Judging the UnitedHealth Decision to Drop Quest Diagnostics in Favor of LabCorp

There was plenty of reaction to last week’s news that UnitedHealth Group had awarded an exclusive, ten-year, national lab testing contract to Laboratory Corporation of America. That contract award excluded Quest Diagnostics Incorporated.

Across the laboratory industry, pathologists and lab directors are keenly interested to learn how this may affect the market for physicians’ office-based lab testing in their communities. Phones and e-mails have been flying into our offices with questions and comments. Two words describe the general reaction to this announcement: “total surprise.” That’s because laboratory professionals understand the range of challenges that UnitedHealth and LabCorp must overcome if this exclusive national lab testing contract is to prove successful.

Even the investment community was not certain how to understand this startling development- but pundits did seize the chance to engage in word play. At BusinessWeek online, the headline was “A Negative Result for Quest Diagnostics.” Over at The Motley Fool, the UnitedHealth contract award story was titled “Great Chemistry at LabCorp.”

However, the harshest criticism came from TheStreet.com. It has a regular feature named “The Five Dumbest Things on Wall Street This Week.” Listed at number four for last week was Quest Diagnostics Incorporated. TheStreet.com noted that Quest Diagnostic’s CEO, Surya Mohapatra had told the financial community that, following one year of negotiations with UnitedHealth, it had suddenly “changed direction” and demanded the right to make an eight-year deal. The Street.com continued “‘If we had signed that contract,’ Mohapatra bristled, according to Dow Jones, ‘it would have been irresponsible not only for us as a company but for the whole industry.'”

TheStreet.com next observed rather dryly that “LabCorp investors are surely applauding that principled stand.”

It then rated the Quest Diagnostics situation thusly:

“Dumb-o-Meter score: 85. ‘Choosing a diagnostic lab with a focus on patients and quality makes a difference for your health,’ Mohapatra warns.”

It is not often that events in the laboratory industry catch the attention of Wall Street. It is even less common for a laboratory company to do something that earns it recognition on a list of “The Five Dumbest Things on Wall Street This Week.” Judging by the 18% drop in Quest Diagnostics’ share price that followed news of the UnitedHealth contract, it seems that a number of smart investors believe LabCorp made the smartest move in this round of the chess game.

At Dark Daily, we are of the opinion that the new UnitedHealth lab testing contract strategy will be long-term negative for the entire laboratory industry. If that proves true, then both Quest Diagnostics and LabCorp will have more to lose in coming years than any immediate gains as a result of this contracting strategy.