I certainly did not foresee all the lab acquisition activity that occurred during 2002. Compared to recent years, both Quest Diagnostics Incorporated and Laboratory Corporation of America have been on a buying spree this year.

Quest Diagnostics acquired American Medical Laboratories in April and has an agreement to acquire Unilab Corporation, pending a decision by the Federal Trade Commission. LabCorp bought Dynacare and has now signed an agreement to acquire DIANON Systems, subject to shareholder approvals and regulatory reviews. There have also been several acquisitions of smaller, private labs throughout 2002.

In simplest terms, it means the biggest labs are getting bigger and the smaller labs are shrinking in number. In May, The Dark Report wrote about how the two blood brothers now hold a national oligopoly in the physicians' office segment, along with regional monopolies in selected cities throughout the United States. (See TDR, May 13, 2002.) How this will affect the marketplace for laboratory testing services has yet to be seen.

As I survey the nation's healthcare system, I think the clinical laboratory industry may be the first clinical segment to have such a dominant oligopoly at the national level. By my guess, combined, LabCorp and Quest Diagnostics control upwards of 70% of the national market for lab specimens originating in physicians' offices. By comparison, in the hospital segment, HCA and Tenet Healthcare, combined, only own about 9% of the nations' hospitals.

Anatomic pathology may be next in line to undergo extensive consolidation. LabCorp's purchase of DIANON is a direct statement that it intends to compete more aggressively for tissue specimens that originate in physicians' offices. This has traditionally been a captive market for local anatomic pathology group practices. Meanwhile, AmeriPath has quietly continued to scoop up three to six pathology practices each year. It now employees 400 pathologists. Local pathology groups that fail to respond to this marketplace trend may find themselves extinct because of their failure to adapt to a changing environment.

All of this consolidation activity raises a critical business question: is the competitive marketplace now tilted in favor of larger labs, with their economics of scale? There are examples of regional labs and pathology "supergroups" which are doing well. But can they sustain this success against competition from our industry's ever-growing billion-dollar oligarchs?

Another Lab Acquisition: LabCorp To Buy DIANON

In purchasing DIANON, LabCorp signals its interest in building anatomic path revenue

CEO SUMMARY: Laboratory Corporation of America Holdings will pay almost $598 million to buy DIANON Systems, Inc. of Stratford, Connecticut. With this move, anatomic pathology becomes a high profile growth target for LabCorp. During the past eight years, DIANON Systems has built a national business providing highly specialized anatomic pathology and esoteric testing services to office-based physicians.

Why DIANON Sale Alters Anatomic Path Market

LabCorp's $598 million investment is a major bet on AP-based diagnostics

CEO SUMMARY: By acquiring DIANON Systems, LabCorp raises the level of competition for tissue specimens originating in physicians' offices. LabCorp's acquisition is also a validation of predictions that cancer diagnostics will be a high-growth segment of laboratory medicine. Anatomic pathologists have ample warning that new national competitors will soon attempt to capture local physician accounts.

"Direct-to-Consumer" Ad Runs in New York Times

IMPATH's first effort to reach consumers hits wrong chord with College of Am. Path.

CEO SUMMARY: Two pioneering advertising campaigns launched in September. Both Myriad Genetics and IMPATH targeted consumers with advertisements about diagnostic testing. In each case, the most vocal response to the advertising came from within the medical community. Within the pathology profession, IMPATH's full-page advertisement in the New York Times Sunday Magazine was not well-received by some.

Diagnostic Assay Marketing

Tenet's Outlier Medicare Fees Put It in Unwelcome Spotlight