Genesis Outreach Lab Acquired by LabCorp

One more community hospital decides to exit lab outreach business and sell to a national lab

CEO SUMMARY: Sources say that Genesis Clinical Laboratory of Berwyn, Illinois, owned by McNeal Hospital, is being sold to Laboratory Corporation of America. Neither party has publicly acknowledged completion of the sale. It is the latest example of consolidation within the clinical lab industry. It is also another instance of a hospital selling its lab outreach business to a national laboratory. Genesis was apparently one of the deals that Regional Diagnostic Laboratories aimed to complete last year.

IN RECENT WEEKS, LAB INSIDERS are reporting that the owners of Genesis Clinical Laboratory of Berwyn, Illinois, have sold their lab outreach business to Laboratory Corporation of America.

This transaction removes one more independent lab company from a major metropolitan market, further consolidating the lab industry. Also, the seller is a for-profit hospital company and this sale is yet another example of a hospital selling its lab outreach business and exiting that sector of the market.

This purchase has not yet been reported publicly by either the buyer or the seller. Several sources told THE DARK REPORT that, although this transaction is consistent with similar ones done in recent years involving hospitals leaving the lab outreach business, there are interesting twists in the story of how Genesis Clinical Laboratory came to be sold. For example, Genesis came within a whisker of being purchased last summer by another buyer.

Essentially, these sources say that Genesis was uniquely positioned to be a growing, dynamic regional laboratory provider in its service area of the greater Chicago metro. Genesis was owned by 373-bed McNeal Hospital. In 2000, the hospital was purchased by Vanguard Health Systems, an operator of for-profit hospitals based in Nashville, Tennessee.

Knowledgeable sources—who asked to remain anonymous—told THE DARK REPORT that the executives running Vanguard never understood the potential of Genesis to be a growing, profitable lab testing company. Growth at Genesis could deliver operating profits to the parent while allowing the lab to expand its in-house testing services in support of inpatient services. The additional benefit is that a productive lab outreach program would create strong relationships with office-based physicians in the community who would be in a position to refer patients to the McNeal Hospital.

For its part, Vanguard itself has been sold. Last month, Tenet Healthcare Corporation of Dallas, Texas, said it would spend $1.73 billion to buy Vanguard Health Systems of Nashville, Tennessee. Tenet owns 49 hospitals nationwide and Vanguard owns 28 hospitals, including four in the Chicago area. At the time when the sale to Tenet was announced, Vanguard owned Genesis Clinical Laboratory.

Outreach Business for Sale

But within weeks of Tenet’s announcement that it would acquire Vanguard, it was learned that Vanguard was selling the outreach business of Genesis Clinical Laboratory to LabCorp. Tenet is keeping the inpatient lab testing segment of the business handled by Genesis.

It should be recognized that, as for-profit hospital operators, over the past 15 years, neither Vanguard nor Tenet has demonstrated a consistent interest in building lab outreach businesses anchored by the community hospitals they own. This lack of interest in lab out-reach was reflected in how Vanguard handled Genesis Clinical Laboratory after it purchased McNeal Hospital in 2000.

From its formation in the early 1990s, Genesis was one of the few successful hospital outreach programs in the Greater Chicago area. As a division of McNeal Hospital, it also provided inpatient lab testing for its parent. Following Vanguard’s acquisition of McNeal in 2000, Genesis served three other Vanguard hospitals: the 236-bed Louis A. Weiss Memorial Hospital in Chicago, the 225-bed Vanguard Westlake Hospital in Melrose Park, and the 172-bed West Suburban Medical Center in Oak Park.

The core lab at MacNeal and the stat labs in the other three facilities were running a total of about 3.5 million clinical pathology tests per year and handling about 32,000 anatomic pathology specimens annually, a source said. Approximately half of the total test volume at Genesis came from its outreach business.

Sale of Lab Outreach

With that outreach business now going to LabCorp, the reduced testing volume at the core lab at MacNeal will decline sharply. That will require a rebalancing of the lab staff at that facility.

