Morningstar Advisor - August/September 2010 - 36

Spotlight

After Reform, Narrow-Moat Firms Have Strong Prospects in Diagnostics
Bill Buhr and Debbie S. Wang

More patients will get more medical tests. Quest and LabCorp are well positioned to take advantage.

Even before health-care reform, the $55 billion diagnostics industry was well on its way to stable, long-term growth. An aging population has benefited from a proliferation of new diagnostic tests. As new disease markers and genetic mutations are discovered, patients will undergo even more tests— a trend that is already on the upswing. The average patient older than 75 was subjected to 13 diagnostic tests in 2005, up from six in 1997. Then came reform—another boon for the industry. As with many other health-care industries, reform will bring more volume to the diagnostics business and will bolster topline growth. Diagnostic tests for the 30 million people who are newly eligible for coverage into the health-care system will have a significant impact on the sector. To analyze that impact, we need to consider the diagnostics industry’s unique place in the health-care reform debate.
Early Diagnosis a Keystone of Reform

On one hand, diagnostic testing was also being cited as a major health-care cost driver. Critics argued that doctors, aiming to be thorough and facing pressure to make the correct diagnosis for fear of malpractice lawsuits, were overusing imaging tests, such as CT scans and MRIs. This rush to use imaging, critics said, led to unnecessary tests and increased costs, including malpractice insurance premiums. On the other hand, many reformers argued that the keys to driving down health-care costs were illness prevention and early detection of diseases—two areas in which diagnostics companies play critical roles. This notion was backed by a September 2009 report by the health-care policy firm the Lewin Group. The report recommended that screening and lab tests should be essential components of reform, because testing assists in the early detection and proper diagnosis and treatment of a huge number of ailments. Testing, therefore, saves money and keep patients healthier. The report also focused on a few of modern medicine’s problem areas, including hospital staph infections and diabetes. Hospital-acquired infections kill almost 100,000 people each year, costing the health-care system as much as $45 billion. Using rapid diagnostic tests, hospitals can more effectively identity and cull outbreaks when they occur. With diabetes, early blood glucose

testing could both delay the disease’s onset and increase the success of managing it, helping to reduce complications and overall costs, which the report pegs at $174 billion annually. The questions of which tests are necessary, which are overused, and whether additional testing leads to healthier patients will continue to be hotly debated. Overtesting is a serious issue across the health-care industry, but it is especially prominent in the diagnostic-imaging sector. But we agree that preventive care is a pathway for lowering health-care costs. It seems to be a pretty reasonable assumption that if a disease or ailment can be identified early, the chances are better that it can be treated more effectively and efficiently. Acknowledging these benefits, the health-care reform bill provides funding for preventive care as a way to improve health and lower costs. An increase in patient volume, with the government encouraging wider use of testing, will benefit diagnostic companies and their offerings. But the sunnier revenue opportunities come with a price—the government wants to take a chunk out of the industry on the cost side. For example, the Senate bill originally called for $750 million in annual industry fees for clinical laboratories and $2 billion in fees for the

Diagnostic services range from routine testing of bodily fluids (for blood chemistry, pregnancy, and thyroid function) to far-more-complex testing of specific tissue and genetic signatures for conditions such as cystic fibrosis, cancer, and Down syndrome.

36 Morningstar Advisor August/September 2010



Morningstar Advisor - August/September 2010

Table of Contents for the Digital Edition of Morningstar Advisor - August/September 2010

