Small-cap lab-testing firm Bio-Reference Labs (NASDAQ:BRLI) again proved it can compete with the big boys in the highly competitive New York metro area.

Third-quarter results beat analyst projections by a decent margin; Bio-Reference posted a 35% increase in sales and 14% improvement in year-over-year diluted earnings for its third quarter. As with the previous quarter, management alluded to disruptions in "regional equilibrium" in the industry, which is likely in regard to managed-care giant UnitedHealth Group's (NYSE:UNH) decision to go with LabCorp (NYSE:LH) over Quest Diagnostics (NYSE:DGX). (LabCorp and Quest are the two 800-pound lab-testing gorillas). The development happened last fall, about the same time that Aetna (NYSE:AET) decided to go with Quest over LabCorp.

So while the two industry giants duke it out over large national contracts with the country's largest health insurers, Bio-Reference appears to be benefiting as a more nimble regional operator. Plus, its focus on esoteric testing, which includes cancer, gene, immune-system, and other tests I can't pronounce, is quite profitable. Esoteric testing lets the company benefit physicians and other customers by providing "clinically relevant answers," or the ability to help clients treat their patients.

Management mentioned that new business obtained through industry contract changes had resulted in higher start-up costs, but these seem to be trailing off. Bottom-line profitability came in especially strong for the quarter, putting Bio-Reference on pace to achieve its long-term goals of 20% sales growth and 30% annual improvements in operating income.

The overall industry's outlook is a bit murky right now, since the recent contracts with UnitedHealth and Aetna could imply that Quest and LabCorp are overly interested in maintaining market share, and willing to sacrifice short-term profitability to gain long-term contracts. But for the time being, this is working out well for smaller players such as hospitals (which collectively account for the bulk of all lab testing) and Bio-Reference. Bio-Reference is definitely demonstrating its appeal as the third-largest player for publicly traded lab-testing firms.                

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LabCorp and UnitedHealth are Stock Advisor selections. Quest Diagnostics and UnitedHealth are Inside Value recommendations.

Fool contributor Ryan Fuhrmann is long shares of Quest Diagnostics but has no financial interest in any other company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.