“The corporate owners—whether Vanguard since 2000 or more recently Tenet—didn’t seem to appreciate the benefits of a thriving lab outreach program that could generate significant revenue and operating margins while building strong relationships with doctors in the area,” the source said. “This is unfortunate, because at the end of 1990s, Genesis was positioned to be a successful and steadily growing enterprise.

“Executives at Vanguard did not recognize this potential,” continued the source. “This meant that Genesis was not given the capital and other resources that would allow it to grow and thrive in its part of greater Chicago—a market traditionally dominated by Quest Diagnostics Incorporated. Doctors like a choice for their lab provider. For that reason, doctors around Chicago were interested in using other lab providers like Genesis.”

Genesis Almost Sold in 2012

During the summer of 2012, talks between the newly-formed Regional Diagnostic Laboratories, Inc., (RDx) of Brentwood, Tennessee, and executives at Vanguard almost resulted in the sale of Genesis to RDx. It is believed that cuts in lab reimbursement that were announced during 2012 by Medicare caused the investors at RDx to pull the plug on the deal that was about to close. (See TDRs, June 25, 2012, and December 10, 2012.)

Now this latest sale to LabCorp has led to further speculation. “Having a buyer such as RDx back away from the acquisition last fall may have motivated Vanguard to be more cautious about investing in the lab outreach business,” offered another source. “What unfolded was not a failure of Genesis and its lab outreach business. Instead, it was a failure of Genesis’ owners to manage the business for more growth over the past 12 years.”

Another source told a similar story. “Neither Vanguard nor Tenet ever understood the investment required to grow a commercial lab outreach business to get it to the next level,” noted this individual. “While other community hospitals were investing in lab outreach, both Vanguard and Tenet were focused on the short term.

Shift In Total Lab Test Volume

“Specimen volume in and around the four hospitals is declining,” he continued. “The lab staff employed by Genesis may decline by 30% to 40% after the sale because about half of the total test volume is shifting to LabCorp.

“What will be left at MacNeal is a core lab that services the employed physicians at the four hospitals in the Chicago market,” said the source. “It appears that the nine pathologists and 204 clinical laboratory staff members will do any lab testing work that LabCorp needs to have done locally in a Chicago lab.”

At a minimum, the sale of the lab outreach business of Genesis Clinical Laboratory reflects the unsettled nature of the lab testing business at the moment. Last year, a qualified buyer walked away in reaction to payer cuts to the prices paid for laboratory tests. It may be that LabCorp was able to acquire Genesis at a fire sale price because of this reason.

First Buyer of Genesis Lab Passed on the Acquisition

LABORATORY CORPORATION OF AMERICA was not the only lab company to express interest in acquiring the laboratory outreach business of Genesis Clinical Laboratory.

In the early summer of 2012, the newly-formed Regional Diagnostic Laboratories, Inc., (RDx) of Brentwood, Tennessee, negotiated an agreement with Vanguard to acquire Genesis, according to sources familiar with the situation.

“RDx was planning to invest in new technology for Genesis and perhaps a new lab facility as well,” said one source. “A contract was in place for Vanguard to sell the lab to RDx for what looked to be very favorable terms.

“Because RDx intended to invest in Genesis to give it the capabilities to grow much larger, the Genesis team was supportive of this ownership change,” he continued. “But that deal fell through at the last minute when the investors for RDx saw the trends toward ongoing cuts in clinical laboratory reimbursement. As a result, RDx pulled the plug on the deal and chose to walk away. (See TDR, December 10, 2012.)

“This happened in the fall of 2012 and that experience—and the perception that the value of the Genesis lab outreach business was less than Vanguard thought— may have led Vanguard to want to sell the lab to the first available bidder,” speculated another source. “In any event, it was LabCorp that ended up buying the Genesis lab outreach business.

“Vanguard is in the hospital business and so is Tenet,” he added. “They had no idea what to do with a commercial laboratory outreach business and so wanted someone to take this entity off their hands and give them cash in return. Then, they could take that cash and reinvest it in other ways.”

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , ,

Enter Your Login Credentials
This setting should only be used on your home or work computer.

×

Send this to a friend