Memorial Hermann Sells Hospital Outreach Lab to Quest

Health system to sell hospital outreach lab business, Quest gets contract to manage inpatient, other labs

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This is an excerpt of a 1,550-word article in the Feb. 17, 2020 issue of THE DARK REPORT (TDR). The full article is available to members of The Dark Intelligence Group.

CEO SUMMARY: THE DARK REPORT analyzes news of the latest hospital outreach business sale, finding that a need for more capital is probably one reason why Memorial Hermann Health System decided to sell its large laboratory hospital outreach business to Quest Diagnostics in a transaction both organizations announced on Jan. 27. Although terms of the sale were not announced, lab executives in Houston believe that Memorial Hermann will be paid several tens of millions of dollars by Quest. Still to be determined is the post-closing staffing needs for pathologists and lab professionals.

The end of January continued a two-month run of Quest Diagnostic acquisitions when Quest announced it would buy the hospital outreach laboratory division of Memorial Hermann Health System (MHHS) in Houston and other assets of Memorial Hermann Diagnostic Laboratories (MHDL).

In the deal, Quest gets two other assets. First, under a multi-year agreement, it will manage all the remaining Memorial Hermann labs, including the core lab, the inpatient laboratories in 17 hospitals, and the labs in four other facilities. Memorial Hermann will continue to own those labs, many of which provide onsite rapid response testing.

Second, Quest will serve the Memorial Hermann Health Plan (MHHP) as the only preferred lab provider. The MHHP has a three-star rating with Medicare and has a 25% share of the HMO market, making it the second largest insurer behind Aetna, which has a 29% share. MHHP does not have a significant presence in the preferred provider, point-of-service, or exchange markets, according to data from the American Medical Association.

As the largest health system in the nation’s fourth-largest city, the nonprofit Memorial Hermann includes 17 hospitals and more than 300 care delivery sites in Houston and its suburbs. MHDL itself has 60 physician office labs and more than 30 patient service centers.

When the deal closes, Memorial Hermann will transfer MHDL’s assets, including its hospital outreach testing business, to Quest, which will use its own Houston lab facility for such testing. MHDL will cease to exist and has no plans to open a new hospital outreach testing business, MHHS said.

Quest announced the Memorial Hermann contract on Jan. 27, just five days after saying it would buy Blueprint Genetics in an all-cash transaction. Based in Helsinki, Finland, Blueprint has operations in Seattle.

In December, Quest announced it acquired some of the clinical laboratory assets of Boston Clinical Laboratories, a privately held lab company in Waltham, Mass. (See sidebar, “In Addition to Getting Memorial Hermann’s Lab Assets, Quest Diagnostics Made Two Other Acquisitions”)

Financial terms were not announced for any of these three deals.

In a letter to patients, Memorial Hermann touted the benefits of the deal, saying Quest has some 80 patient service centers in Greater Houston and that the transition to Quest will give patients “broad health plan access that includes all major payers,” although how a clinical lab can provide broad access to health insurers was not explained. Patients also get access to what Memorial Hermann called “a comprehensive test menu,” without explaining the differences between the two companies’ test menus.

Memo to Physicians

In a memo on Jan. 27 to Memorial Hermann Physician Partners, Memorial Hermann’s President and CEO David L. Callender, MD, said physicians were not required to refer patient testing to Quest Diagnostics. The memo made no other reference to lab referrals. He also wrote that MHHS’ pathology groups would not be changing as a result of the agreement and that they would continue to have clinical oversight.

Neither Quest nor MHHS will make any immediate changes to laboratory operations until the deal closes in the spring, Callender added, in part because the relationship was in its early stages.

For physicians who have in-office lab services or are clients of MHDL, he wrote, the Quest Diagnostics Commercial team in Houston would be in contact to discuss preparations for the transition.

As all health systems shift away from volume and toward value-based payment, Callender emphasized this point in his memo to physicians. Memorial Hermann is shifting toward value-based care, he wrote, and “this agreement serves as a natural extension of our vision and strategy for the future.”

Value of Lab Test Data

That statement may lead clinical lab employees and managers to wonder what will happen to the lab test data Memorial Hermann collected on its patients. In value-based payment arrangements, labs collect extensive data on patients’ conditions that health systems can use to increase the value of services they deliver to payers. (See “How Northwell’s Lab Team Demonstrated Value Over 10 Years,” TDR, Jan. 20, 2020, and “TriCore Forges Ahead to Help Payers Manage Population Health,” TDR, May 20, 2019.)

According to Otto Schaefer, founder and president of Advanced Pathways Consulting, among clinical lab professionals and pathologists in Houston the Quest-Memorial Hermann announcement was “ground shaking.” Schaefer, who advises pathologists and pathology groups on business strategy, said one of the biggest concerns about the deal is how it will affect pathologists, clinical lab staff, and the managers and directors of Memorial Hermann’s labs.

Path Groups to Lose Income?

The effect on pathologists may be the most significant, he added. “My main concern is what will be the effect of this deal on the revenue that currently goes to the pathology groups in the Memorial Hermann system,” he commented.

As one of the largest integrated delivery networks in Houston, Memorial Hermann employs at least three different pathology groups. “That’s likely by design because they don’t want any one pathology group to have a monopoly within the system,” said Schaefer. The pathologists in those groups serve as medical directors of lab services in Memorial Hermann hospitals, he added.

Lab Staff, Pathologist Jobs

Lab staff and pathologists in Houston have told Schaefer they are concerned that Quest will replace the current laboratory operations managers and directors in Memorial Hermann laboratories.

“They can apply for the positions they’re in now through Quest’s direct hiring process,” he reported. “But Quest may not retain most of those department heads or managers. Instead, Quest will probably want to have their own people manage hospital laboratory operations.”

Both parties will benefit from having Quest take over some positions, because MHDL will no longer be responsible for paying the salaries and benefits of those management employees, and Quest will be able to cut staff as needed, he commented.

“In addition to the management staff changes, most med techs in the core lab will probably be let go,” he added.

“Also, what will happen with the key parts of hospital labs such as histology and cytology?” he asked. “I don’t know how the core lab at MHDL manages histology or cytology, but all the regional Memorial Hermann laboratories have their own histology labs.

Will Lab Billing Be Affected?

“I wouldn’t be surprised if a lot of that work was moved to MHDL’s core laboratory,” Schaefer commented. “If so, that work is not in Quest’s wheelhouse because it’s labor intensive and not scalable. That raises the question about what’s going to happen to pathology services.

“In the announcement, both Quest and Memorial Hermann said pathology services will remain the same,” Schaefer confirmed. “I read that memo to mean that the pathology service groups would be unchanged. But if you look at the economics of it all—which is what I do with the groups I consult with—you see an unsettling trend.”

How does the ongoing trend of national labs snapping up hospital outreach lab businesses impact your outreach lab? Please share your thoughts with us in the comments below.

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