CEO SUMMARY: This latest laboratory joint venture, in partnership with Saint Joseph Health System, gives Pathology Associates Medical Laboratories, LLC (PAML), a solid presence in Kentucky’s laboratory testing marketplace. Over the past 10 years, PAML, which is based in the Pacific Northwest, has proved adept at developing laboratory joint ventures with hospitals and major health systems as a way to enter new regional markets. This is the third significant lab JV for PAML in the past six months.
ON MARCH 7, IT WAS ANNOUNCED that Saint Joseph Health System of (SJHS) Lexington, Kentucky, and Pathology Associates Medical Laboratories, LLC (PAML), entered into a laboratory joint venture (JV).
Kentucky Laboratory Services (KLS) will be the name of the new enterprise. It will be based in Lexington and will serve office-based physicians throughout the state of Kentucky.
“Our plan is to grow the outreach business at three of SJHS’ eight hospitals,” stated Noel Maring, PAML’s Senior Vice President and Chief Marketing Officer. “This will enable the laboratory joint venture to keep 85% to 90% of the testing in Kentucky.
“Within the joint venture, Saint Joseph Health System will provide several resources,” said Maring. “For example, its hospital laboratories will provide the lion’s share of the laboratory testing. The joint venture will also use patient service centers (PSC) owned and operated by the SJHS hospitals. These PSCs are typically located in prime locations at the hospital and in nearby medical office buildings.”
For its part, PAML will provide an integrated informatics solution that manages the laboratory test data and connects the JV labs with the office-based physicians served by the joint venture. PAML will act as the managing partner of the joint venture and will handle sales, marketing, courier, billing/collections, customer service and other operational support for the joint venture. PAML will also provide reference and esoteric testing for Kentucky Lab Services.
Three Hospital Laboratories
Three SJHS hospitals will participate in the laboratory joint venture. They are:
• Saint Joseph Hospital (468 beds)
• Saint Joseph Hospital-East (174 beds)
• Saint Joseph-Jessimine (ambulatory care center)
One unique trait of the Kentucky market for laboratory testing may help Kentucky Laboratory Services build market share rapidly. “No national lab company operates a sizeable lab facility in the state,” noted Maring.
This favorably positions our joint venture laboratory company to be the state’s largest local provider of lab tests,” he added. “By contrast the other major lab companies operating in the Bluegrass State primarily have just courier services and limited stat testing services in some areas of the state.”
Kentucky’s Market Is Unique
“This makes Kentucky different from some of the markets where PAML has laboratory joint ventures with local hospitals,” explained Maring. “In these other markets, we often compete directly with lab competitors who operate major lab facilities in the community, along with significant infrastructure to support their regional activities.
“What makes the Kentucky market different from other regional markets is that the biggest lab competitors must transport specimens out of state for testing,” he said. “By contrast, since Kentucky Laboratory Services will be the local laboratory, we think this fact will give us significant competitive advantage.
“It also means we will keep testing and keep the healthcare dollars in Kentucky,” declared Maring. “There are physicians and patients who will be very loyal in supporting their local laboratory because it keeps jobs in these communities while boosting the local economy.”
This new laboratory testing joint venture in Lexington, Kentucky, is a direct result of PAML’s business relationship with Catholic Health Initiatives (CHI) of Denver, Colorado. CHI is one of the nation’s largest health systems It has annual revenue in excess of $6.8 billion.
CHI Invests in PAML
In 2009, CHI invested substantial capital and became a 25% equity owner in PAML. (See TDR, November 2, 2009.) At the time, both CHI and PAML announced that they would collaborate to make PAML the preferred reference lab for CHI’s 78 hospitals, located in 20 states. CHI and PAML would also work to develop lab joint ventures with CHI hospitals in each of these regions.
First fruits from this business relationship was a laboratory joint venture that was made public in August, 2010. Providence Health & Services of California and PAML formed a new clinical laboratory company that is called California Laboratory Associates, LLC (CLA). This lab venture utilizes the laboratories of three of five hospitals owned by Providence in Southern California.
