [or Quest] in competing with highly specialized labs [or academic labs] is whether the company, because of its large size, would be unable to compete with the small and more specialized labs. The field of cancer genomics is exploding with new tests almost on a monthly basis. For me, the academic labs may hold an edge in this "first to market" strategy but it's not always clear whether they can exploit this advantage. It's also important not to underestimate the importance of the reputation of the Mayo and ARUP brands.