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Losing exclusive contracts might normally seem like bad news, but shares of Quest Diagnostics and LabCorp surged on Friday after the rival lab services firms announced new non-exclusive agreements with health insurers.
Starting in 2019, LabCorp will no longer be the exclusive lab provider for UnitedHealth, but it will gain access to Aetna. Meanwhile, Quest will lose its exclusivity with Aetna, but will be among UnitedHealth's preferred providers.
Quest gained 4.9 percent on Friday, while LabCorp closed up 3.8 percent after hitting a historic high.
"This expanded agreement is the culmination of our years-long effort to return to a full collaborative relationship with Aetna," said LabCorp CEO David King in a statement announcing the new partnership. He said the company was also pleased with the term of its new agreement with United.
Analysts say the dual announcements mean Quest and LabCorp likely did not have to resort to rock-bottom pricing to hold onto their agreements, and likely won't suffer when it comes to market share.
"Quest and LabCorp are now de-risked from the possibility of getting denied access to a major health plan. While we view Quest as the net winner given it picks up more "net lives" … we believe both labs are well positioned to win back business from regional labs that had benefitted from (their past) exclusion from major health plan," wrote Canaccord Genuity analyst Mark Massaro in a note to clients.
For Quest, the new deal with UnitedHealth will give it access to United's 48 million members, which could well offset losing its exclusivity with Aetna's membership of 22 million.
"It expands our relationship with United which, I will share, is becoming more strategic for us," said Quest CEO Steve Rusckowski said in a phone interview. He added that it's also good for United members, "because those that have been using us as an out-of- network provider now will be in-network."
The new contract goes beyond lab services: It also includes more collaboration on diagnostic data and wellness services. That's an increasingly big focus for Quest – to leverage the company's own physical testing centers, and partnerships with retailers like Safeway and Walmart, to provide basic health services for consumers who may test positive for diabetes or high cholesterol.
"The opportunity, independent of the insurance companies … is to get great access for where we need to be to serve the population. And we continue to build on that network," Rusckowski explained.
The CEO added that focus on using its testing data for more consumer-focused services will position it well with increasingly new integrated health firms, such as the proposed CVS- Aetna and Cigna-Express Scripts mergers.
A few years ago, Quest and LabCorp came under pressure when would-be disruptor Theranos claimed it had developed a revolutionary machine that could provide test results from just one drop of blood. In March, the SEC charged Theranos' founder Elizabeth Holmes with what it called massive fraud.
When asked for his thoughts on the rise and fall of the start-up, Rusckowksi said there was one good thing that came out of the hype.
"It added a lot of visibility to our marketplace, a lot of attention placed on lab testing... and how the consumer should control it," he said. "It helped us to amplify what we're doing and now we're delivering on that promise."