PAML’s second lab joint venture with a CHI-owned health system was Colorado Laboratory Services, LLC (CLS). This deal was announced in September, 2010. Its partner in this venture is Centura Health System. Centura has 12 hospitals spread across the Denver metro and all these hospitals participate in Colorado Laboratory Services.
Growth Prospects
For its part, PAML is excited about the prospects of expanding laboratory outreach in Lexington. “The Saint Joseph Health System is a forward-thinking organization that holds a dominant position in this market,” observed Maring. “Further, Lexington is a great location.
“For example, this city is just 90 miles from Cincinnati and 90 miles from Louisville,” he stated. “These are both attractive markets for laboratory testing and would be logical cities for expansion.”
THE DARK REPORT notes that PAML has a business model that is unique in the United States. It is a commercial laboratory company that is owned by two multi- billion dollar Catholic Health Systems. Its primary growth strategy is to create laboratory joint ventures with local hospitals.
For these reasons, C-Suite administrators at innovative hospitals and health systems would find it instructive to study both this business model developed by PAML and the financial success it brings to the local hospitals that are partnering with PAML.
New Laboratory Joint Venture Hopes to Use Faster Test Turnaround Times to Win Share
IMPROVED LAB TEST TURNAROUND TIME may differentiate Kentucky Laboratory Services (KLS) from the national laboratories that serve office-based physicians in Lexington, Kentucky, and the surrounding regions.
“We expect this new laboratory joint venture will offer turnaround times that meet and exceed the current turnaround times that competing laboratories offer to office-based physicians in Lexington, Kentucky, and surrounding communities,” observed Noel Maring, Senior Vice President and Chief Marketing Officer for PAML, which is the managing partner in the KLS laboratory joint venture.
Same Day Lab Test TAT
“First, as much as 90% of all testing will be done by the three SJHS hospital laboratory partners that are located in and around Lexington, Kentucky,” he continued. “Because these labs are in full operation and busy with inpatient testing throughout the day, it gives us the capability to report many test results the same day, as well as in the early evening.
“Our market research team determined, that in this region, both Laboratory Corporation of America and Quest Diagnostics Incorporated send the specimens they collect in Kentucky to laboratories they operate in other states,” added Maring. “Both lab companies typically transmit the electronic lab test reports back to their physician clients in Kentucky in the middle of the night.
“This positions us to raise the bar on the laboratory testing services that KLS provides to office-based physicians in this region,” he noted. “It should be equally true that turn-around times for our laboratory joint venture’s reference and esoteric testing will be equal to, or better than, what competing laboratory companies provide.
“We are confident that we can meet and beat existing turnaround times for lab test reporting because we have an established reference and esoteric testing program in place with all eight hospitals in the Saint Joseph Health System,” continued Maring. “Transporting specimens in a timely manner from the hinterlands of Kentucky to the PAML main lab in Spokane, which is located in eastern Washington, turns out to be surprisingly easy.
“Working in tandem with Federal Express, our reference and esoteric specimens from Eastern Kentucky are picked up by couriers and end up at the FedEx sorting hub in Memphis, Tennessee,” he said. “Here, these specimens are combined with all our specimens from other parts of the country, including the East Coast.
“At the FedEx Memphis hub, we keep a specially-designed transport container,” continued Maring. “One section of this container is refrigerated. The other section maintains room temperature. FedEx delivers this container to our Spokane laboratory by 6:00 a.m. every morning.
“To further improve lab test turnaround time, in Spokane, we ramped up testing capabilities to coincide with the arrival of those specimens,” stated Maring. “At a minimum, this arrangement allows us to equal existing service levels in regional markets like Kentucky, But in many cases, we’ve successfully improved turnaround time for reference and esoteric testing that we provide to hospital laboratories.”
Lab JV’s Business Prospects
The existing business relationships that PAML currently maintains with the eight hospitals owned by Saint Joseph Health System in and around Lexington, Kentucky, are one reason why both partners in the KLS laboratory joint venture are optimistic about the future of this new enterprise. Many of the transportation logistics and informatics links are already in place and market-tested.
