MedLab CEO Discusses Changes in Lab Market

Erosion in lab test reimbursement caused investors to shy away from investing in lab firm

CEO SUMMARY: Two factors combined to cause executives at Laboratory Partners and its MedLab business division to file a Chapter 11 bankruptcy petition on October 25. One was the sustained and continuing cuts to lab test reimbursement. The other was the reluctance of Wall Street investors to continue to fund the company. The majority of MedLab’s specimen volume and revenue comes from long-term care facilities and the lab company hopes to sell virtually all of its remaining assets as part of the restructuring.

DECLINING LAB TEST REIMBURSEMENT was given as a major reason why Laboratory Partners, Inc. filed its Chapter 11 bankruptcy petition on October 25. The Delaware bankruptcy filing included both the parent company, Laboratory Partners, Inc., and all of its subsidiaries, including MedLab.

It is a story that has useful insights for pathologists and clinical laboratory managers. Along with the sustained reductions in lab test reimbursement that occurred in recent years, Laboratory Partners said it faces other significant issues. In the documents it filed with the bankruptcy court, it identified the negative effects of the recession and its continuing high cost of capital as additional contributing factors.

Investors Getting Gunshy

Another reason identified by Laboratory Partners is the general reluctance of investors to continue funding a lab testing venture during a time when reimbursement for lab tests is falling. An equally significant factor is that the lab company derives a majority of its specimens and revenues from one of the most expensive market sectors in the lab testing business: long-term care. MedLab says that approximately 900 of its 1,050 employees serve long-term care clients.

Laboratory Partners has specific goals for its Chapter 11 bankruptcy action. The company has appointed William A. Brandt, Jr., as President and CEO of its parent corporation, Laboratory Partners, Inc., as well as all of its subsidiaries. Brandt is a specialist in turning around or reorganizing businesses. He is also the President and CEO of Development Specialists, Inc., of Chicago.

“MedLab is operating its business in the usual fashion and remains totally committed to providing the highest quality of timely and accurate service to its patients and clients,” stated Brandt in an interview with THE DARK REPORT. “That said, it is probably time to actively entertain bids for the sale of the remaining constituent parts of the business, and to arrange for those sales to occur on an operating basis with no interruption in service.

“At this time, there are several parties interested in bidding on portions of our business,” he said. “I would expect that in the near term we will sell off the remaining operations and divisions of the company.”

In addition to its largest lab in Cincinnati, Ohio, MedLab operates 23 lab facilities in Illinois, Indiana, Kentucky, Maryland, Michigan, Missouri, Virginia, and Washington, D.C. It also has more than 500 phlebotomists and its labs perform about 6 million tests annually.

“In recent years, CMS and some com- mercial insurers have tightened up on reimbursement,” explained Brandt. “That puts financial pressure on all labs and is a significant factor for MedLab. But MedLab also faces other issues.

“From the creation of Laboratory Partners in 2007, its MedLab business unit had sought, by starting with a large regional footprint, to become a national player in the lab business,” he noted. “At its inception, the business truly flourished, but shortly thereafter came the recession and a sustained weakened economy. As a result of these factors, as well as the continuing tightening up of reimbursements, MedLab has struggled and has been in a recent mode of selling off some of its business units.”

In a Restructuring Mode

“In the past few months, MedLab was dealing with creditors and was in a restructuring mode,” stated Brandt. “As part of that restructuring, the company reassessed its strategic vision regarding becoming a national laboratory company.

“MedLab also talked with the investors—such as institutional investors and others—that originally got behind the business when it looked like it was going to be an obvious growth endeavor,” he continued. “But as the numbers changed over time, many of those investors changed their expectations and their out- look. They could see that the business model MedLab had developed needed more growth in order to flourish.

“But as the lab testing market changed, investors began hedging their bets on whether more growth was possible,” continued Brandt. “With a business like this, you either get to a certain size that is sustainable or you find that the lab business model you’ve built may not be developing the way you envisioned it. As a result of these developments, we’ve seen many investors become concerned about investing in the lab business.

Factors Plaguing Labs

“Right now, a host of factors are plaguing clinical labs,” he said. “Two such factors include the uncertainty surrounding the implementation of the Affordable Care Act and the constant pressure on lab test reimbursement.

“The strategic vision MedLab had was of consolidating many labs into a larger platform where the economies of scale would be significant,” observed Brandt. “In the middle of that rollout, we started to see reimbursement for lab tests go down.

“Suddenly the prospect of getting MedLab to grow to the size where the economies of scale makes sense isn’t as realistic as it once was,” he explained. “That causes everyone—including professional investors—to take another look at things and reconsider their investment plans.

“Another problem for MedLab was that the capital it raised in the first few years was borrowed at rather high interest rates,” added Brandt. “Simply said, and with the economy in a sustained weakened state, our continuing costs of funds became difficult to justify, particularly because MedLab’s existing overhead structure was built to support a larger volume of testing. When factors conspired to prohibit MedLab from getting any larger, these high costs began to be an impediment.

“Of course, these are common issues in the lab testing industry” he said. “Many lab organizations are dealing with these issues and some are doing it better than others. But clearly, a shakeout is coming to the clinical laboratory industry and this bankruptcy is one sign of that shakeout.

“So in the current market environment, the math of the lab testing business doesn’t make sense for some organizations like MedLab,” concluded Brandt. “The need is for volume production, and for MedLab the economies of scale are simply not there. To serve nursing homes and LTC facilities, it would make all the difference to have a lower overhead structure as well as a better set of logistics, but at the present time, MedLab doesn’t enjoy these advantages.”

Laboratory Partners Quietly Expanded Operations to Provide Lab Test Services Across Midwest

FROM ITS INCORPORATION IN 2004, Laboratory Partners, Inc., quietly acquired a number of laboratory companies across the Midwest. Operating under the name MedLab, the company eventually grew to 12 laboratories located in seven states and the District of Columbia.

It has raised tens of millions in venture capital funding. Public filings indicate that investors have included Aquilo Partners, Chrysalis Ventures, Oxford Bioscience Partners IV LP, and Primus Venture Partners. In documents filed with the bankruptcy court, Laboratory Partners said it is seeking court permission to sell its laboratory division in Terre Haute, Indiana. It hopes to complete these transactions as early as December using such sales methods as auctions.

Service Region for MedLab

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These are the business units of Laboratory Partners, Inc. that were included in the Chapter 11 Bankruptcy action:

Pathology Associates of Terre Haute, Inc., Terre Haute, IN.

Terre Haute Medical Laboratory, Inc., Terre Haute, IN.

Biological Technology Laboratory, Inc., St. Louis, MO.

Suburban Medical Laboratory, Inc., Cuyahoga Falls, OH.

Kilbourne Medical Laboratories, Inc., Cincinnati, OH.

MedLab Ohio, Inc., Cincinnati, OH.

Laboratory Partners, Inc., Palo Alto, CA.

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