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Overview of clinical laboratory services industry in the US

  • Why are clinical laboratories essential?
  • Analysis of the US clinical laboratory industry
  • The future outlook

 

Clinical laboratory tests are performed on a specimen collected from patients to diagnose a disease, its prevention and proper treatment. These have gained great influence on medical decisions and around 70% of the medical decisions are based on clinical laboratory results (as per industry leader Quest Diagnostics). The growing population, increasing number of diseases and disorders, rising awareness on the importance of early diagnosis are the major contributors in fuelling the growth of the clinical laboratory tests industry. The global clinical laboratory services market size is expected to reach a valuation of USD 361.3bn (2025) from USD 208bn (2016) at a CAGR of 6-7% (Source: Transparency Market Research, 2017). Further, based on the testing services, the clinical laboratories market is segmented into three major categories:

  1. Routine medical testing: includes full body testing such as eye check-ups, blood tests, diabetes test and others
  2. Esoteric medical testing: includes those tests which are not performed routinely, but are for rare diseases and require specialised personnel for testing
  3. Genetic medical testing: includes those tests which identify the change in the gene system of a body

 

The United States accounts for the largest share with a revenue of USD 80bn of the global clinical laboratory tests industry. The increase in the population of ages 65 and above, high customer penetration, high rate of lab automation coupled with an increase in patient awareness led to a demand for preventive healthcare and personalised medical treatments in the nation.

The clinical laboratory services are cost-effective and form the least invasive method for clinical decision-making. This has led to an increase in the demand for screening and early detection techniques. In terms of expenditure, clinical laboratories take approximately 2-3% of the overall healthcare expenditure.

Consequently, the US clinical laboratory tests industry witnessed a CAGR of 6.44% over 2011-17. The clinical laboratory services industry in the US is a mature industry and has been in existence for quite some time. Further, according to Centers for Disease Control and Prevention (CDC) data (2010), there were 40 million people aged 65 and above in the US, accounting for ~13% of the total population and CDC projected that around 20% of the population would be under this category by 2030.

Moreover, the clinical laboratory service industry reaches its customers through three ways: hospitals, affiliated physician and commercial clinical laboratories.

The hospital-based laboratories are the major player in the US for the industry with a ~59% share in 2017.

The other key growth drivers for the clinical laboratory test industry in the US include the presence of a favourable reimbursement framework (especially post the implementation of the Affordable Care Act) as clinical laboratory tests related reimbursements by Medicare and Medicaid account for ~2% of the total reimbursement in the US.

Televisory analysed a number of companies to understand the market framework in the US for clinical laboratory services industry like; Laboratory Corporation of America (LCA), Quest Diagnostics Inc. (Quest), Genomic Health, Inc. (Genomic), Exact Sciences Corp. (Exact Sciences), Neo Genomics Inc, Natera Inc., etc. Out of these, LCA and Quest are the industry leaders, jointly accounting for more than 18% of the share in the US clinical laboratory service industry revenue.

Thus, based on the analysis of the companies and their offerings, the industry can be classified into two segments: Routine medical testing segment, and esoteric and genetic medical testing segment. In the US clinical laboratory industry, LCA and Quest are the industry leaders in the routine medical testing segment and the other companies under analysis are into the esoteric and genetic segment. The below table shows the features and comparison between these two segments.

Comparison of different clinical laboratory testing segments

Further, as stated above, LCA and Quest have the highest revenue because of their large customer base, which is due to an intense customer penetration, thousands of labs and number of test offerings, whereas other companies under the analysis had 1-3 laboratories with a very limited test menu of 4-5 tests targeting a niche segment of genetic and esoteric tests.

LCA and Quest both reflect similar cost structure, whereas, for other companies under analysis, the cost structure is different. These companies continuously focus on how to gain a customer base by expanding their sales force on existing offerings as well as indulging in intensive research and development for new offerings. The firms are heavily expanding on their sales and research to gain the market share. Though these companies serve a niche demand, they are striving for profitability as these are finding ways to create customer penetration. Televisory believe that companies serving a niche market will take time to break even their profitability as they are significantly spending on selling and research and development.

Furthermore, as healthcare demand is increasing, the clinical laboratory service industry will also see the growth because of its vital role in the industry for detection of diseases, so that a proper treatment can be provided to patients. In recent years, the demand for medical laboratories has increased, simultaneously, the industry is also facing major challenges through policy changes and lack of skilled workers. The government made changes in the reimbursement policies of Medicare and hence, implemented the PAMA (the Protecting Access to Medicare Act, 2014) from the 1st of Jan. 2018. Henceforth, the implementation of the PAMA, the market-based rates will be considered for reimbursements, which will result in a decline of prices reimbursed by Medicare to clinical labs. The new National Limitation Amounts (NLA) in Clinical Laboratory Fee Schedule (CLFS) of 2018 shows there will be a negative impact on more than 75% of tests, which will decrease on an average of 35% for reimbursements. But this reduction is capped at 10% for 2018-20 and 15% for 2021-23 until Medicare reimbursement equals NLA. According to the US Bureau of Labor Statistics, the demand for the clinical laboratory technical workers will grow by 22% between 2012 and 2022, but laboratory workforce currently getting training is only about half of what is required. While there is an increase in demand for specialised tests, which will increase the need for high-cost, specialised equipment in the industry will cause capital investment to escalate as well.

Televisory believe that there will be an increase in demand for all the type of tests due to the above stated multiple factors. Hence, in order to deal with this increase in demand, the industry will see a large staff requirement for conducting tests, marketing, collection and distribution. However, to overcome the limited supply of skilled workers, companies will move towards automation. There will be an adverse effect of policy change for Medicare reimbursement on companies’ margin as the reimbursement will be linked to the market-based prices. Further, the impact on the routine medical testing segment will be higher as compared to the esoteric and genetic testing segment. Thus, as the demand is increasing, the overall industry will grow but at a slower pace than compared to previous years due to policy change and increasing scarcity of skilled workers.

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