It's no coincidence that two recent lab industry developments are centered around lab companies in California. Repeatedly that state has proven to be a valuable bellwether of lab industry trends for the nation. On the lab regulatory front, state officials from the California Department of Health Services (CDHS) have sanctioned Specialty Laboratories, Inc., based upon regulatory deficiencies observed during visits to its laboratory facility in Santa Monica in June and October, 2001. Based on their findings, and subsequent negotiations with Specialty Labs to develop an acceptable Plan of Correction, the Centers for Medicare and Medicaid (CMS) is sanctioning Specialty Labs and revoking its CLIA-88 license because of deficiencies under CLIA regulations. (See pages 2-5.)

As of press time, neither state nor federal lab regulators have issued public statements concerning the Specialty Labs matter. This makes it hard to determine whether there is a broader message to the lab industry behind the sanctions leveled against Specialty. But action to revoke a public lab company's CLIA-88 license, particularly one as well known as Specialty Labs, is a sign that laboratory regulators are assuming a tougher stance toward identified violations of public laws and regulations. Since California regulates clinical laboratory operations more tightly than most other states, actions taken by CDHS and CMS against Specialty Labs may be an early market signal of a change in enforcement policy by regulators.

The other development is the acquisition of Unilab Corporation by Quest Diagnostics Incorporated. (See pages 6-14.) By purchasing Unilab, Quest Diagnostics is buying dominant market share of the"physicians' office segment" of lab testing in California. Pooled with its existing lab operations in California and its clout with managed care plans, Quest Diagnostics is poised to dominate the Golden State. With antitrust regulators likely to approve the deal, since they judge market share by the total lab testing pie (adding hospital inpatient testing, physicians' office laboratory [POL] testing, and physicians' office referral testing together), it is a sentinel event in the evolution of the nation's competitive marketplace.

On both counts, the two events in California reveal that government regulators—one group monitoring lab operations, one group monitoring anti-trust behavior—are signaling the type of directions they will tolerate for the nation's clinical laboratories.

State, Federal Regulators Target Specialty Labs

Specialty Laboratories' CLIA-88 license"yanked" by CMS laboratory enforcers

CEO Summary:  Specialty Laboratories, Inc. has earned the dubious honor of being the first-ever publicly-traded laboratory to have its CLIA-88 license revoked by federal regulators, terminating its right to payment for services covered by Medicare and Medicaid. The revocation is slated to take effect on April 26, but is subject to a court appeal that suspends the revocation until a decision is rendered.

Quest Pays $1.1 Billion To Acquire Unilab Corp.

Its second lab purchase in 2002 positions Quest Diagnostics to dominate California

CEO Summary:  Quest Diagnostics Incorporated is showing its muscle. The dust had hardly settled on its $500 million acquisition of American Medical Laboratories when the lab industry's behemoth announced that it would pay $1.1 billion to buy Unilab, by far the largest lab testing company in California. Integration of the two laboratory operations is planned to occur over the next two years.

Ken Freeman Discusses Plans to Integrate AML and Unilab

After its $1.7 billion buying spree, Quest Diagnostics Incorporated now must tackle integration of two lab firms.