Sonora Quest—In Command and Control in Arizona

When Dave Dexter got the call from Kenneth Freeman in 1999 to take over Sonora Quest, the joint venture laboratory in Arizona, it was a Hail Mary pass. The venture had lost money every month for the 27 it had been in operation. Freeman was looking for someone to save it from being shut down.

The weather from Dexter's office window at Quest Diagnostics in Portland, Ore. seemed fitting for the grim scenario. It was raining—the 87th consecutive day with rain. When Dexter—then in charge of Quest's Northwest operations—flew down to Phoenix, it was sunny and 82 degrees.

"I was feeling kind of weak that day," Dexter recalled. "But I thought, 'I could get used to this.'"

Freeman left as Quest Diagnostics' CEO more than a decade ago. Dexter hasn't budged from Arizona. His longevity may have something to do with his second month at the helm of Sonora Quest Laboratories. During his first month, the venture lost $1.3 million, hemmed in by business contracts with global caps.

If Dexter was still feeling weak, he hid it very well. "I blew every single one of those contracts up," he said, and held payers to new pacts with leakage clauses.

The next month, Sonora Quest eked out a $13,000 profit.

Sixteen years later, the Tempe-based Sonora Quest is the dominant laboratory in the Grand Canyon State. It's a joint venture between Quest Diagnostics and Banner Health, Arizona's biggest hospital system with 16 inpatient facilities statewide and 13 others in Alaska, California, Colorado, Nevada and Nebraska. Sonora Quest has about 2,600 employees. Banner is involved in a dozen accountable care organizations statewide, and Sonora Quest has been along for the ride, making it one of the nation's most deeply immersed labs in ACOs.

Dexter juggles a variety of titles and duties. He is not only Sonora Quest's president and chief executive officer, but also heads Laboratory Sciences of Arizona LLC, a wholly-owned non-profit subsidiary that manages Banner's hospital labs. And he also has a title with Quest, serving as the lab giant's general manager of joint ventures in Arizona.

Sonora Quest performs about 45 million tests a year—far, far more than any other lab in Arizona—and has annual revenue crowding $300 million. Revenue and test volumes have been growing slowly but steadily in recent years—about 3 to 4 percent, according to Dexter. It has also found a new niche in prescription drug management. According to Dexter, it went from zero assays just a couple of years ago to nearly 400,000 tests a year, mostly from the state's Medicaid program, and potential new contracts are likely to make that grow further.

Banner's merger with the University of Arizona Health Network just a few months ago will also grow Sonora Quest substantially. The deal includes two hospitals, a cancer center and five pathology groups with more than two dozen pathologists. The hospital lab business is being integrated into Laboratory Sciences, while Sonora Quest will manage the hospital outreach volume. According to Dexter, it will add about 8 million in annual testing volume to the venture.

Dennis Weissman, a Washington, D.C.-based laboratory industry consultant, attributed a lot of Dexter's success to his management style.

"The way he works with personnel and staff, really is one of the big differentiators," Weissman said. Sonora Quest has won several awards over the years for being among the best places to work in Arizona.

According to Dexter, the primary goal is not to work 24 hours a day. "It is not how many hits you get, but how many runs you score," he said. Instead, Sonora Quest focuses on being highly engaged with employees—which Dexter believes leads to satisfied customers—and keeping a focus on ethics. He noted that the company has walked away from business if there has been an integrity issue.

For senior managers, Dexter asks that they give their best 9 hours in a workday. "That means if you want to go to your kids' little league baseball game, you can," he said, adding that the precise business plans and roadmaps Sonora Quest formulates every year makes the performance expectations quite clear.

Dexter also requires himself and senior management to lead a major charitable event each year and sit on the board of a philanthropic organization. Sonora Quest provides resources to 36 different charitable organizations, and the executive leadership provides business acumen. "It's a nice intertwining with what we do," Dexter said.

Last year, G2 Intelligence recognized Dexter with its Laboratory Public Service National Leadership Award for Business Creativity and Innovation. Weissman, who founded G2 Intelligence and was a consultant for the organization until last year, said the award was given for his ability to create a cohesive organization.

Theranos—threat or pretender?
Yet for the first time since its first couple of difficult years in the 1990s, Sonora Quest is facing a potential challenge to its business.

Theranos, the often closed-mouth Silicon Valley-based lab created a decade ago by Stanford University dropout Elizabeth Holmes, has decided to make Arizona its first place to challenge the diagnostic world's old guard. It operates 41 centers in Arizona at Walgreens sites where patients can undergo lab tests.

But Theranos didn't enter Arizona with just its fingers crossed. The company lobbied to change state law so that any lab test offered in the state could be marketed directly to consumers.

"Arizona's law can and should serve as a model for the nation for direct access testing," Holmes said at the bill's signing last April. "Every state should have a law like Arizona's because it demonstrates how it is possible to help health care providers engage with patients in preventative care, save money for the government and individuals, protect physicians and health care providers from liabilities that can hinder preventive care, and strengthen an individual's basic right to information about themselves."

The law goes into effect the day before Independence Day. Theranos has been taking out full-page ads in the Arizona Republic to publish its prices, which are 50 percent below Medicare rates. The most expensive test on the menu is a hepatitis C genotyping at $117.96. A hemoglobin test can be had for less than $2.

Theranos' cowboy-like incursion into Arizona has not gone without Sonora Quest's notice. It had previously offered 50 tests directly to consumers. Beginning on July 5, that number will double to 100, and prices will also be posted at Sonora Quest's draw centers, Dexter said. But that is about as far as the market adjustments will go.

"We're not competing with Theranos, and we're not competing with them on price," he said, adding that Sonora Quest believes that having access to a primary care or other physician in the testing process is critical for the appropriate interpretation of results.

Whether Theranos becomes a major force in Arizona still remains to be seen. Dexter noted that Theranos hired 80 phlebotomists statewide to service its draw centers in Walgreens, but that they have not appeared to be overworked.

Weissman also believes that Theranos will have a tough go of it. "Because of Sonora Quest's involvement with the largest health care system in the state, for the foreseeable future I don't see Theranos driving consumers in the hundreds of thousands from Quest. It's not the same market as an established health system laboratory. It's a much different process."

Takeaway: Sonora Quest is likely to remain Arizona's dominant laboratory— and do so on its own terms.