CEO SUMMARY: Probably the single biggest contributing factor to consolidation of hospital laboratories is when new owners or new healthcare systems take control of a hospital. For 2000, merger and acquisition activity in the hospital industry declined in 2000 by 40%. A total of 318 hospitals were involved in the 129 deals. This decline in hospital transactions is causing a decline in new hospital lab consolidation projects.
JUST-RELEASED DATA INDICATES that the 1990s’ boom in hospital mergers, acquisitions, joint ventures, and partnerships has slowed to a crawl.
Throughout 2000, only 318 hospitals were involved in 129 individual deals. This is a decline of 40% from 1999, when 530 hospitals were part of 142 deals.
These numbers were tallied by Modern Healthcare, the weekly publication tracking the hospital industry. It is the seventh year that Modern Healthcare has done this survey. Its tabulation includes mergers, acquisitions, joint ventures, long-term leases, and other partnerships in which a change in control or equity stake occurred. The survey excludes management contracts and simple affiliations.
Important Lab Trend
Statistics about hospital deals are important for tracking one important laboratory industry trend: the number of new hospital laboratory consolidation projects initiated each year. There is a close correlation between the change in ownership of a hospital and subsequent consolidation of laboratory services.
THE DARK REPORT carefully tracks these numbers. Two bar charts are presented on the next page. One chart shows the six-year change in the numbers of hospitals involved in “ownership” transactions. The other chart shows the number of total transactions for each year. Now that a clear trend is visible, several observations and conclusions can be made.
OBSERVATION #1: Deal activity during the four years 1995-1998 involved no less than 627 individual hospitals per year. This means about 12% to 15% of the nation’s hospitals saw a change in ownership in each year.
OBSERVATION #2: During these same four years, a cumulative total of 2,817 hospitals were involved in some type of owners/management change. This is 56% of the nation’s 5,000 hospitals.
OBSERVATION #3: For the most recent six years, the cumulative total is 3,365 hospitals, or 67% of all the hospitals in the United States.
CONCLUSION #4: During the past six years, as many as two-thirds of the nation’s hospitals have been involved in some form of ownership or management change. Most of these deals were health systems acquiring independent hospitals.
CONCLUSION #5: The peak deal years began in 1995. Hospital lab consolidation became a widespread phenomena by 1997. Thus, lab consolidation seems to lag ownership changes by about 18-24 months.
CONCLUSION #6: In both 1999 and 2000, the number of hospitals and the number of deals declined significantly. This is evidence that few “choice” hospital acquisition opportunities remain. Accordingly, hospital lab consolidation will be less of an industry-wide issue.
New Lab Directions
This data supports an overall conclusion that consolidation of hospital labs will diminish in importance as an industry-wide trend. THE DARK REPORT believes the strategic business emphasis for hospital laboratories is already evolving in several new directions.
The main pressures on hospital lab administrators will be to harvest year-to-year reductions in the costs associated with lab testing while simultaneously boosting the added value of lab tests. But since obvious cost savings have already been harvested (consolidation, greater purchasing volume, etc.), this will have to be achieved by more rigorous management of people and equipment, and the shrewd acquisition of new technology that boosts lab productivity.
“Shared Lab Systems”
THE DARK REPORT also stands by its prediction that there will be an increase in the number of health systems which form “shared laboratory organizations.” Ever-greater volumes of specimens still reduce the average cost per test. Once a health system consolidates its internal hospital lab organization, its senior administrators will begin to view consolidation of several health system labs within the region to be both beneficial and desirable. Examples of this can already be found across the United States.
It is for these reasons that the next generation of hospital laboratory administrators will be as equally skilled in management as they are in the science of laboratory medicine. Subtle pressures for sustained increases in lab productivity will reward those administrators who possess the knowledge and the skills to deliver those important gains.