This is an excerpt from a 1,021-word article in the March 13, 2017, issue of THE DARK REPORT. The complete article is available for a limited time to all readers, and available at all times to paid members of the Dark Intelligence Group.
CEO SUMMARY: Is this year’s early spate of deals involving the sales of hospital lab outreach programs and a new joint venture the first tremors of an impending earthquake of similar transactions? In the first 10 weeks of 2017, Laboratory Corporation of America, Quest Diagnostics, and Sonic Healthcare announced significant agreements to purchase sizeable hospital lab outreach businesses and establish a laboratory joint venture. How will this unusual number of lab acquisitions affect your business?
In the first 10 weeks of 2017, hospitals and health systems announced a surprising number of lab acquisitions to sell off all or part of their clinical lab operations to the nation’s largest commercial laboratory companies.
The parade of transactions and some joint-venture partnerships has involved Laboratory Corporation of America, Mount Sinai Health System, Providence Health and Services, Catholic Health Initiatives, Pathology Associates Medical Laboratories (PAML), Colorado Laboratory Services, Kentucky Laboratory Services, MountainStar Clinical Laboratories, PACLAB Network Laboratories, Tri-Cities Laboratory, Quest Diagnostics Incorporated, PeaceHealth Laboratories, Sonic Healthcare USA, Western Connecticut Health Network, Constitution Diagnostics Network, Danbury Hospital, Norwalk Hospital, New Milford Hospital, Sunrise Medical Laboratories, West Pacific Medical Laboratories, and Baptist Memorial Health Care.
THE DARK REPORT believes there is no precedent for all this activity, and savvy lab executives should keep on top of all these transactions. Read this recent issue to get all the details.
Keen Interest In These Deals
Pathologists and lab administrators who operate hospital lab outreach programs are watching these developments with interest to understand if this number of agreements represents the first wave of a new trend, or whether these four major deals are simply a coincidence.
One argument in favor of the “coincidence” interpretation is that these announcements came shortly after the start of 2017. It is common for buyers and sellers to want to enter into sales agreements before year-end because of the tax benefits and other advantages. Thus, one school of thought is that the agreements were signed in January and February because the parties could not complete their negotiations in December.
There could be another motive that triggered these sales. Over the past 25 years, the most common reason for a hospital or health system to sell its lab out- reach business to a commercial lab company was to convert the value of that asset into cash. In a substantial number of these transactions, the hospital or health system needed to bolster a deteriorating balance sheet, due to either outright losses or erosion in operating margins. The recent financial statements for each of the hospitals or health systems involved in these four transactions shows some evidence of financial pressure.
Weakening finances could be a factor in the Mount Sinai transaction, for example. The health system saw its cash and cash equivalents on hand shrink from $289 million at the end of 2014 to $194 million at the end of 2015, a decline of $85 million in just 12 months.
Hospitals’ Money Problems?
At PeaceHealth, financial performance has been stable. One big expenditure has been $352 million to implement an EHR in both the ambulatory and inpatient settings in recent years. The need to beef up capital could be one factor in the timing of PeaceHealth’s decision to sell its outreach business.
Providence Health and Services is feeling financial pressure and announced in November 2016 that it planned an undisclosed number of layoffs. At that time, officials said this action was a response to reductions in payment and increased costs.
Catholic Health Initiatives is experiencing similar declining reimbursement and higher costs. For its year ending June 30, 2016, CHI reported a loss in net income of $699 million.
Razor-Thin profit Margins
Also, times are tough for WCHN. This three-hospital system reported a $12.8 million operating margin, or about 1%, for 2015. Last year, Modern Healthcare reported, “For the current year , the WCHN board approved a budget that envisions no margin whatsoever, but [CFO] Steven Rosenberg said even that might be optimistic. ‘We’re not at a break-even pace this year, and we’re really struggling with what to do,’ he said.”
Among hospital administrators, interest in discussing the options for their clinical laboratories has never been higher, according to LabCorp and Quest Diagnostics. During presentations at investment conferences, lab executives from these two companies express great optimism about their respective prospects to do more clinical lab deals with health systems this year.
These dynamics leave unanswered a critical question: Is the lab industry at the beginning of a new trend in which significant numbers of hospitals and health systems are considering selling their lab outreach businesses and allowing commercial lab companies to manage their inpatient labs?
One factor forcing this question into the open is that hospitals and labs will continue to endure drops in reimbursement. This trend will work against most hospital and health system laboratories. For hospitals, less reimbursement for patient care will necessitate increasingly radical steps to bring costs in line with falling revenue. That would be one reason why selling an outreach lab business and outsourcing management of inpatient labs might appeal to hospital administrators.
Read more about about the double-whammy hit to profits.