Reinventing Lab Services, One Blood Sample at a Time
Since early 2014, Sg2’s technology team has been tracking a lab services company that, until recently, has been operating in “stealth mode” outside of the media spotlight. Theranos, a Palo Alto, CA–based company, has the potential to be a highly disruptive upstart in America’s $73 billion diagnostic lab industry, which performs nearly 10 billion tests a year and is estimated to provide the basis for 70% of doctors’ medical decisions. Medicare and Medicaid each pay roughly $10 billion annually in reimbursements for these tests.
Theranos runs a “high-complexity laboratory,” certified by CMS and licensed to operate in nearly every state. It currently offers more than 200—and is ramping up to offer more than 1,000—of the most commonly ordered blood diagnostic tests, all without the need for a syringe.
More Test Results From Less Blood
Theranos’s tests can be performed on just a few drops of blood, or about 1/100th to 1/1,000th of the amount that would ordinarily be required—an extraordinary potential boon to frequently tested hospital patients, cancer patients, the elderly, infants, children, patients on anticoagulants or simply anyone with an aversion to blood draws. The blood sample is drawn with a finger stick using a patented method that minimizes even the minor discomfort involved with the procedure.
The company has performed as many as 70 different tests from a single draw of 25 to 50 microliters collected in a tiny vial approximately 1.3 centimeters in size, which Theranos founder Elizabeth Holmes has dubbed a “nanotainer.” Similar testing using conventional means would require 3,000 to 5,000 microliters (3 to 5 milliliters or cubic centimeters) of blood.
The fact that Theranos’s technology uses such microscopic amounts of blood should eventually allow physicians far greater latitude when ordering so-called reflex tests. With reflex testing, the physician specifies that if a certain test comes up abnormal, the lab should immediately perform follow-up tests on the same sample to pinpoint the cause of the abnormality. Reflex testing saves patients the time, inconvenience, cost and pain of return doctor visits and additional blood draws.
The results of Theranos’s tests are available within hours—often matching the speed of emergency “stat” labs today (although stat labs, which are highly efficient, usually include only a limited menu of approximately 40 tests).
It’s not just the blood draws that are tiny. The analytical systems Theranos uses to perform the tests take up a small fraction of the footprint required by a conventional lab. This unique benefit makes it possible to imagine one day placing Holmes’s labs adjacent to the operating rooms in hospitals, in military evacuation helicopters, on ships and submarines, or in refugee camps.
Cost Savings Are Significant
Most important, Theranos tests cost less. Its prices are often a half to a quarter of the prices charged by independent labs, and a quarter to one tenth of the prices billed by hospital labs, with still greater savings for expensive tests. Such pricing represents a potentially enormous benefit for the uninsured, the insured with high deductibles, insurers and taxpayers. For example, the chargemaster rate for a comprehensive metabolic panel at an academic medical center (AMC) is $333, while the rate at the same AMC with the insurance discount is $176.49. The Theranos price for the same lab test is $7.27.
The company’s prices are set to never exceed half the Medicare reimbursement rate for each procedure, a fact that, with widespread adoption, could save the nation billions. The company also posts its prices online, a seemingly obvious service to consumers, but one that is revolutionary in the notoriously opaque and seemingly arbitrary world of contemporary health care pricing.
Operations Are Expected to Exponentially Scale
The scale of Theranos’s operations at the moment is modest. Its phlebotomists currently take physician-ordered blood draws (as well as saliva, urine, feces and other samples) at collection centers the company operates at its headquarters in Palo Alto and at 21 Walgreens—one in Palo Alto and the rest in Phoenix, AZ. But these are only the advance guard in a gradual, national rollout that Walgreens committed to last September: it plans to establish Theranos outposts in a substantial percentage of its 8,200 drugstores in all 50 states. It is the first step in Holmes’s audacious plan to place a Theranos center within 5 miles of almost every American and within 1 mile of every city dweller. Walgreens CEO Greg Wasson said in an interview that he hopes to eventually place Theranos centers in the pharmacies of the company’s European partner chain, Alliance Boots, as well.
Furthermore, three hospital groups are now working closely with Theranos to deploy Theranos’s lab services. These groups are UCSF Medical Center in San Francisco, Dignity Health’s 21-state hospital group, and Intermountain Healthcare’s 22-hospital system in Utah and Idaho.
- For organizations considering outsourcing lab services, add Theranos to the list of potential partners and compare the benefits and challenges of working with third-party diagnostic companies. Identify pain points in your current lab model that could be remedied with Theranos’s solution.
- For organizations aiming to grow lab services and associated ancillary volumes, keep Theranos on your radar and be aware of the breadth of competitors entering the diagnostics space. Understand that convenience, low cost and ease of access will be key drivers of consumer decision making in this space.
Sources: Baeum S. Theranos CEO wants to make blood tests less painful and easier to get. MedCity News. September 11, 2014; Brown A. Meet the newest members of the 2014 Forbes 400. Forbes. September 29, 2014; Dunn L. Maybe healthcare shouldn’t be local. Becker’s Hospital Review. September 4, 2014; Leuty R. New blood: Theranos targets 500 hires in Arizona. San Francisco Business Times. July 22, 2014; Loria K. This woman’s revolutionary idea made her a billionaire—and could change medicine. Business Insider. September 29, 2014; Parloff R. This CEO is out for blood. Fortune. June 12, 2014; Sg2 Analysis, 2014.