Quest Diagnostics Exits 31-Year-Old Lab Venture

Partners in this laboratory joint venture were hospital, pathology group, and Quest Diagnostics

CEO SUMMARY: News that Quest Diagnostics had exited the long-running CompuNet Clinical Laboratory joint venture in Dayton, Ohio, caught many observers by surprise. The only clues as to possible problems and the motivation of Premier Health, the 51% owner, to buy out Quest’s ownership share are contained in an announcement the health system issued. The Dark Report analyzes that news and provides a history of the CompuNet lab joint venture.

ONE OF THE NATION’S LONGEST-RUNNING LABORATORY JOINT VENTURES among a hospital, a private pathology practice, and a commercial laboratory ended earlier this month.

On June 8, Premier Health of Dayton, Ohio, announced that it purchased Quest Diagnostics’ ownership stake in CompuNet Clinical Laboratories, effective June 1.

The Dayton Business Journal reported that Premier Health had purchased Quest’s 33% share of the lab company and now Premier Health holds an 84% ownership stake. Valley Pathologists, also of Dayton, holds the remaining 16% ownership stake, according to the paper.

For a hospital-commercial lab joint venture launched in 1986, it appeared to outside parties to be doing well. This end appeared to come suddenly. None of the parties was willing to speak to THE DARK REPORT about the reasons behind this change.

Important clues, however, about what motivated Premier Health to buy out Quest’s share and continue operating CompuNet in conjunction with the pathologists can be found in the press release that Premier Health issued to announce the deal.

Premier Health wrote that, the “transaction is expected to ensure more rapid turn-around times for patient lab results.” It also said Premier made a “move that enhances local oversight of clinical lab services and helps to maintain laboratory testing across the Dayton region to meet patients’ needs.”

In the press release, Premier Health President and CEO Mary Boosalis added that, “this transaction will help Premier Health achieve its vision of a more system-based approach to clinical laboratory testing. It enables us to build upon our existing laboratory capabilities, achieve greater economies of scale, and control the costs of laboratory services.”

Another hint of an issue that might have motivated the partners was the statement in the news release from pathologist Atef Shrit, MD, Chairman of the CompuNet Board of Directors. “The change in ownership provides CompuNet with a greater degree of independence,” he said. “With 100% local control, our ability to enhance testing capabilities which impact the community is greatly improved.”

What Motivated Premier?

Taken at face value, Premier Health was saying in the announcement that, without Quest as a partner, it would:

  • Gain “local oversight of lab testing services… to meet patients’ needs”
  • Ensure more rapid turnaround times for patient lab results
  • Achieve greater economies of scale
  • Control the costs of lab services
  • Have 100% local control to enhance testing capabilities “which impact the local community”

All of these statements imply that Premier Health believed it was not realizing these benefits in the three-way lab joint venture.

When THE DARK REPORT called Premier Health for comment, the public communications officer responded by email, saying, “We would like for the news release to speak for itself.”

Calls to Valley Pathologists for comment were not returned. Quest Diagnostics was contacted, but declined to comment as of press time.

The decision by Premier Health to end this laboratory joint venture is noteworthy for at least two reasons. First, it marks the end of a durable laboratory joint venture that lasted 31 years, survived two acquisitions of the commercial lab company partner, and, by all outside appearances, was considered to be successful and meeting the needs of the JV’s three partners.

Second, it is the second time this year that Quest Diagnostics has lost a significant business relationship involving a laboratory services agreement with a regional health system. In February, Lovelace Health System of Albuquerque, N.M., did not renew the five-year contract in which Quest managed the inpatient labs of the four Lovelace hospitals.

Third, Premier Health’s move to buy out its commercial lab partner and become the majority owner of CompuNet is a business decision that runs contrary to the message of the nation’s two largest lab companies: that hospitals will benefit from selling or outsourcing their inpatient and outreach lab programs because commercial lab operators can cut hospitals’ lab testing costs.

The statements Premier Health made in its news release imply that CompuNet was not fully benefiting from economies of scale that it would expect from this joint venture. Similarly, its comments about the goal of achieving improved lab test turnaround times could be interpreted as unhappiness with that performance metric and how it was affecting patient care within the health system.

History Dates to Mid-1980s

CompuNet was founded in 1986. Its three original partners were 845-bed Miami Valley Hospital, Valley Pathologists Inc., and International Clinical Laboratories (ICL). Later in 1986, SmithKline Beecham Clinical Laboratories (SBCL) acquired ICL. In 1999, Quest Diagnostics purchased SBCL and assumed SBCL’s interest in CompuNet.

Now, 18 years after Quest Diagnostics became a part-owner of CompuNet, it has sold its interest to Premier Health, the four-hospital system that owns Miami Valley Hospital.

Tracking Hospital Inpatient Lab Agreements, During 2017, Quest Diagnostics Is Up 2, Down 2

MANY HOSPITAL LAB directors are concerned that their parent organizations may decide to outsource management of their inpatient labs to one of the national commercial lab companies.

For this reason, they watch closely every deal involving a hospital or health system and a national lab company. Have enough of these deals happened to say there is a trend among hospitals to enter into agreements in which third parties manage inpatient labs?

A Question To Answer

That is a more difficult question to answer because the inpatient lab management agreements between hospitals and national lab companies that expire and do not renew seldom get national news coverage.

A case in point is the experience of Quest Diagnostics. On Jan. 27, Quest announced an agreement to provide certain lab testing services to Montefiore Health System in New York. Quest will not manage the inpatient labs, but will perform “a portion of low complexity diagnostics tests.”

Then, on Feb. 15, Quest disclosed an agreement with PeaceHealth of Vancouver, Wash., to purchase PeaceHealth Laboratories’ outreach lab business. Through a professional laboratory services agreement, “Quest will manage 11 laboratories, which PeaceHealth will continue to own, serving PeaceHealth’s medical centers in three states.” On May 1, this transaction became final.

Thus, year to date, Quest has increased its hospital inpatient laboratory arrangements by two clients.

Meanwhile, on or about Feb. 1, Quest ceased to be the manager of the inpatient labs at the four hospitals of Lovelace Health System in Albuquerque, N.M. Lovelace did not renew the five-year inpatient lab management agreement it signed in January 2012, as part of Quest’s acquisition of S.E.D. Medical Laboratories. Instead, Lovelace entered into an inpatient laboratory management contract with TriCore Reference Laboratories, also of Albuquerque.

Earlier this month, a hospital partner purchased Quest’s interest in the lab joint venture known as CompuNet Clinical Laboratories in Dayton, Ohio. This purchase ended a 31-year JV in which Quest was an active partner in the operation of the inpatient labs of Premier Health.

Thus, anyone keeping score on the net change in hospital laboratory management agreements that Quest holds from the beginning of 2017 through the present, the number would be zero. Quest gained two agreements that involve its participation in hospital inpatient testing. But it also lost two agreements.

Touting New Agreements

The pattern is for public lab companies to announce a new hospital lab inpatient testing agreement. News outlets publish that announcement throughout the country. But when a public lab company fails to renew an inpatient testing agreement, no news gets released about the loss of such contracts except perhaps in local newspapers, as happened with the CompuNet and Lovelace Health System transactions.

Back to the original question: Is there a trend of commercial labs winning hospital and health system inpatient lab management contracts, and is this trend gaining momentum because more hospitals are entering into such agreements? As the experience of Quest Diagnostics in 2017 demonstrates, the answer is not yet known.

Another element that would help the clinical lab industry understand more about this trend is if hospitals that terminated these types of inpatient lab management agreements disclosed the reasons for their decision.

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