CEO SUMMARY: Not too many years ago, many hospitals and health systems were bullish on their laboratory outreach businesses. But financial pressures on hospitals and health systems may be causing the pendulum to swing in the direction of hospitals selling their lab outreach programs, suggest two healthcare researchers.
COMMENTING ON THE SIGNIFICANCE OF THE PENDING MERGER of Sanford Health and Fairview Health Services, two keen observers of healthcare and the hospital sectors think these health system mega-mergers may cause administrators to look differently at the financial opportunities associated with their hospital laboratories.
“Generally, when we see these huge [health system] mergers, it may take a while, but eventually within a few years the parent system begins reviewing the clinical lab capabilities,” said Tyler Trask, Director of New Product Development at Darwin Research, a healthcare consulting and research firm in Scottsdale, Arizona.
“Eventually in this merger between Sanford Health and Fairview Health Services, you could see some improved lab capabilities and increased investment in rural sites,” Trask added. “But almost inevitably you’ll see a shift in which some of the testing is done by centralized laboratories. Also, we don’t fully know what arrangements either Sanford or Fairview has with third-party laboratories that they’ll need to reconcile.”
There is evidence to support the assertion that mergers between multi-hospital health systems can contribute to the erosion of hospitals controlling their own clinical laboratory services and outreach programs. In some cases, to raise cash, the health system may sell its laboratory outreach business to one of the billion-dollar lab corporations. There are examples of health systems outsourcing inpatient lab management to national lab companies.
“Something to watch with deals involving two or more health systems that cover a large geographic area is the ownership of these hospital laboratory outreach programs,” observed Genna Hill, National Account Director at Darwin Research. “Years ago, it seemed to be everybody in a hospital system was rushing to put together laboratory outreach programs.
“Now we see the pendulum swing a bit the other way, with some hospitals leaning more towards having the Labcorps and Quest Diagnostics of the world buy the lab outreach business and maybe also take over a hospital’s inpatient core lab and run it,” she continued. “Especially with more complicated diagnostic tests and screenings coming on board, hospital systems seem to be more open to having a commercial laboratory as a partner.”
Recent Hospital Lab Deal
For example, in August 2022, Labcorp acquired the laboratory outreach business of 11-hospital RWJBarnabas Health in New Jersey. RWJBarnabas was formed by the merger of the Robert Wood Johnson Health System and Saint Barnabas Health Care System in 2015.
“A twist in the Sanford Health/Fairview Health Services deal is that both health systems have access to academic medical centers that have specialized laboratory analyzers capable of conducting complex diagnostic tests,” Trask observed.
He said that it remains to be seen how the academic relationship might affect a prospective offer from a national laboratory company to run diagnostic operations at the post-merger Sanford-Fairview IDN.
Pendulum Swing Metaphor
Trask and Hill make an interesting observation, using the metaphor of the pendulum swing.
They note how it was widespread some years ago for hospitals and health systems to invest in laboratory outreach programs. In assessing the post-merger actions by a number of large health systems, they speculate that the pendulum is now swinging in the opposite direction, with some health system administrators more willing to sell their laboratory outreach programs, as well as invite a commercial lab company to operate their inpatient laboratories.
Of course, there are many lab administrators and pathologists who make persuasive arguments that selling the outreach lab business and/or having a third party manage the inpatient labs is not in the best interest of the parent hospitals.
Contact Tyler Trask at ttrask@darwinresearch.com and Genna Hill at ghill@darwinresearch.com.
Recent Mergers Involving Large IDNs
INTEGRATED DELIVERY NETWORK MERGERS have marked significant shakeups of hospital ownership in the U.S. Here are a few:
- In 2023, a proposed merger is expected to close between Sanford Health in Sioux Falls, South Dakota, and Fairview Health Services in Minneapolis. The new company, which will be called Sanford Health, will have 58 hospitals, and take in an estimated $12 billion in revenue.
- In 2022, Atrium Health in Charlotte, North Carolina, announced a merger with Advocate Aurora Health, co-headquartered in Downers Grove, Illinois, and Milwaukee. The combined company is called Advocate Health. This merger resulted in a health system with 67 hospitals and more than 1,000 ambulatory clinics across six states, with $27.1 billion in revenue.
- In 2022, Intermountain Healthcare in Salt Lake City and SCL Health in Broomfield, Colorado, combined into Intermountain Healthcare. With 33 hospitals, the new IDN has estimated earnings of $14.2 billion.
- In 2013, Baylor Health Care System in Dallas and Scott & White Healthcare in Temple, Texas, merged to become the largest not-for-profit health system in Texas. Subsequently known as Baylor Scott & White Health, the system currently has 51 hospitals and 800 patient care sites. It boasted annual revenue of about $10.5 billion in 2021.
- In recent weeks, Des Moines, Iowa-based UnityPoint Health and Albuquerque, New Mexico-based Presbyterian Healthcare Services announced merger plans that would form a system with more than 40 hospitals across four states.
