Quest, Lab­Corp forge di­ver­gent paths to hospi­tal lab deals

Modern Healthcare - - NEWS - By Adam Ruben­fire

Quest Di­ag­nos­tics and Lab­o­ra­tory Cor­po­ra­tion of Amer­ica Hold­ings are wag­ing a bat­tle worth watch­ing for mar­ket share in the di­ag­nos­tic lab­o­ra­tory in­dus­try.

And in re­cent years, both com­pa­nies have made sig­nif­i­cant gains by part­ner­ing with hos­pi­tals. But while Quest has con­cen­trated on ac­quir­ing health sys­tem labs, Lab­Corp has fo­cused on ac­qui­si­tions that broaden its of­fer­ings and shore up its di­ag­nos­tic ser­vices.

Ex­perts say the two com­pa­nies are on dis­tinct paths that will shape the fu­ture of the health in­dus­try gi­ants. Quest’s strat­egy aims to grow its core busi­ness, while Lab­Corp’s ef­forts to steer the Burling­ton, N.C.-based com­pany to­ward a fu­ture be­yond clin­i­cal labs.

Over the past two years, Madi­son, N.J.-based Quest has reached agree­ments with seven health sys­tems. Some of those deals cover outreach busi­nesses that per­form ser­vices for cus­tomers seek­ing to fill a lab or­der from their per­sonal physi­cian or an­other provider at a dif­fer­ent hospi­tal.

“The strat­egy and fu­ture of Quest … is to be a sig­nif­i­cant part­ner with the hospi­tal and health sys­tem,” said Dr. Jon Co­hen, se­nior vice pres­i­dent and group ex­ec­u­tive of Quest’s di­ag­nos­tic so­lu­tions busi­nesses. “We are try­ing to move away from a ven­dor re­la­tion­ship.”

When Quest man­ages a hospi­tal’s lab, it moves 20% to 30% of tests to its own fa­cil­i­ties, which can trim as much as 20% of a hospi­tal’s lab costs, Co­hen said.

Shortly af­ter be­ing ap­pointed Quest’s CEO in 2012, Steve Rusck­owski said the com­pany needed to re­fo­cus on core di­ag­nos­tic in­for­ma­tion ser­vices.

“At that time, Quest’s man­age­ment had the fore­sight to rec­og­nize that re­im­burse­ment pres­sures on lab test­ing would soon trickle down to hospi­tal labs,” Co­hen said. “They also rec­og­nized that Quest’s scale and ex­per­tise would af­ford the op­por­tu­nity to pro­vide com­pa­ra­ble ser­vices for much less cost un­der th­ese chang­ing dy­nam­ics.”

Quest’s hospi­tal deals tend to be di­verse and com­plex, said David Ni­chols, pres­i­dent of Ni­chols Man­age­ment Group, a di­ag­nos­tic lab con­sul­tancy. Quest’s fo­cus on ac­quir­ing outreach busi­nesses, rather than hos­pi­tals’ full-lab oper­a­tions, is likely be­cause many hos­pi­tals don’t want to re­lin­quish con­trol of their in­pa­tient lab oper­a­tions, de­spite the cost and uti­liza­tion chal­lenges.

Still, a limited num­ber of health sys­tems out­source those ser­vices to com­pa­nies like Quest.

Quest moved its clin­i­cal tri­als into a joint ven­ture with Quin­tiles last year, while Lab­Corp has in­vested heav­ily in clin­i­cal tri­als and drug de­vel­op­ment with its $5.7 bil­lion pickup of Co­vance and other spe­cialty busi­nesses. Lab­Corp de­clined to com­ment on this story.

Lab­Corp recorded ac­qui­si­tions of $128.6 mil­lion last year alone, and has spent about $5.8 bil­lion in cash and $1.8 bil­lion in equity on ac­qui­si­tions since 2010, most of which can be at­trib­uted to Co­vance.

Lab­Corp is more dis­ci­plined than Quest in its eval­u­a­tion of po­ten­tial merger and ac­qui­si­tion tar­gets, said Brian Tan­quilut, a stock an­a­lyst cov­er­ing health­care ser­vices at Jef­feries & Co. But the com­pa­nies have dis­tinctly dif­fer­ent strate­gies. Lab­Corp has a broad per­spec­tive on deal sourc­ing, whereas Quest be­lieves that vol­ume growth can be driven by go­ing af­ter the hospi­tal op­por­tu­ni­ties, Tan­quilut said.

Health sys­tem labs are ripe for the pick­ing, as many see a steady flow of re­fer­rals and vol­ume fol­low­ing con­sol­i­da­tion. But Ni­chols cau­tioned providers against rush­ing to sell their lab outreach busi­nesses—the sales would gen­er­ate quick cash, but test costs within the sys­tem would go up sig­nif­i­cantly, since the in-house lab would still re­quire the same equip­ment and staffing lev­els, de­spite lower vol­ume. Labs have rel­a­tively high fixed costs and low vari­able costs, so they’re dif­fi­cult to down­size, he said.

Nev­er­the­less, Quest’s and Lab­Corp’s ef­forts to take con­trol of hospi­tal labs should send sys­tem lead­ers a clear mes­sage: Bol­ster your lab ser­vice lines and make them ef­fi­cient and com­pet­i­tive, or di­vest them and exit the busi­ness.

“Get in or get out of the lab ser­vices busi­ness,” Ni­chols said. “We don’t see strad­dling as a good strat­egy in a mar­ket that is in­creas­ingly com­pet­i­tive with de­clin­ing re­im­burse­ment.”

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