Diagnostics-as-a-service may be one of the most important opportunities in digital health
But it’s also one of the hardest - here’s why.
Though often underappreciated, lab tests inform 70% of today’s medical decisions. In fact, they’re some of the best tools available to identify health risks, pinpoint diagnoses, plan treatments, and monitor conditions over time.
Compared to many other segments of healthcare, however, the lab testing industrial complex has received disproportionately less attention and investment, causing it to fall markedly behind on the digitalization and consumerization initiatives sweeping the rest of the industry. It’s one of the reasons why we at OMERS Ventures are tracking the space closely.
On top of that, forward momentum has long been stifled by the presence of a major duopoly that, at times, has been accused of predatory practices.
These dynamics continue to cause real pain points to be felt across stakeholders.
But now a handful of tailwinds are encouraging both incumbents and new entrants to break the mold.
After chatting with half-a-dozen founders and industry experts, here are some high level observations:
The problems with the existing paradigm are too big and too important to ignore.
More investment needs to flow into digital infrastructure and enablement tech to uplevel diagnostic care journeys and clinical workflows.
The direct access testing (DAT) market – where a patient can order a lab test directly without a physician's order – is large and growing. But it has its limitations. And as incumbents lean more into this space, new entrants’ defensibility will become less clear. Consumer marketing could be a critical determinant of DAT players’ staying power.
For more complex tests, the winning strategy – playing nice with or competing against the incumbents (Labcorp, Quest, hospital labs) – is yet to be determined, but if done right, there certainly can be scale advantages to working with the national players.
Startups looking to enter the diagnostics-as-a-service (DaaS) space should prioritize seamless tech integrations, intuitive UI/UX, and a commitment to clinical quality standards.
DaaS appears to be a value-additive layer of the evolving lab testing tech stack, but its ultimate success/failure will depend on a host of factors we don’t have a great line of sight into currently.
The traditional model
In the US, the traditional model is broken. These are just a few of the biggest problems we face today.
Access & inclusivity
Many labs aren’t completed simply because patients can’t get the time off from work, find childcare, or access transportation. These can be particularly challenging hurdles in marginalized communities.
Other vulnerable patient populations – like those with Parkinson’s, Alzheimer’s, dementia, etc. – may not get the labs they need because the inconvenience is too great for their already overburdened and largely uncompensated caregivers.
Physical limitations make travel difficult for some, while for others the trip to the lab can pose huge emotional/psychological burdens (e.g., depression, agoraphobia, highly concerned with exposure) or medical risks (e.g., immunocompromised individuals).
Additionally, “infections like HIV, STIs, and Viral Hepatitis can go undetected because people fear the social repercussions of diagnosis,” said David Stein, Co-Founder & CEO at Ash Wellness. “In particular, stigma is a barrier to care for people with non-normative gender and sexual identities who might not feel safe in traditional medical settings.”
The end-to-end patient experience is leagues below what consumers have come to expect. Especially since the onset of Covid and the rise of more digital- and virtual-first options that meet them where they are, when they want, in the way they prefer.
“Although it is common in healthcare to have poor customer experience, lab services hit a new low,” Shantanu Phatakwala, Chief Digital Officer of Olea Health, told me. “Most service centers close at 2pm or earlier and have no weekend service.”
For these reasons, it’s rare for patients to find on-demand availability – let alone same-day availability – at their nearest labs, meaning they often have to schedule days in advance or, for truly urgent matters, travel much longer distances to reach a lab that can serve them.
Even those who are able to make an appointment might still face long wait times once they arrive at the lab testing facility. And then have to wait days if not weeks to get their results.
“It’s no surprise 30%+ of ordered tests go unfulfilled,” Phatakwala said. That puts patients at risk and represents a major cost to the system.
It’s also not uncommon for patients to go to urgent care centers versus scheduling a lab visit - and that just adds unnecessary expense.
“If we order a package from Amazon, lunch from GrubHub, a car from Uber, etc., we expect a certain level of transparency in the process,” Workpath CEO Eddie Peloke shared with me.
Patients have come to expect the same level of transparency with their healthcare.
But once they leave the lab, they have very little insight into what’s happening with their samples. Oftentimes, a patient won’t even get their results (if they get them at all) until days after their physician receives them from the lab.
And if they do get the results, they might not have any idea what the numbers mean as it’s rare that anyone shares interpretations or comments. Unless they have medical training, of course.
And then there’s the ever-present issue of price transparency. There’s nothing worse than getting a mystery bill for a lab that an insurance company won’t cover.
