The United States Clinical Laboratory Testing Market

Clinical laboratory testing is an essential element in the delivery of healthcare services. Physicians use laboratory tests to assist in the detection, diagnosis, evaluation, monitoring and treatment of diseases and other medical conditions. Clinical laboratory testing is generally categorized as clinical testing and anatomic pathology testing. Clinical testing is performed on body fluids, such as blood and urine. Anatomic pathology testing is performed on tissues and other samples, such as human cells. Most clinical laboratory tests are considered routine and can be performed by most commercial clinical laboratories. Tests that are not routine and that require more sophisticated equipment and highly skilled personnel are considered esoteric tests. Esoteric tests, including gene-based tests, are generally referred to laboratories that specialize in performing those tests.

We believe that the United States diagnostic testing industry had over $37 billion in annual revenues in 2003. Most laboratory tests are performed by one of three types of laboratories: commercial clinical laboratories; hospital-affiliated laboratories; and physician-office laboratories. In 2003, we believe that hospital-affiliated laboratories performed over one-half of the clinical laboratory tests in the United States, commercial clinical laboratories performed approximately one-third of those tests, and physician-office laboratories performed the balance.

The underlying fundamentals of the diagnostic testing industry have improved since the early to mid-1990s, which was a period of declining reimbursement and reduced test utilization. During the early 1990s, the industry was negatively impacted by changes in government regulation and investigations into various billing practices. In addition, the rapid growth of managed care, as a result of the need to reduce overall healthcare costs, and excess laboratory testing capacity, led to revenue and profit declines across the diagnostic testing industry, which in turn led to industry consolidation, particularly among commercial laboratories. As a result of these dynamics, fewer but larger commercial laboratories have emerged, which have greater economies of scale, rigorous programs designed to assure compliance with government billing regulations and other laws, and a more disciplined approach to pricing services. These changes have resulted in improved profitability and a reduced risk of non-compliance with complex government regulations. At the same time, a slowdown in the growth of managed care and decreasing influence by managed care organizations on the ordering of clinical laboratory testing by physicians has contributed to renewed growth in testing volumes and further improvements in profitability since 1999. Partially offsetting these favorable trends have been changes in the United States economy during the last several years, which have resulted in an increase in the number of unemployed and uninsured. In addition, in an attempt to slow the rapidly rising costs of healthcare, employers and healthcare insurers have made design changes to healthcare plans which shift a larger portion of healthcare costs to consumers. We believe these factors have reduced the utilization of healthcare services in general.  Orders for laboratory testing are generated from physician offices, hospitals and employers. As such, factors such as the number of unemployed and uninsured and design changes in healthcare plans, which impact the level of employment or the number of physicians’ office and hospital visits, will impact the utilization of laboratory testing.

We believe the diagnostic testing industry has continued to grow during the last several years despite the slowdown in the United States economy and the changes in healthcare plan design, and that growth will accelerate as the economy improves. In addition, over the longer term, growth is expected to accelerate as a result of the following factors:

•  general expansion and aging of the United States population;

•  continuing research and development in the area of genomics and proteomics, which is expected to yield new, more sophisticated and specialized diagnostic tests;

•  increasing recognition by consumers and payers of the value of early detection and prevention, which can be provided through laboratory testing, as a means to improve health and reduce the overall cost of healthcare; and

•  increasing affordability of tests due to advances in technology and cost efficiencies.