Wall Street has yet to grasp this essential truth of laboratory medicine-lab test quality comes with its own price tag

At this moment in time, Quest Diagnostics Incorporated‘s  (NYSE:DGX) advertised value proposition to other labs—”industry-leading quality and technical proficiency”—has diminished credibility with pathologists and lab industry executives. They are questioning how the nation’s largest lab company could allow systemic errors that caused it to report inaccurate Vitamin 25(OH) D test results to tens of thousands of patients for 18 months during 2007 and 2008.

These same pathologists represent an important source of reference and esoteric testing referrals to the nation’s largest lab company. Thus, the disclosure of systemic failures in its Vitamin D testing program may have implications for Quest Diagnostics over the long term. Many health systems, hospitals, and laboratories across the United States refer reference and esoteric tests to Quest Diagnostics. Quality and test result integrity are a primary buying motive for the pathologists and lab directors in these organizations. As scientists, they want confidence in the analytical integrity of the test results they provide to their own clinicians.

Two national reference laboratories with solid reputations for quality and lab test result integrity are ARUP Laboratories and Mayo Medical Laboratories. These reputations for quality and integrity are key assets at ARUP and Mayo. Both firms compete successfully against the two blood brothers because many referring laboratories believe the scientific integrity at ARUP and Mayo is not compromised in ways that may occur in publicly-traded lab companies. Of interest, both these laboratories earn adequate profit margins while competing effectively on price, service, and quality against the national lab companies.

Quest Diagnostics now finds itself facing a tough challenge in the reference/esoteric testing marketplace. Among its peers in the scientific and laboratory medicine communities, the quality and integrity of its lab test results will be seriously questioned. And because pathologists have long memories, this can be an issue for years into the future.

That has been the experience of Specialty Laboratories, Inc. During the 1990s, this was a go-go reference and esoteric testing laboratory. Fast-growing, it had a reputation for first-rank science and regularly introduced new proprietary assays to the medical community. But, in April, 2002, federal and state laboratory regulators yanked Specialty’s license to do business with Medicare. The story centered around internal whistleblowers and regulatory directives that were not fully addressed by Specialty’s executive team. There were questions about the integrity of test results for some lines of lab tests performed at Specialty. (“State, Federal Regulators Target Specialty Labs,” The Dark Report, April 22, 2002.)

Within a few months, Specialty Labs was able to reclaim its Medicare license after fixing deficiencies and passing its inspections. However, loss of its Medicare license was a body blow to Specialty Laboratories. Across the nation, pathologists and laboratory directors stopped sending specimens to Specialty Labs. Overnight, the company experienced a precipitous decline in specimen volume and revenue. Facing grim financial prospects, in January 2006 it was sold to AmeriPath. Ironically, Quest Diagnostics found itself the owner of Specialty Laboratories when it acquired AmeriPath last year.

The example of Specialty Labs illustrates why quality, integrity, and trust matter-a great deal! Pathologists and lab directors face personal liability if their laboratory delivers inaccurate results to patients and physicians. Their personal reputations ride on the performance of their laboratory. As physicians, they understand the consequences to patient care when a laboratory fails to report accurate test results. Their own laboratory must maintain its reputation for integrity and quality if it is to retain the trust of the clinicians and patients it serves.

Further, these same pathologists and lab directors regularly interview and hire scientists and medical technologists from both of the national laboratory companies. They hear lots of stories about the internal operations of these two billion-dollar lab companies. There are few secrets about events that unfold inside the two blood brothers. For example, lab scientists directing Vitamin D testing at their own labs quickly recognized, early in 2007, that Quest Diagnostics was struggling with its home brew mass spectrometry Vitamin D assay.

The lab community has watched both national labs continually cut costs over the past ten years. Competing labs conduct hiring interviews with the wave after wave of terminated employees hunting for jobs after each RIF (reduction in force) trims back staff to save money. Pathologists and lab directors understand the consequences of sustained cost cutting. Eventually, a laboratory’s cost cutting reaches a point where the resources, staff time, and operational capability required to sustain a high level of analytical accuracy and integrity can be compromised.

That is why many laboratory professionals are asking if the inaccurate Vitamin 25(OH) D results performed over an 18-month period on tens of thousands of patients is a sign that should not be ignored. Has Quest Diagnostics reached the threshold where further cost-cutting to satisfy Wall Street will undermine the quality and integrity of its lab test results?

Of all the customers of the two national laboratories, pathologists are the best informed about how constant budget reductions can undermine the quality and integrity of laboratory test results. They know that lab test quality is an expensive proposition.

Thus, no one should be surprised if, going forward, both national laboratories find it more difficult to expand the reference and esoteric business which comes to them from other laboratories across the nation. Should either firm experience even modest declines in the year-over-growth in this business segment, it will be a significant sign. Questions associated with test integrity may be motivating an important source of reference and esoteric testing to steer their specimens to other laboratory providers.

Should this happen, no one should be surprised. If a decade of sustained cost-cutting has finally reached the point where laboratory customers question the quality of the test results produced by major lab companies, it will only be the market imposing its discipline. The market will be reminding Wall Street investors that spending to sustain quality protects market share and profits. After all, as the libertarians say, “There ain’t no such thing as a free lunch (TANSTAAFL)”!

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