Morningstar Advisor - August/September 2010
Contents
New on MorningstarAdvisor.com
Contributors
Letter From the Editor
What Aspects of Health-Care Reform Will Most Affect Your Clients?
Bonds, Chicago Style
Investment Briefs
Which Risk Are You Managing?
Eye on the Prize
Advisors Can’t Rely on Fidelity Alone
Health Care Gets Back to Business
An Opportune Time to Bet the Pharm
Reform’s Impact on Other Health-Care Industries
Top Takeover Targets in Biotech
After Reform, Narrow-Moat Firms Have Strong Prospects in Diagnostics
Health-Care Investing Alive and Well
Quest for Knowledge
Four Picks for the Present
How to Make Your Bond Portfolio Inflation-Resistant
Weeding Through the Energy Patch
Uncertainty and Value in Basic Materials
Stock Market Doom-Busters
Hunting Down European Debt-Dodgers
Mutual Fund Analyst Picks
50 Most Popular Equity ETFs
Undervalued Stocks With Wide Moats
VA Sales Slip a Bit in First Quarter
New at Morningstar
Star Wars, the Sequel
Morningstar Advisor - August/September 2010 - Morningstar Advisor - August/September 2010
Morningstar Advisor - August/September 2010 - Cover2
Morningstar Advisor - August/September 2010 - 1
Morningstar Advisor - August/September 2010 - 2
Morningstar Advisor - August/September 2010 - Contents
Morningstar Advisor - August/September 2010 - 4
Morningstar Advisor - August/September 2010 - 5
Morningstar Advisor - August/September 2010 - New on MorningstarAdvisor.com
Morningstar Advisor - August/September 2010 - 7
Morningstar Advisor - August/September 2010 - Contributors
Morningstar Advisor - August/September 2010 - Letter From the Editor
Morningstar Advisor - August/September 2010 - What Aspects of Health-Care Reform Will Most Affect Your Clients?
Morningstar Advisor - August/September 2010 - 11
Morningstar Advisor - August/September 2010 - Bonds, Chicago Style
Morningstar Advisor - August/September 2010 - 13
Morningstar Advisor - August/September 2010 - Investment Briefs
Morningstar Advisor - August/September 2010 - 15
Morningstar Advisor - August/September 2010 - Which Risk Are You Managing?
Morningstar Advisor - August/September 2010 - 17
Morningstar Advisor - August/September 2010 - 18
Morningstar Advisor - August/September 2010 - Eye on the Prize
Morningstar Advisor - August/September 2010 - 20
Morningstar Advisor - August/September 2010 - 21
Morningstar Advisor - August/September 2010 - Advisors Can’t Rely on Fidelity Alone
Morningstar Advisor - August/September 2010 - 23
Morningstar Advisor - August/September 2010 - 24
Morningstar Advisor - August/September 2010 - 25
Morningstar Advisor - August/September 2010 - 26
Morningstar Advisor - August/September 2010 - Health Care Gets Back to Business
Morningstar Advisor - August/September 2010 - An Opportune Time to Bet the Pharm
Morningstar Advisor - August/September 2010 - 29
Morningstar Advisor - August/September 2010 - Reform’s Impact on Other Health-Care Industries
Morningstar Advisor - August/September 2010 - 31
Morningstar Advisor - August/September 2010 - 32
Morningstar Advisor - August/September 2010 - Top Takeover Targets in Biotech
Morningstar Advisor - August/September 2010 - 34
Morningstar Advisor - August/September 2010 - 35
Morningstar Advisor - August/September 2010 - After Reform, Narrow-Moat Firms Have Strong Prospects in Diagnostics
Morningstar Advisor - August/September 2010 - 37
Morningstar Advisor - August/September 2010 - 38
Morningstar Advisor - August/September 2010 - 39
Morningstar Advisor - August/September 2010 - 40
Morningstar Advisor - August/September 2010 - Health-Care Investing Alive and Well
Morningstar Advisor - August/September 2010 - 42
Morningstar Advisor - August/September 2010 - 43
Morningstar Advisor - August/September 2010 - 44
Morningstar Advisor - August/September 2010 - 45
Morningstar Advisor - August/September 2010 - 46
Morningstar Advisor - August/September 2010 - 47
Morningstar Advisor - August/September 2010 - 48
Morningstar Advisor - August/September 2010 - Quest for Knowledge
Morningstar Advisor - August/September 2010 - 50
Morningstar Advisor - August/September 2010 - 51
Morningstar Advisor - August/September 2010 - Four Picks for the Present
Morningstar Advisor - August/September 2010 - 53
Morningstar Advisor - August/September 2010 - How to Make Your Bond Portfolio Inflation-Resistant
Morningstar Advisor - August/September 2010 - 55
Morningstar Advisor - August/September 2010 - 56
Morningstar Advisor - August/September 2010 - 57
Morningstar Advisor - August/September 2010 - Weeding Through the Energy Patch
Morningstar Advisor - August/September 2010 - 59
Morningstar Advisor - August/September 2010 - 60
Morningstar Advisor - August/September 2010 - Uncertainty and Value in Basic Materials
Morningstar Advisor - August/September 2010 - 62
Morningstar Advisor - August/September 2010 - 63
Morningstar Advisor - August/September 2010 - Stock Market Doom-Busters
Morningstar Advisor - August/September 2010 - 65
Morningstar Advisor - August/September 2010 - Hunting Down European Debt-Dodgers
Morningstar Advisor - August/September 2010 - 67
Morningstar Advisor - August/September 2010 - Mutual Fund Analyst Picks
Morningstar Advisor - August/September 2010 - 69
Morningstar Advisor - August/September 2010 - 70
Morningstar Advisor - August/September 2010 - 71
Morningstar Advisor - August/September 2010 - 50 Most Popular Equity ETFs
Morningstar Advisor - August/September 2010 - 73
Morningstar Advisor - August/September 2010 - Undervalued Stocks With Wide Moats
Morningstar Advisor - August/September 2010 - 75
Morningstar Advisor - August/September 2010 - VA Sales Slip a Bit in First Quarter
Morningstar Advisor - August/September 2010 - 77
Morningstar Advisor - August/September 2010 - 78
Morningstar Advisor - August/September 2010 - New at Morningstar
Morningstar Advisor - August/September 2010 - Star Wars, the Sequel
Morningstar Advisor - August/September 2010 - Cover3
Morningstar Advisor - August/September 2010 - Cover4
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