There’s lots to improve on the provider experience side as well. According to Axle Health Co-Founder & CEO Connor Hailey, “providers want an easy way to submit requisitions and consume results,” yet there’s a glaring gap of technology when it comes to ordering and tracking samples.
On the results delivery side, Phatakwala said that most providers want results and data back faster, not 2-10 days. He noted that providers would prefer to have information before they see the patient, but current workflow doesn’t allow for it. “[They also want] more regular data points so they can titrate treatment based on trends,” he explained.
But the tech infrastructure standards of laboratories are years in the past, even more so than other aspects of health care. For example, most labs still use fax machines for requisitions. And those interfaces leave a lot to be desired.
And there can be a host of limitations to working with even some of the most tech-forward labs. We read this fantastic blog post outlining the problem, written by Ash Wellness’ VP of Engineering, Nick Sempere. To summarize:
Most labs use individual APIs, making it incredibly challenging, time-consuming, and costly for businesses to establish integrations across multiple labs.
Most lab APIs are small, meaning they can’t push large volumes of data.
Most lab APIs still require manual data entry, which is too difficult a task for a layperson and too time-consuming for a skilled lab technician.
So the prevailing paradigm is atrocious. Why can change happen now?
Two macro tailwinds are opening the door for other business models to emerge: consumerization and decentralization.
We’ve been talking about the consumerization of healthcare for years. This trend – consumers demanding greater control and ownership of their health – has moved the needle to some extent on things like clinical data access via patient health records, but for a host of other aspects of care, including lab testing, structural dynamics have prevented it from taking off.
Covid, however, has really improved consumers’ awareness of and access to direct access testing (DAT) – aka DTC or patient-authorized testing – at mass scale for the first time.
With the rise of Direct Access Testing, consumers can purchase tests directly (bypassing physicians’ orders) and complete them on their own schedules. Some of these tests can be completed from home.
Importantly, there are both advantages and disadvantages associated with the trend. For example, while it may provide greater convenience, privacy, or more rapid turnarounds, there are also concerns about consumers’ abilities to order appropriate tests, accurately interpret the results, and follow-up with physicians when necessary.
Direct Access Testing also isn’t universally available. Only 37 states and D.C. currently allow it to be performed, 12 of which have placed limitations on the practice (e.g., prohibiting hospital labs or only allowing CLIA-waived tests). For a deeper dive on DAT, we recommend giving this fantastic overview a read.
Looking beyond the pandemic, industry experts believe consumers will continue to demand the same level of access, convenience, and transparency with their lab testing needs.
“Patients have become accustomed to self service, easy access healthcare during the pandemic and continue to want more direct access to care, [and they] need us to keep meeting those needs after the pandemic,” said Stein.
Part of that involves allowing care to continue in more decentralized ways. As more care shifts online and into the home, there’s a growing need for more convenient, accessible and consumer-friendly testing options to support it there.
Solving this problem is “the natural extension—and required next step to scaling—the virtual care/telemedicine industry,” noted Workpath’s Peloke to me. “When a blood test or other diagnostic is needed to ensure a high standard of care, asking the patient to get in their car and drive to a lab completely breaks down the convenience of the virtual model,” he said.
It also jeopardizes the patient experience. And for virtual care providers navigating an increasingly competitive market, patient experience is everything. It can mean the difference between staying healthy or not.
However, self-test/self-collection menus aren’t broad enough – and the tests themselves aren’t complex enough – to meet all patients’ medical needs. And many DATs still require a trip to the lab, which is inconvenient for most and completely inaccessible for some.
So a growing number of companies are stepping up to provide mobile/in-home testing and sample collection services (i.e., for more complex tests that have to be completed in the lab). One particular variation, mobile phlebotomy, isn’t a new model (as an aside, we recommend reading this article for more context), but it certainly is experiencing a reawakening of sorts.
New entrants in this space aim to improve customer experience and operational efficiencies through a combination of administrative, logistical, and clinical workflow tech (e.g., scheduling, routing, communications, etc.).
Workpath, for example, says it’s applying lessons learned from Amazon, GrubHub, and Uber to bring more transparency to diagnostics. So, as an example, if the patient knows who is coming to their home and when, they can track the healthcare professional when they are on the way.
To offer another example: Axle Health, a company offering in-home testing services, is working on technology to ensure health professionals operate at the top of their license while also keeping costs low. It works by automatically assigning visits based on several parameters including clinical need, geography/distance, and cost.
