Bigger Labs Have Always Coveted Hospital Testing

LabCorp’s PathLab acquisition opens new chapter in efforts to woo hospitals

CEO SUMMARY: For almost two decades, the nation’s largest laboratory companies have, for all intents and purposes, been “locked out” of the market of hospital inpatient lab testing. Executives at commercial labs have long viewed hospital inpatient lab testing as an untapped market. PathLab was successful at operating collaborative lab ventures with hospitals and LabCorp hopes to build upon this expertise.

COMMERCIAL LABS have long coveted the testing done by hospital laboratories for inpatient services.

The reason is simple. More than half of the $35+ billion of diagnostic lab testing done annually in the United States is performed on hospital inpatients and outpatients. Yet commercial lab companies are involved in only a small percentage of this testing.

From the perspective of large commercial laboratories, hospital inpatient testing is the “untapped mother lode,” a lucrative and untouched market ripe for harvesting. Commercial lab execs consider the hospital inpatient market particularly appealing for another reason: their regional labs are located in close proximity to many large hospitals. To them, it seems only natural that a portion of hospital lab tests could be economically consolidated into their regional laboratory centers.

Certainly this is not news to hospital lab administrators and commercial lab executives. During the past two decades, both groups have participated in many discussions about joint ventures, outsourcing, and other shared testing proposals.

Though the 1980s and 1990s, the larger commercial lab companies invested millions of dollars in sales efforts to convince hospitals that there was merit to various forms of shared testing relationships. Despite that considerable effort and expense, in 2001 only a relative handful of operational partnerships exist between commercial laboratories and hospitals.

Heightens The Interest

It is this fact which heightens the interest of THE DARK REPORT in Laboratory Corporation of America’s impending acquisition of Path Lab Holdings, Inc. of Portsmouth, New Hampshire.

Because so few have succeeded in the past, many lab industry veterans would characterize LabCorp’s goal of assimilating Path Lab’s expertise and success in cooperative hospital lab testing as a daunting challenge.

They would observe that Path Lab’s success in this type of hospital lab/commercial lab partnership is probably due, in large part, to the talents and personalities of specific individuals, in combination with circumstances unique to the local healthcare markets served by Path Lab.

It certainly seems the cautious attitude by hospitals toward collaborative testing arrangements between hospitals and commercial labs has changed little over the last 15 years.

During the past 15 years, attempts by national lab companies to clone specific types of unique local business models and lab joint ventures with hospitals in order to export them to other regions of the United States have generally proved unproductive and disappointing.

Partnering Arrangements

At the Executive War Colleges held in 1998 and 1999, there were several hospital lab management case studies that included some type of partnering arrangement with commercial labs. This was seen as favorable evidence that the number of collaborations between hospital laboratories and commercial lab companies were likely to increase in succeeding years.

However, this did not occur. One reason may be the easing of the negative financial impact that the 1996 Balanced Budget Act had on hospitals. During the financial squeeze of 1997 and 1998, hospitals had a motivation to collaborate with commercial labs. As financial pressures eased in 1999 and 2000, hospitals lost their motivation to consider this business strategy.

It was also during 1998 that Premier, Inc. and Quest Diagnostics Incorporated announced their agreement to offer Premier’s 1,700 hospital members a unique brand of laboratory consulting expertise. Despite the hoopla and publicity surrounding this new service, few hospitals have stepped to the table and engaged the Premier/Quest partners in a comprehensive laboratory project.

Actively Seeking Deals

Two other major laboratory companies actively seeking collaborative lab partnerships with hospitals are Dynacare, Inc. and MDS Laboratory Services. In spite of sustained sales efforts, during the past 12 months these two companies have only been able to announce a meager number of new collaborative lab testing agreements with hospitals or hospital systems.

It certainly seems the cautious attitude by hospitals toward collaborative testing arrangements between hospitals and commercial labs has changed little over the last 15 years. Hospital administrators want direct control over their laboratory operations and are reluctant to trust their inpatient testing activities to an outside partner.

Viewed from this perspective, Path Lab’s ability to sustain long-term cooperative testing arrangements with multiple hospitals in New England is an extraordinary accomplishment. Not surprisingly, LabCorp recognizes this fact.

Strong Revenue Growth

But it remains to be seen whether the market strategies and business model used by Path Lab to maintain its hospital testing arrangements in New England can be exported by LabCorp to other areas of the country. On the other hand, the Path Lab business model may prove attractive for smaller hospitals that are not part of big healthcare systems.

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