By Jonathan Briggs
Every day in this county, clinical laboratories provide vital diagnostic information and services to healthcare providers and their patients at what is, for the most part, a very reasonable price. Patient lives are saved, extended and improved by lab tests that are remarkably accurate and inexpensive. Compare it, for example, to diagnostic tests performed in the imaging department.
Yet laboratories are not immune to the influence of market forces. Like many other industries, mergers and acquisitions among healthcare systems and diagnostics industry vendors have taken their toll. Although many market segments of the diagnostics industry are considered mature, the world of diagnostic testing continues to change rapidly. There are many reasons for these changes and the changes themselves affect each other, making clinical diagnostics one of the most dynamic segments of the healthcare industry.
Revenue for the diagnostics industry follows the classic “razor/razor blade” business model. Although the large automated analyzers that manufacturers sell to core laboratories are very expensive, the majority of profits are made through the high-volume sale of reagents, calibrators and controls that are necessary to run each test. Thus, many manufacturers are willing to cut deals on the price of their capital equipment in order to capture another outlet for selling their reagents.
Some of the factors impacting the diagnostics industry overall and the clinical laboratory world in particular are obvious — new tests, technologies and automation. Other forces, such as population trends and labor issues, are more subtle. Still other factors include the disparate roles of government as regulator and as customer. And, of course, there is the perennial issue of reimbursement.
The players — manufacturers
Worldwide, clinical or in vitro diagnostics is a $20 billion industry. The United States is by far the major spender in this area with estimates of annual outlay ranging from $6 to $8 billion. Since the 1980s, the industry has consolidated from dozens of players to seven industry giants with annual sales of over a billion dollars.
The seven marquee companies are: Roche Diagnostics of Indianapolis; Abbott Diagnostics of Abbott Park, Ill.; Bayer Diagnostics of Tarrytown, N.Y.; J & J’s Ortho Clinical Diagnostics of Raritan, N.J.; BD (Becton Dickinson & Co.) of Franklin Lakes, N.J.; Beckman Coulter of Fullerton, Calif.; and Dade Behring of Deerfield, Ill. Together these seven companies accounted for about 75 percent of U.S. diagnostics industry sales in 1998. Just four years earlier, 98 percent of sales were divvied up among 15 companies, according to a 2000 report on the in vitro diagnostics industry from Merrill Lynch’s equity research group.
In addition to the industry giants, there are several companies with sales between $100 million and a $1 billion that also make significant contributions in the diagnostics market. They are: bioMerieux Vitek of St. Louis; Bio-Rad Laboratories in Hercules, Calif.; Organon Teknika of Durham, N.C.; Instrumentation Laboratories of Lexington, Mass.; Radiometer America Inc. of Westlake, Ohio; Diagnostic Products Corp. of Los Angeles; and ABX Diagnostics of Irvine, Calif. Another 20 or so companies with sales under $100 million flesh out the roster of clinical diagnostics vendors. In addition to supplying the equipment and reagents that clinical labs use, these companies also invest considerable resources in research and development.
Bright future for particular segments
A report published in July by Norwalk, Conn.-based Business Communications Co. (BCC), an industry research and technical market analysis company, forecasted that the clinical diagnostic industries including laboratory equipment and ambulatory and point-of-care-products, will grow at about 2 percent a year for the next five years. A somewhat more optimistic analysis of the market by Merrill Lynch puts the annual industry growth rate closer to 5 or 6 percent. It is not surprising that these analyses differ, because no two analysts segment the industry the same way or look at exactly the same factors.
The key point is that after several years of slow growth due to widespread consolidation among both healthcare systems and manufacturers and the restructuring of reimbursement systems, things appear to be getting better, although not everything.
For example, price pressure and restrictions on procedures by managed care organizations continue. The BCC report mentions the increased cost of care for aging populations, more point-of-care services and the advent of “super laboratories” as important factors. Consequently, companies must respond on multiple fronts to stay competitive.
“Pricing is tougher and tougher at the same time testing is growing due to the aging population,” said Jeff McHugh, vice president of Beckman Coulter’s North and South American operations. “Maybe with favorable reimbursement changes, the positive trends will be even better.”
Stopping reimbursement erosion is among the reasons Beckman Coulter and many other companies work to educate government agencies and third-party insurers on the importance of doing more testing, not less, to reduce the cost of healthcare. McHugh listed several lab tests that he believes reduce healthcare costs. Among them are pre-surgical testing of patients’ nutritional status, and additional prostate testing for patients with initial results in the “gray” zone.
Molecular testing is another area expected to bring big changes to the industry. “Significant investing in molecular testing and genomics over the next 10 years will bring savings,” said Ronnie Andrews, vice president of marketing at Roche Diagnostics. Andrews believes that an improved reimbursement climate will help companies perform the needed research to develop molecular and genomic tests and manufacture standardized products that can result in lower healthcare costs.
The players — laboratories
Clinical laboratories in the United States do about $35 billion a year in business. As of 2000, 99 percent of these were private, with government funded labs accounting for 1 percent. Among that 99 percent, only 9 percent are hospital and references labs, but these account for more than 90 percent of clinical laboratory revenues.
