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Quiet company poised to shake up legacy healthcare companies

Inflexibility may make it difficult for traditional providers to compete with companies like Theranos

Tammy Worth, Contributor

For those who haven’t heard yet of Theranos, take note because it may be a business disrupter of huge proportions.

Founded a decade ago by Elizabeth Holmes to address her fear of needles, Theranos says it has created equipment and processes that need only 1/1,000th the amount of blood that is normally needed for testing – something that none of the current legacy laboratories can do – and results are achieved typically within four hours instead of days.

The company offers a wide range of tests and plans on expanding. What’s more, it posts its prices online – something that is not the norm for most labs – and claims it will never charge more than half of the traditional Medicare rates for tests. Theranos’ approach to pricing may give people who are uninsured or have high deductibles the ability to pay for otherwise cost-prohibitive testing and it could save costs for Medicare and Medicaid, which pay approximately $10 billion a year in lab testing. Its equipment – which is said to be the size of a large desktop computer tower – is being piloted by Walgreens, who may roll it out nationwide if the company is pleased with the results.

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The threat to legacy providers from companies like Theranos is that it is addressing a larger issue in healthcare – the desire for no more borders, said Ken Kaufman, chair of management consulting firm Kaufman Hall.

“It is what we’ve had since Amazon was created,” he said. “We have moved away from facility-based real estate stores to ways of consuming goods over the Internet.”

The change in an industry from an outside source is what Kaufman calls “disruptive economics.” Be it in healthcare or other industries, it often takes an outsider to come in and make changes to reduce costs or improve quality. This is usually because legacy providers are too entrenched in the structure and revenue to create new models.

Theranos could be a big disruption in the healthcare industry because it has no walls; its equipment would fit anywhere, noted Kaufman, so it shouldn’t have the same fixed costs as legacy companies.

“I think if Theranos is the real thing, it’s a remarkable disruption because the fixed costs are so much lower,” he said. “Theranos is not the be-all and end-all of this. It is just an example … and if you have the fixed costs of a real estate operation, it may not be a good place to be in healthcare over the next 15 years.”

But Theranos’ disruption is not a slam dunk, countered Elissa Passiment, executive vice president of the American Society for Clinical Laboratory Science.

Theranos may be less expensive than other laboratories, she said, but they will have to be a lot less expensive to be competitive because, for one thing, it is new to the field and still proving itself, and for another, private payers often negotiate rates drastically below Medicare rates with organizations like Quest Diagnostics.

Theranos will also at some point have to face approval from the Food and Drug Administration, a laborious process. “At some point, the FDA is going to want to see something from them to know what they are doing meets the claims they are making,” she said.