Any analysis of how independent reference laboratories became the fastest growing segment of the clinical testing industry is framed by three factors: consolidation, computerization, and coordination.

Reference labs now account for more than $11 billion of the estimated $35 billion clinical laboratory market and their share is growing. In contrast to the 1990s, the year 2000, according to The Dark Report, proved relatively uneventful for reference labs. The number of commercial laboratory/hospital joint ventures fell; lab compliance programs were credited with reducing the number of fraud and abuse investigations.

Fewer but bigger labs
Consolidation flourished over the last decade. The more than 7,000 independent clinical laboratories in the United States in 1985 have shriveled to fewer than 4,500 today. In 1995, National Health and Roche Biomedical combined to form LabCorp, the country’s largest lab system. Four years later, Quest edged out LabCorp for the No. 1 spot when it acquired SmithKline Beecham Clinical Labs.

Computerization continues to surge. A recent survey of public health labs by the U.S. Department of Health and Human Services indicates reference labs are adding lab information systems (LIS) much faster than public health labs.

Lab representatives, medical schools and pathologists have been working on a universal coding system to encompass at least 98 percent of an average lab’s results.

Also, labs are forming alliances with health insurers (LabCorp and Humana; Specialty Labs and VHA) to streamline the transmission of patient billing. Initial physician reluctance to use the Internet seems to be changing. For example, the American Medical Association recently learned that the percentage of physicians using the Internet in their practices nearly doubled from 1997 to 1999.

Lab testing remains pivotal to better medical outcomes. Although it consumes only 4 percent of national healthcare spending, lab testing helps determine how 70 percent of healthcare dollars get spent.

National Reference/Esoteric Laboratories

Rank Laboratory 1999 Revenue*
1. Quest Diagnostics, Teterboro, N.J. $400
2. Laboratory Corp of America, Burlington, N.C. $175
3. Specialty Laboratories, Santa Monica, Calif. $148
4. American Medical Laboratories, Chantilly, Va. $129
5. ARUP Laboratories, Salt Lake City $116
6. Mayo Medical Laboratories, Rochester, Minn. $92
7. Esoterix, Austin, Texas $55
Total $1,114
Source: 1999 Dark Report Reference Lab Rankings *in millions
1. Provided by Quest Diagnostics based on pro-forma testing revenue.
2. LabCorp does not track hospital send-out testing as a separate category. It provided a number of $105.6 million for molecular testing and $156.6 million for esoteric testing which includes physician office referral and hospital send-out tests. TDR estimates $175 million originates from hospitals.
3. Source is recent public filings.
4. Source is American Medical Laboratories. This number is for hospital send-out testing only and does not include its revenues from physician offices.
5. Source is ARUP Laboratories for fiscal year ending June 30, 1999.
6. Mayo declined to provide numbers. Estimate is based on corporate investment rating services and other sources.
7. Source is Esoterix. Numbers include direct physician testing services.

Quest Diagnostics
With over $3 billion in annual revenues, Quest is the nation’s largest reference lab network. It continues to expand. Four months ago, it announced an equity investment in Structural Bioinformatics Inc., a technology company involved in the large scale generation and use of protein structure and protein structural information. In January, Quest entered an agreement with HIV pharmacogenomics pioneer Virco to offer the VirtualPhenotype test for predicting resistance to antiviral drugs.

Gary Samuels, vice president of external communications at Quest, said his company is committed to getting closer to its customers. The Quest Results-On-Line service provides confidential test results online. The company also is joining with MedPlus to develop software that provides medical records electronically. The goal, Samuels said, is to give customers more options for gaining access to lab information. “The faster doctors get test results, the better they can care for and treat patients,” he said.

Gene-based testing, said Samuels, represents the greatest potential for growth. Quest expects that segment to continue increasing by as much as 25 percent or more annually. According to Samuels, Quest has been able to increase revenue per requisition by strong leadership on quality and pricing discipline.

“We have insisted that we be reimbursed appropriately for testing. In a number of cases, we have walked away from business that didn’t make economic sense for us,” Samuels said. An aging population, more consumer involvement in healthcare and new gene-based testing are all trends pointing to a promising future for reference labs, he said.

Laboratory Corporation of America
LabCorp performs diagnostic procedures on specimens from more than 260,000 patients each day, from routine blood workups to advanced testing at the molecular level.

Pam Sherry, vice president of investor relations, said LabCorp expects the Internet to play a growing role in its business into the 21st Century.

“Certainly, this form of communication can be very efficient and cost effective as well as a good educational vehicle,” she said.

Demand for all testing, routine and esoteric, is likely to increase in the future. A key driver, according to Sherry, is the mapping of the human genome. “As research on the human genome progresses and disease-causing genes are identified, demand for high-value genomic tests (at the DNA/RNA level) is expected to increase,” she said. LabCorp pioneered new testing technologies and was the first commercial laboratory to offer polymerase chain reaction (PCR) technology. In addition to PCR, testing for infectious disease (HIV and hepatitis C), genetic disorders, such as cystic fibrosis, and cancers such as colon and breast cancer are also increasing.

Last year, LabCorp acquired six laboratories including the National Genetics Institute (NGI) in Los Angeles. The NGI acquisition enhances LabCorp’s leadership in genomic testing, and its reputation in infectious disease should expand LabCorp’s opportunities to participate in clinical trials, Sherry said.

While the laboratory reimbursement picture has not been pretty in recent years, Sherry noted that a recent study by the Institute of Medicine of the National Academies offered some hope for the future. The study identified a need to reduce the complexities of the payment system and urged regular reviews and updates of fees. “We view this report as a positive for the industry but recognize it will take time to cause favorable changes at HCFA (Health Care Finance Administration),” Sherry said.

She said managed-care providers over the past 18 months have been shifting their approach to delivering healthcare by more frequently using diagnostic testing to improve outcomes and gain greater economic benefit. “This recognition of the predictive value of early diagnostic testing should positively impact our volumes in both routine and esoteric testing,” Sherry predicted.

Specialty Laboratories
Specialty Laboratories serves more than 10,000 clients across the United States. The company concentrates on cutting-edge research and development of new assays with greater sensitivity, specificity, efficiency and clinical value. With more than 3,500 tests and panels, Specialty is the largest single source of specialized laboratory testing in the nation.

Information technology has become a core initiative for the Santa Monica, Calif.-based company which partners with more than 2,000 hospitals, said Ron Blum, Ph.D, director of medical communications.

Specialty introduced its Web-based DataPassportMD program in 1998 and today the company has installed more than 1,400 systems. “Currently, more than 90 percent of orders are transmitted electronically,” Blum said.

While reimbursements and pricing concern all testing labs, Blum said, Specialty is focused on delivering the services doctors and hospitals need to provide the best care. “Our focus is on science and service, specifically, conducting high-quality testing and getting the results to doctors quickly — especially when fast turnaround is a critical concern,” Blum said.

Nicholas Borgert is a freelance writer based in Charlotte, N.C.