Moreover, the high-volume super labs that perform more than 10,000 tests a year accounted for 80 percent of the dollars spent on instruments and accessories. In contrast, single analysis labs and doctor’s offices that perform under 2,500 tests a year make up 50 percent of the private lab market but contribute less than 3 percent to IVD suppliers, according to the BCC report. The remaining 40 percent of labs are made up of non-hospital independent labs that account for about 7 percent of lab revenues and play a role in shoring up the other 20 percent of the diagnostics industry revenue pie.
Meanwhile, manufacturers are not the only ones consolidating. During the 1990s, the number of independent reference labs steadily dwindled from seven to only a pair in 1999. One of the two is Quest Diagnostics of Teterboro, N.J., with about 35 percent of the market, and the other is LabCorp of Burlington, N.C., with about 15 percent, according to Merrill Lynch. As consolidation whittled away the number of labs, more tests were done at fewer sites. The exception to this trend is point-of-care testing, performed near the patient but managed by the lab.
Segments
To further complicate matters, the IVD industry encompasses a wide array of procedures and services ranging from common clinical chemistries such as glucose to cutting-edge nucleic acid and genomic testing and automated immnuohistochemistry analyses.
Although the IVD market is divided into its specialized segments — chemistry, hematology, microbiology, and immunology, to name a few — the distinctions between them are not always clear or permanent. While each segment has a life of its own and is independently influenced by market factors and demographics, as new healthcare technologies emerge, the boundaries between segments are blurred. For example, many of the immunodiagnostic tests that once ran on a separate analyzer are now capable of being placed on the same platform as most chemistry tests. Still, looking at segment growth and volume can be useful in determining trends that could impact lab operations.
The top three diagnostic industry segments in terms of volume or number of tests performed are glucose monitoring (19%), immunoassay (19%), and clinical chemistry (17%). Each of these accounts for just under 20 percent of laboratory activity. The next three busiest segments are blood processing (8%), microbiology (8%) and hematology (6%), which together account for about another 20 percent. The remaining fifth of lab services include segments such as nucleic acid testing NAT (4%), critical care testing (4%), point-of-care testing (4%), coagulation (3%), flow cytometry (3%), and other (5%) according to the Merrill Lynch analysis.
According to Merrill Lynch, the three fastest growing segments of the clinical diagnostics market are glucose monitoring, NAT and point-of-care testing. These three segments also illustrate how market and demographic factors influence growth in different diagnostics industry segments. Glucose monitoring is expected to increase by as much as 15 percent by 2004 due to the large and increasing number of Americans with diabetes. This is influenced by aging Baby Boomers and expected increases in the number of obese individuals. Moreover, the amount of testing per diabetic is expected to increase. Patient education that results in better awareness about diabetes should also result in increased testing.
Nucleic acid testing growth, on the other hand, is being fed by the demand for sexually transmitted disease and viral load testing. It could leap ahead 35 percent by 2004. NAT also is encroaching on microbiology’s traditional turf of pathogen identification and susceptibility testing.
Finally, point-of-care testing, which may grow by 12 percent by 2004, is on the increase because the quick results it provides can help clinicians make clinical decisions quicker, potentially reducing the cost of care. Another area looking at significant growth is flow cytometry. It could increase as much as 15 percent as it expands its boundaries from primarily research to clinical applications.
The core lab tests, chemistry, hematology, and coagulation testing, account for more than 70 percent of all diagnostic testing. Growth in these segments is predicted to be modest at best, perhaps as much as 3 percent for each by 2004.
What are the strengths in the clinical chemistry industry? It appears to have overcome the blow dealt it by the Health Care Finance Administration in 1997-1998 which restricted docs from ordering chemical test panels with more than 12 tests. Also, it accounts for the highest volume of lab activity. Hematology posts the second highest volume in testing due to the high demand for cell counts. Coagulation testing is supported by the advent of many new antiplatelet drugs. Laboratories could see a major change here if reimbursement for home coag testing is approved by third party payors.
The concept that preventive testing or screening for various diseases can reduce healthcare costs is not new, but implementing it has been tortuously slow. As noted above, diagnostics industry representatives believe changes in reimbursement policies are needed. Currently, a new test that improves the precision or accuracy of a diagnostic test is reimbursed at the same rate as the old test. Thus manufacturers have little incentive to develop new tests that may ultimately drive down the cost of healthcare.
One reason for resistance by HCFA and third-party payors is the lack of clinical studies demonstrating a direct cause-and-effect relationship between screening tests and reduced healthcare costs. Industry representatives say that some of the needed studies are finished, but others will take time because preventive testing benefits do not show up right away.
In the meantime, other forces are indirectly increasing the demand for preventive testing. First, consumers are seeking more cholesterol, prostate and Pap tests. Second, HMOs are providing more Pap, chlamydia, cholesterol and hemoglobin A1c tests along with prenatal and postpartum exams in order to get national accreditation. And, third, it is likely that Medicare will soon reimburse for biannual Pap tests and other screening exams.
Reimbursement
In the late 1990s, HCFA medical necessity guidelines reduced testing volumes significantly. This year, things changed. Although The AMA nixed the thyroid panel, it added new tests to some panels. For example, it added a 10-test renal function panel and replaced the hepatitis panel with an acute hepatitis panel. In other good news for the industry, Medicare lab fees have been stable since about 1998.
Despite the good news, if diagnostic testing is to thrive, everyone in the industry is going to have to work towards showing the value of old, and particularly new tests in terms of their ability to help reduce the cost of healthcare.