“In essence, we don’t want a higher licensed professional (e.g., an RN) to do something in the home (e.g., a blood draw) a lower licensed health professional (e.g., a phlebotomist) can do,” he said. “What if an RN is finishing a more complex visit that’s only 5 minutes from a blood draw visit, but the phlebotomist is 30 minutes away?”
For another founder, Neal Wozniak, COO of mobile testing business Euverita, rapid reaction time isn’t necessarily the core driver of the business. For most use-cases, he notes, a several-hour wait for someone to come to the home is still far superior to driving and waiting in the waiting room. But it’s important to set expectations while keeping the burden low for the patient.
But unit economics are still a challenge.
“Mobile phlebotomy businesses operate with razor-thin margins due to low value of the test and high cost of collection,” JAZZ Venture Partners Principal and former Getlabs investor Amanda Way shared. In fact, “existing operators (e.g., labs) operate mobile phlebotomy at a loss to upsell and/or acquire new physician customers.”
I agree and it’s our view that these models could start to work once they get to scale, but that’s a challenging prospect in and of itself. Partnering with existing operators can only get them so far. What they should aspire to do is bring demand in through a wider array of channels than existing operators have access to. Further below, we detail one way they could potentially do that.
Another challenge that needs solving is the supply constraint. Some companies like Getlabs are offering accelerated training programs to recruit more people and train them on more complex blood draws. But it’s too early to say if these programs have had or could have a material impact on supply.
How are the lab giants responding to these trends?
The Direct Access Testing opportunity certainly isn’t lost on Quest & LabCorp. With Covid-19 testing revenue forecasted to drop markedly this year, the testing giants hope to soften the blow with other business lines.
In Quest’s 2021 Investor Day, SVP of Clinical Franchise Solutions & Marketing Cathy Doherty claimed the DAT market is positioned for breakout growth, growing to $2B by 2025 according to their estimates. The company also announced plans to expand its existing DAT operations with the goal of capturing $250M (12.5% share) of the market.
And earlier this year, LabCorp launched a new lab ordering platform called LabCorp OnDemand. Initially being launched as a DTC offering, the company said it plans to roll it out to physicians and payers in the future as well.
The major labs are experimenting with mobile phlebotomy as well.
And according to the Senate’s Lobbying Disclosure Act (LDA) database, both Quest and LabCorp disclosed telehealth lobbying activity for the first time ever in Q1’22.
But questions remain about the incumbents’ abilities to truly satisfy consumers’ wants and needs. According to the founders I talked to, Quest and LabCorp run lab samples at massive scale - and they do that well. But a lot more goes into diagnostics as a whole and where these companies falter is with patient experience.
This is perhaps why we’re seeing the two partner up with organizations – like Walgreens Walmart, and Getlabs – that are arguably stronger in that arena.
DaaS: an emerging business model
Another thing that became clear early in our conversations was the emergence of a seemingly new buzz term: “diagnostics-as-a-service” (DaaS).
As is typical in digital health, few people agree on its meaning, but in a general sense DaaS is being used to describe a growing crop of startups aiming to make lab testing a more integrated component of virtual, at-home, and consumer-directed care.
A few caveats to bear in mind, since on the surface the term can be a bit misleading:
While “diagnostics” generally encompasses a range of modalities (e.g., imaging, wearables, pathology, etc.), here we’re referring specifically to the in vitro testing portion, meaning any test requiring a blood, saliva, urine, or other biological sample.
It also accounts for a wide variety of tests – not just those used for definitive diagnosis but also those for screening and general educational/informational purposes.
In our view, DaaS most aptly describes plug-and-play B2B vendors like ixlayer, Truepill, and Everly Health Solutions. Though they have their differences, all offer full-stack, turnkey solutions for businesses to launch their own patient-centric lab testing programs (consumer- and/or physician-directed).
With the exception of ixlayer (which has adopted a DaaS business model from day 1) most players got an opportunistic taste of DaaS during Covid.
But now they’re increasingly making bets on its ability to scale beyond the pandemic. In the last 18 months, they’ve all built, bought, or pivoted into DaaS businesses in material ways.
In May 2021, following the success of its digital pharmacy business, Truepill launched a diagnostics division.
Exclusively B2C at the time, at-home testing company Everlywell made 2 acquisitions to kickstart its B2B DaaS strategy in March 2021. It was rebranded as two distinct entities – Everlywell on the B2C side and Everly Health Solutions on the B2B side.
According to Axios, imaware started pivoting away from DTC last year and now is committed entirely to B2B, with goals to be the “‘Intel Inside of lab testing.’"
LetsGetChecked has expanded its B2B strategy from “corporate coronavirus testing” (focused on workplaces and schools) to end-to-end solutions for health plans, employers, healthcare providers, and public sector agencies.
