Key Laboratory Services Trends

Since we published our last Laboratory Services M&A Snapshot in September 2019, the dominant issue for laboratory services—and all of healthcare—has been the COVID-19 pandemic. The pandemic has brought several key laboratory services trends into focus:

 

Ability of national lab companies to mobilize quickly

In the first week of March 2020, even before stay-at home orders started in states around the country, both LabCorp and Quest Diagnostics had announced their launch of COVID-19 testing capabilities.1 Since then, they have developed at-home test collection kits2 and partnered with major national retailers to expand testing capacity.3

Depth of scientific expertise, experience with agencies such as the Food and Drug Administration (FDA), more robust supply chains, and the ability to process tests at scale have been advantages for the national labs as the M&A Snapshot: Laboratory Services Outlooks and Trends nation as a whole has struggled to keep up with demand for testing. This is placing additional pressure on hospital owned outreach labs and may lead to additional sales of hospital outreach labs, which can also offer hospitals and health systems monetization opportunities.

 

Testing as a key indicator of recovery

Volumes at national labs reflected precipitous drops in volume at hospitals and physician offices in the early weeks of the pandemic, with testing declines of 50% to 60% at the end of the first quarter reported by LabCorp and Quest Diagnostics. Preliminary results for the second quarter showed a better than expected recovery in testing from the first quarter, with Quest Diagnostics reporting volume (as measured by requisitions) down 18% over the prior year and volumes in the base business (excluding COVID-19 antigen and antibody tests) down 34% yearover-year.4 Improvement in testing volumes correlates with improving volumes in non-emergency procedures.5

 

Acquisition Activity, 2014 – Q1 2020

With five transactions announced in the first quarter of 2020 (Figure 1), the year began on pace with recent years, which have seen from 19 (2017) to 22 (2019) total transactions. Although it is too soon to estimate the COVID-19 pandemic’s impact on transactions, we predict that hospitals looking for operational support, monetization, and operational efficiencies will drive an acceleration of transactions through the end of the year.

Figure 1: Number of Lab Transactions Per Year, 2014 – Q1 2020

 

Update on Major Publicly Traded Lab Companies

The two largest publicly traded lab companies continue to participate in a range of transactions. Quest Diagnostics announced three domestic laboratory transactions in 2019, including two management services agreements and an acquisition, and has announced two transactions through the first half of 2020, specifically the acquisition of two outreach businesses. LabCorp announced three domestic laboratory transactions in 2019, specifically three acquisitions encompassing both outreach businesses and specialty testing targets.

LabCorp also is leveraging de-identified patient data to provide analytics reports to health systems and provider organizations. The reports focus on community antibiograms, management of chronic conditions, and lab stewardship (including utilization reports to identify commonly misordered tests and potential testing efficiencies).

 

Outlook for Hospital-Based Laboratories: New Pressures from Another National Payer

In July 2019, UnitedHealthcare (UHC) launched its Preferred Lab Network (PLN). The network currently includes eight lab companies (AmeriPath/DermPath Diagnostics, BioReference Laboratories, Inc., GeneDX, Invitae Corporation, LabCorp, Mayo Clinic Laboratories, Millennium Health, LLC, and Quest Diagnostics, Inc.). Their names are highlighted in United Healthcare’s provider directories to help guide ordering physicians to what “could be a more affordable, higher quality option to offer to their patients.”6 Patients can still access any lab listed in UHC’s directories, but do so at a potentially higher out-of-pocket cost than at a PLN lab. Freestanding independent labs currently contracted with UHC are eligible to apply for the PLN; for hospital labs to participate, they must contract with UHC as a freestanding lab provider and meet the PLN criteria.7 In a related change in policy announced this spring, UHC will now prohibit hospitals acting as a reference laboratory or conducting diagnostic testing for non-patients from billing under the hospital’s facility participation agreement. To be paid for outreach lab testing, hospitals will now need to contract separately with UHC as a reference laboratory. Originally scheduled to go into effect on May 1, 2020, the policy has been delayed until October 1.8

UHC’s new network and payment policies follow upon Anthem’s introduction late in 2018 of a rate-alignment policy that seeks to align payment for testing regardless of what type of lab performed the test and eliminate payment differentials between hospital-based labs and independent lab companies. These moves by the nation’s first- and second-largest commercial health insurers add to the significant headwinds that hospital-based laboratories were already facing.

