Laboratory of America Holdings Earnings Call INSIGHTS: Under Pricing Pressure, Alternative Delivery Models

On Thursday, Laboratory Corporation of America Holdings (NYSE:LH) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Under Pricing Pressure

Gary Lieberman – Wells Fargo: This is a little disorienting with Adam not getting the first question.

David P. King – Chairman and CEO: He had plenty of questions.

Gary Lieberman – Wells Fargo: I won’t throw this one at him. I asked this question on the earlier call, but there is a lot of discussion continuing around pricing pressure, and for very long time there was pricing stability, and I don’t know exactly when, but it seems like five or six years ago. We started to see pressure on price. So, maybe could you comment about, is there a path back towards pricing stability, and what are the challenges of getting there?

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David P. King – Chairman and CEO: Yeah. Gary, I guess. It’s Dave. I guess I would characterize it a little differently, which is, there was – I think as everybody remembers in 2007 and 2008 a fairly sizable pricing reset and my view is that since that time pricing has been quite stable and that on both a unit cost and a mix basis pricing has generally been positive. You know I look at other industries, probably aside from pharmaceuticals and healthcare services and I see a trend where unit price and when you look at imaging, look at hospital services, look at physician services. I see a trend where unit pricing has been fairly steadily going down, whereas for us unit pricing has been relatively flat and couple of years unit pricing has been positive. So our pricing in this quarter was positive, and we’re happy about that, and we continue to make every effort to be disciplined on pricing given the surrounding environment.

Gary Lieberman – Wells Fargo: And then maybe just a follow-up to that would be, with the – assuming the Accountable Care Act is implemented, what kind of impact do you see on your overall unit pricing from the implementation of healthcare reform?

David P. King – Chairman and CEO: I just think it’s too early to hypothesize about what’s going to happen to price. There are too many variables that are employed. For example, it’s been widely discussed that employers may decide not to continue to extend coverage and pay the penalty instead. If that happened and employees go to the exchanges, I mean that has one potential pricing impact you have potentially more patients in Medicaid, which has unit pricing implications, if they’re uninsured now or if they’re outside the system. So I just think it’s too early to tell what implications the ACA would have for price, because there are too many moving pieces.

Alternative Delivery Models

Amanda Murphy – William Blair: Follow-up to some comments that you made about the alternative delivery models. I’m curious what are you seeing these days in terms of managed care’s efforts to manage lab spend? How willing are they to adopt those type of models, and specifically how do we think about those models impacting the P&L relative to current models?

David P. King – Chairman and CEO: I think that there is increasing focus in managed care on lab trend, not so much on lab spend, because as we have always said, the spend is 3% of total healthcare expenditure, although we provide heck of a lot more (than) 3% of the value. But I think there is increasing focus on trend and the trend is utilization, and it’s also what tests are being selected. So, I think in a appropriate way, managed care – and it’s not only managed care by the way, it’s integrated delivery networks, it’s health systems, are focused on what tests are being ordered and why are the tests being ordered and are they being ordered from the right provider. So I think there’s more willingness to approach these issues. Like everything, there’s a implementation period, there’s a learning curve, and we’re still at the early stages of what I would describe as managed care and hospitals and delivery networks and health systems and even physician groups implementing a more focused approach to how tests are ordered.

Amanda Murphy – William Blair: So, just thinking over the next couple of years how do we think about the offsetting the factors of – I think there has been a lot of discussion about hospitals purchasing physician practices and how those test volumes or I guess the referral source changes the direction of the test volume, and then you think about hospitals selling their outreach business and some of the things you’ve talked. I mean how you rationalize all of those and think about the impact to volumes over the next couple of years? Does one seem like it’s standing out more than the other?

David P. King – Chairman and CEO: Well obviously we’ve talked about it and it’s been widely discussed that health systems, I would describe those big health systems are purchasing physician practices as well as other significant number of other types of services as well which has the potential to redirect the flow of lab specimen, on the other hand it also has the potential to significant increase the cost of the lab expense to payors and even the internal cost of the laboratory services that the health systems are now providing the physicians. So, to me the increasing focus on reducing the overall cost of care and on directing not only lab work but all services to the highest quality and most efficient provider benefits us, because I think we’re the highest quality and most efficient provider.

Amanda Murphy – William Blair: Just last one, if you think about volumes over the past few years, they have been, it’s been a challenging environment just given the macro situation, and how do you think about if you put performance side for a second, how do you think about this general utilization of patients? Is there something that you think is a fundamental shift and how people are using healthcare or is there something you think as the macro environment theoretically improves, we could see better utilization levels?

David P. King – Chairman and CEO: I have always maintained that as the macro environment improves that that we will see improved utilization levels, and I continue to hold that view. It certainly is the case that we’re in a period of low volume growth, that’s the environment, and so it requires us to manage the business very well to be able to continue to be successful, but we’re also in a very, very tough macro environment with a lot of overhang of high unemployment, and as the economy is not picking up in the way that economists and everybody else thought that it would, and I do think that has the effect of (muting) the use of healthcare services generally and lab services specifically.

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