Ash Wellness started as a D2C company specializing in remote STI testing for LGBTQ people, and pivoted in 2020 to a B2B solution that uses technology to support at-home testing for current healthcare systems.
But how big is the DaaS market? It’s tough to say but it’s likely bigger than you’d expect. And that’s because there are lots of businesses that don’t traditionally offer – but could benefit from offering – consumer-centric lab services like these. For pharma, for example, DaaS could potentially unlock the personalized medicine opportunity.
According to their marketing material, DaaS vendors see opportunities to sell into a diverse array of providers, biopharma/CROs, employers, health plans, public health agencies, pharmacies/retailers, consumer brands, and more.
Selling into these markets is not without challenges, however. Several experts we talked to detailed the difficulty selling into health systems and multi-specialty provider groups, for example.
As one founder told us, health systems are very hesitant to partner up with businesses powering their disintermediaries (e.g., DaaS vendors powering DTC telemedicine companies). Another told us his company’s had a lot of interest from PCPs but there’s concern that using their service could interfere with referrals to higher-margin specialty services.
What’s needed to deliver DaaS effectively?
Many of the experts we talked to agree it comes down to a few core things:
Easy integration (API-accessible),
A seamless experience (for all involved: patient, provider, lab, mobile workforce),
A commitment to clinical quality standards,
Broad/deep test menu to service a diverse set of patients and medical needs,
And, of course, successful unit economics.
In practice, there’s a lot of variability in what these “ingredients” look like – as well as the technical, regulatory, and logistical challenges – depending on the tests being done.
“Understanding that there isn’t a one-size-fits-all solution for patients can be challenging to early entrants,” said Brian Krueger, who previously served as a technical R&D director at LabCorp. For those reasons, he emphasized that a real deep knowledge of the lab testing industry is required to scale a lab testing infrastructure business effectively.
First, different tests require different supplies, processing and shipping requirements. For some subset of patients, certain blood diagnostics can be accomplished with an in-home kit, which DaaS companies can facilitate, noted Hailey from Axle. But in his view, even that can be plagued by shipping and supply chain constraints, clinical quality, and test breadth issues.
There are a few dozen analytes that can be tested using finger-prick dried blood spots, but “the vast majority require a cold chain or tube spinning from venous blood draws to prevent analyte degradation,” noted Krueger. “As much as people want to believe that capillary/finger-prick-based testing can be equivalent, we know, empirically, it’s not.”
The only alternatives are a visit to a patient service center or a visit from a mobile phlebotomy unit.
A notable exception, he said, is STD/STI testing. Much of that testing can be performed at home using self-collection swabs because the analyte being tested is RNA/DNA, which can be transported more stably at room temperature.
Having an expansive lab network can help mitigate some of the logistical challenges, but the composition of that lab network is also one of the biggest risks to clinical quality.
Krueger warns DaaS entrants about taking a “ham-fisted approach…to aggregate as many labs as possible.” Though a CAP or CLIA license is required to operate a lab, he explains, that doesn’t mean every lab’s quality program is equivalent.
So why not use a top-tier national provider (e.g., LabCorp, Quest) as your lab network? Well, it’s incredibly hard to obtain service agreements with them. “Healthcare is about quality and trust, and so the last thing [they] want to do as a brand in a trust-based industry is to allow someone to use [their] services inappropriately,” Krueger said.
And then you have clinical oversight and care delivery risk. These workforces can have major impacts on customer experience and safety and can also leave companies vulnerable to regulatory scrutiny.
Many lab tests – including DATs in some states – require a physician’s order and clinical oversight. This oversight involves reviewing test orders for medical appropriateness, conducting prior authorizations when necessary, and interpreting and communicating results.
But these relationships between physicians and lab services are highly regulated and strictly enforced by the federal government (e.g., Stark Law, Anti-Kickback Statute, Eliminating Kickbacks in Recovery Act). With few exceptions (e.g., “in-office ancillary,” VBC safe harbors), physicians are prohibited from referring clinical lab services to entities in which they have financial interests. In simple terms, that means it’s best to keep physicians and lab services separate.
DaaS vendors – especially those looking to own the lab piece – can utilize third party clinical services (e.g., OpenLoop, Wheel, SteadyMD) to mitigate that regulatory risk. But they should also be extraordinarily critical of quality standards in their partner selection process.
And as we mentioned before, in-home/mobile technicians may be needed for more complex testing. Beyond the technical skills, those collecting samples also need to be trained in customer service, and keeping that quality at scale is tricky.