 

Notable Health System Transactions (August 1, 2019 – June 30, 2020)

 

Health System

Date

Lab Partner

Structure

Value Proposition to Partners

Community Health Network’s and Ascension St. Vincent’s interests in Mid America Clinical Laboratories (MACL)

June 2020

Quest

Acquisition of the systems’ remaining interest in MACL’s outreach lab

· Direct access to Quest’s broader, high quality, and innovative test services in Indiana

· Monetizes remainder of each system’s outreach laboratory services

Westchester Medical Center Health Network

May 2020

BioReference

Management Agreement

· Allows healthcare providers and patients of WMCHealth expanded access to analytics tools, scientific expertise, and patient experience platforms, resulting in improved patient outcomes

Memorial Hermann

January 2020

Quest

Acquisition of Memorial Hermann’s outreach laboratory business and management agreement for its inpatient operations

· Quest has roughly 80 patient service centers in Greater Houston – the transition to Quest will give patients broad health plan access that includes all major payers

· Patients also get access to a more comprehensive test menu

· Monetizes Memorial Hermann’s outreach laboratory services via a $120M purchase price

 

For more information, please contact Courtney Midanek, Managing Director in Kaufman Hall's Mergers, Acquisitions & Partnerships practice.

 

1 Tenebroso, J.: “LabCorp and Quest to Offer Coronavirus Tests.” Nasdaq, March 7, 2020. www.nasdaq.com/articles/labcorp-and-quest-to-offer-coronavirus-tests-2020-03-07

2 U.S. Food and Drug Administration: “Coronavirus (COVID-19) Update: FDA Authorizes First Test for Patient At-Home Sample Collection.” Press release, April 21, 2020. https://www.fda.gov/news-events/press-announcements/coronavirus-covid-19-update-fda-authorizes-first-test-patient-home-sample-collection

3 Livingston, S.: “Humana Works with Labs, Walmart to Boost COVID Testing.” Modern Healthcare, June 30, 2020. www.modernhealthcare.com/insurance/humana-works-labs-walmartboost-covid-testing

4 Quest Diagnostics: “Quest Diagnostics Announces Preliminary Second Quarter 2020 Financial Results.” Press release, July 13, 2020. ir.questdiagnostics.com/press-releases/pressrelease-details/2020/Quest-Diagnostics-Announces-Preliminary-Second-Quarter-2020-Financial-Results/default.aspx

5 Bonislawski, A.: “Lab Test Volumes Up as Providers Begin to Reopen.” Modern Healthcare, May 19, 2020. www.modernhealthcare.com/finance/lab-test-volumes-up-providers-begin-reopen

6 UnitedHealthcare website: “UnitedHealthcare’s Triple Aim Focus Adding More Value for Lab Services.” July 1, 2020. newsroom.uhc.com/experience/preferred-lab-network.html

7 UnitedHealthcare: “Preferred Lab Network: Frequently Asked Questions.” 2019. www.uhcprovider.com/content/dam/provider/docs/public/reports/Preferred-Lab-NetworkFrequently-Asked-Questions.pdf

8 UnitedHealthcare website: “Policy, Protocol and Program Delays (Full List).” www.uhcprovider.com/en/resource-library/news/2020-network-bulletin-featured-articles/0620-policyprotocol-program-delays.html

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Courtney-Midanek

Courtney Midanek

Managing Director
Courtney Midanek provides partnership advisory services for a variety of healthcare clients in both acute and non-acute care.
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