New Year’s Day 2007 marked more than the start of the New Year. It was also the effective date for a new exclusive national laboratory services contract for Laboratory Corporation of America with UnitedHealth Group. Also on New Year’s Day, Quest Diagnostics lost its status as a national laboratory provider for UnitedHealth. (See the Dark Daily “United Health Disrupts the National Contract Status Quo Between the Two Blood Brothers” from October 4, 2007.)
Although New Year’s Day was the effective date for both major contract changes, the two national laboratories turned up the competition more than six weeks earlier. In New York City and selected cities around the United States, LabCorp and Quest have run radio ads and newspaper advertisements to get their message out to the public and the physician community. As well, LabCorp has scrambled to create the service organization it needs to compete for UnitedHealth beneficiaries in such cities as New York and Chicago.
Dark Daily observes that these advertising efforts by LabCorp and Quest Diagnostics represents the largest consumer advertising blitz ever mounted by clinical laboratories. The Internet is also now a marketing channel. Lab directors and pathologists interested in how LabCorp and Quest Diagnostics are advertising themselves in this battle over UnitedHealth patients can see the full media campaigns of both companies. Quest Diagnostics established the Web site “MyLabIsQuest.com” as an information center for physicians and patients. On this Web site, it has posted radio ads and print advertisements run during this advertising campaign.
Similarly, LabCorp created “ChooseLabCorp.com” as its Web site to present information to physicians and patients about the new UnitedHealth contract. This Web site contains radio ads, public statements, and other information about LabCorp. Of interest to lab executives and pathologists, LabCorp has created a sign-up page and a LabCorp welcome kit for physicians.
Now that the UnitedHealth-LabCorp national contract is effective, it means that the flow of reimbursement dollars will begin to change for both LabCorp and Quest Diagnostics. As the exclusive national network provider, LabCorp is working aggressively to sign up as many physician accounts as possible. At the same time, Quest Diagnostics is working just as aggressively to convince physicians to continue using it, even though it is an out-of-network laboratory for most UnitedHealth plans.
United Health: Quest is “Out”-LabCorp Is “In”, The Dark Report, Vol. XIII, No. 14, October 16, 2006.
“LabCorp Selected Exclusive National Laboratory for UnitedHealthcare; Will also Develop and Manage Lab Networks Selectively Across the United States”
“Quest Diagnostics to No Longer Be a National Contracted Provider of Lab Services to UnitedHealthcare Effective 2007”
“Bio-Reference Laboratories Announces Extension of Provider Participation Agreement with United Healthcare to Include Oxford Health Plans Effective January 2007”
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.
It was major news yesterday when the public learned that UnitedHealth Group Incorporated had awarded an exclusive, 10-year national contract for laboratory testing services to Laboratory Corporation of America. UnitedHealth is the nation’s second largest health insurance company, with approximately 26 million beneficiaries. LabCorp says it should see an additional $3 billion in revenue during the 10-year term of its pact with UnitedHealth.
This new contract takes effect on January 1, 2007. After that date, Quest Diagnostics Incorporated ceases to be a contract provider of laboratory services to UnitedHealth beneficiaries, with a few exceptions. Quest Diagnostics acknowledges that its UnitedHealth book of business represents 7% of total revenues, or about $385 million per year. That business is now at risk, for a number of reasons.
What is big news for LabCorp and Quest Diagnostics is likely to be a “ho hum” for most other laboratories. That’s because they are already excluded from lab testing contracts with UnitedHealth. What may be of more immediate impact to hospital lab outreach programs and independent laboratory companies is the fact that LabCorp will be developing contract networks for UnitedHealth in selected regions around the United States. Depending on the prices and terms of such contract networks, local labs may find it advantageous to participate to gain access to UnitedHealth beneficiaries.
As to the two blood brothers, Dark Daily predicts the capture of UnitedHealth’s business by LabCorp will intensify competition between the two billion-dollar behemoths. Quest Diagnostics will not lie down and cede the UnitedHealth business to LabCorp. Nor will LabCorp be anything but aggressive about exploiting this opportunity. From this perspective, news that LabCorp has been granted an exclusive, 10-year lab testing services contract with UnitedHealth Group is just the first round. Stay tuned, because the battle is about to get nasty. Check out coming issues of The Dark Report for additional intelligence about this tectonic shift in national lab contracts.