So to summarize, DaaS vendors should ensure they offer seamless tech integrations, intuitive UI/UX, and a broad range of testing services without jeopardizing clinical quality. These will be their moat builders.
As platform plays, however, they should be especially careful about what they choose to buy vs. build vs. outsource to partners. These decisions can have a major impact on quality, user experience, and unit economics.
A quick note on DaaS adjacencies
Though they don’t fall in the DaaS bucket, there are a host of other tech vendors (e.g. electronic ordering, tracking, & reporting, LMS/LIMS, etc.), suppliers (e.g., test kitting), and service providers (e.g., fulfillment, logistics, in-home/last mile care delivery, virtual clinical review, etc.) that underpin and are levered to the DaaS theme.
As we mentioned earlier, one segment worth calling out is in-home/mobile lab services (e.g., Sprinter, Axle, Workpath, Getlabs). These businesses are close relatives to DaaS in that they offer turnkey, consumer-centric testing solutions but look and feel more like local service providers than SaaS businesses.
Other parts of the stack need some upgrades to meet the needs of emerging business models. Neal Wozniak opined, “I’m not seeing many LIS's that support truly mobile testing. I think there is room to innovate on a truly modern system.” Ash’s Stein agreed, saying even the gold standard is horrible.
Brendan Keeler, a Senior PM at Zus, said he’d like to see the Stripe-equivalent for lab ordering. Some vendors have tried this but, in his opinion, there’s much left to be desired.
Summary thoughts on DaaS
Taking a step back to look at the ecosystem as a whole, we view it in layers - with each one focusing on its core competency.
Let’s say a DTC health brand wants to launch a consumer-centric lab testing offering.
What a DTC health brand does super well, for example, is consumer marketing. But it may not be naturally equipped in test kitting, sample processing, or care delivery, for example. So it can use a DaaS vendor to pull all those pieces of the ecosystem together to make the experiences and data exchange seamless (e.g., for the end users/consumers, labs, physicians, etc.). And all those “pieces”, in turn, specialize in their respective areas. For an in-home care delivery company, it may be logistics. For clinical oversight, it may be on-demand staffing. For labs, it’s sample processing. And so on.
In my view, it’s the DaaS layer that provides a lot of value as the connective tissue. It also appears more scalable than others.
In theory, DaaS vendors could capitalize on trends driving both sides of the market (e.g., growing demand for consumer-centric testing options and labs’ growing imperative – but historical inability – to meet that demand) by building defensible moats (i.e., on tech integration, UI/UX, data exchange, etc.) and offering a range of testing services without having to own any of the capital-intensive parts of the value chain.
In practice, however, DaaS vendors are still beholden to many of the challenges the rest of the ecosystem faces.
The at-home tests (and self-collection kits) they can offer – either on their own accord or through partners – are limited in scope for several reasons (e.g., technical, regulatory, etc.).
Barring some major technological advancements, DaaS vendors need to rely on in-home/mobile care delivery partners – which face supply constraints, generate razor thin margins, and are incredibly hard to scale – to enable access to more complex tests.
They’ve also got to have a high-quality lab network that can process high volumes cost- and time-efficiently and keep error and retest rates low.
Locking in contracts with high quality labs – especially those with national footprints – is incredibly challenging. It can be even more difficult if those labs believe the DaaS vendor powers their competitors/disintermediaries.
DaaS vendors bear the burden of building out one-off API integrations with labs, which is a great value-add for their customers but can be taxing on engineering resources as lab networks grow.
DaaS vendors take on clinical quality risk in several areas – even in the areas of the value chain they don’t technically own. That isn’t something health tech startups can afford to be cavalier about.
At the moment, it’s not clear to us if it’s better to adopt a flexible, asset-light, partnership-heavy strategy or to vertically integrate and own as much of the value chain as possible. And based on what we’re seeing and hearing from industry participants, they’re not so sure yet either, so we expect to see some experimentation on this front.
There’s also the big overarching question: what will LabCorp and Quest do? It’s too early to say if the incumbents will see these insurgents as potential friends or foes. Is there a place for new entrants to operate here, or will the testing giants do what they’ve done in the past to consolidate market share and quell competition?
As investors, we’re eager to see how the space evolves but for the time being we’ll be adopting a wait and see approach.
great read! concurrent rise of digital front doors eg bouy health will be key in shepherding consumers to DaaS further accelerating DAT as the expected norm. patients are generally poor shoppers of healthcare, but when paired up with a trusted guide eg primary care physicians they can become incredibly discerning shoppers.