CEO SUMMARY: In Oregon, one of the nation’s more successful and long-established health system outreach laboratories will cease to exist following its sale to Quest Diagnostics Incorporated. The seller explained that the Medicare Part B price cuts coming as a result of the PAMA market price reporting rule would result in a 20% revenue decline in 2018. This sale, and the reason for it, is first evidence of how the rule CMS crafted has the potential to disrupt the financial stability of community labs.
ANOTHER MAJOR HEALTH SYSTEM has sold its laboratory outreach business. On Feb. 15, Quest Diagnostics announced an agreement to acquire PeaceHealth Laboratories and to manage the inpatient labs of the hospitals PeaceHealth operates in three states.
Price and terms of the agreement were not disclosed. The sale is expected to close during the second quarter of this year.
PeaceHealth Laboratories is the lab outreach business of PeaceHealth, a nonprofit healthcare system based in Vancouver, Wash. The system has 10 medical centers serving patients in Alaska, Oregon, and Washington. In all three states, Quest Diagnostics will acquire PeaceHealth’s outreach laboratory business except in communities where PeaceHealth operates critical access hospitals.
When the sale closes, one of the nation’s oldest and consistently successful lab outreach programs will disappear. The lab has 906 employees working in 11 laboratories and 27 patient service centers. Its central laboratory is in Springfield, Ore., next to Eugene and employs about 400 people.
One of the nation’s largest mid-size lab businesses, PeaceHealth Laboratories is widely respected for serving patients with efficiency and low-cost lab testing services. So why did this health system decide to sell its lab operations?
In an interview with THE DARK REPORT last week, Ran Whitehead, President of PeaceHealth Laboratories, explained that the lab and health system’s leadership projected the effect that the Protecting Access to Medicare Act (PAMA) would have on clinical lab testing payments starting next year. From those projections, the administrators determined that—just as other similar mid-sized laboratories have decided— PeaceHealth Laboratories would see a decline in reimbursement of 20% starting in 2018 and continuing into future years.
Negative effects from PAMA
The change in ownership of the lab will have a direct effect on 500 of the more than 900 lab employees. In local news coverage of the agreement, Dylan J. Darling of the Register Guard newspaper in Eugene, reported that some 500 PeaceHealth lab staff members would likely be laid off when the deal is complete this spring. Quest plans to hire 275 lab staff members in Oregon and Washington, he added.
Darling quoted PeaceHealth CEO Rand O’Leary saying, “Our intent when this is all said and done is to try and place as many people as we can in positions with PeaceHealth or Quest.”
The search for a buyer began two years ago when lab and health system administrators acknowledged that their lab business faced increased competition and regulations and needed sustained capital investment for technology. At the time, PeaceHealth began to assess those lab companies nationwide that might be a good fit as a partner or a buyer.
Long-Term Solution Needed
“The aim was to determine the best way to provide laboratory services in the most appropriate, sustainable manner,” PeaceHealth announced. “In other words, a long-term solution was needed to meet the growing service and technological needs of our communities, as well as the caregivers and providers with whom we serve.” After meeting with a number of lab companies, PeaceHealth decided that the best long-term solution was to sell to Quest Diagnostics.
Along with the announcement, PeaceHealth provided a list of questions and answers, including the question of whether this sale indicated that PeaceHealth was in financial trouble. “No. PeaceHealth is financially strong and stable,” the company said. “By working with Quest, PeaceHealth will ensure long-term access to sustainable delivery of high-quality laboratory services within our communities as we continue in our call to promote personal and community health.”
The sale of this respected health system lab outreach business has important implications for the clinical laboratory industry. For example, similar to the assessment at PeaceHealth, other lab executives and hospital lab administrators are acknowledging that the coming Medicare Part B fee cuts under the PAMA market price reporting rule will undermine the financial stability of their labs. At PeaceHealth, the financial consequences of the coming fee cuts played a significant role in the decision to sell the outreach business.
Lab outreach Business Sold
The decision of a major hospital system to sell to one of the national lab companies and thus exit the laboratory outreach business is early evidence that critics of CMS’ PAMA market price reporting rule may be correct. Those critics predicted that the nation’s community labs and hospital labs will struggle financially and some may close. The beneficiaries of this market development would be the nation’s largest lab companies.
Following the sale, the buyer intends to close the community labs that PeaceHealth Labs currently owns and send the specimens elsewhere. Thus, not only will loyal, long-serving lab employees be laid off, but physicians and patients, including Medicare beneficiaries in these communities, will lose access to lab testing performed locally.
Contact Ran Whitehead at 541-349-8440 or RWhitehead@peacehealthlabs.org.
Two Northwest News Outlets Report Possibility That a Sale of PAML to LabCorp Might Be Close
IN OTHER NEWS FROM THE PACIFIC NORTHWEST, at least two reports surfaced last week that Pathology Associates Medical Laboratories of Spokane, Wash., would be sold to Laboratory Corporation of America.
Both the Lund Report, which covers healthcare in Oregon, and the Spokesman- Review of Spokane, reported that the sale was imminent. No sale was confirmed, however, in either of the news articles.
“Providence Health & Services is also planning to announce the sale of Pathology Associates Medical Lab which it owns in collaboration with Catholic Health Initiatives, a minority shareholder, but the timeline is unclear,” wrote Diane Lund-Muzikant of the Lund Report.
Writing for the Spokesman-Review, Scott Maben picked up on the Lund Report article and wrote, “PAML, the national medical-test- ing laboratory based in Spokane, is on the brink of sale to LabCorp, the world’s leading healthcare diagnostics company, reports an independent news site covering the Northwest health care industry.”
The current owners of PAML are Providence Health & Services and Catholic Health Initiatives. The lab company has more than 1,600 employees and collects specimens from patients from eight states to generate annual review of approximately $300 million, he wrote.
In a statement to Maben, PAML said, “We have heard that there was an online post that has created questions. However, at this time we don’t have any information to share.”
In her story, Lund quoted Robert Michel, Editor of The Dark Report, who said, “In the Pacific Northwest, there have been continual rumors for more than 24 months now that Providence Health was negotiating a sale of PAML, its gem of a laboratory outreach business, to Laboratory Corporation of America. Many people have pieces of information about the activities of administrators at Providence, LabCorp’s C-suite, and executives at PAML during this time that are consistent with sales negotiations. But, in response to questions from the media and others, no one from these three organizations will confirm something as basic as that discussions of PAML’s sale between Providence and LabCorp have occurred. Yet, the market chatter is continual and credible, leaving lab industry professionals to believe that some type of deal is under development.”
More than two years ago, THE DARK REPORT published a story, “Is PAML To Be Sold? ‘No Comment!’ Say Execs.” At that time, an exec- utive of PAML provided the following state- ment: “Thank you for your recent inquiry regarding PAML, LLC. As an organization we regularly explore opportunities that would help us improve quality, reduce the cost of care, and enhance patient experience. However, we don’t discuss details publicly until all parties involved agree to do so.” (See TDR, December 15, 2014.)
On LabCorp’s quarterly conference call last week, an analyst asked CEO David King the same question about the rumors of PAML’s possible sale. King’s response was, “Well, I’m not going to comment on anything about any particular transaction. And I think to some extent we’ve responded to this question earlier, which is the pipeline is robust and there is new interest from health systems generally and more broadly. In terms of strategic opportunities, that may include sale or it may include broader partnerships.”
Is PAML for sale? Is LabCorp the likely buyer? The non-stop chatter throughout the Northwest for more than two years is associated with the movement and meetings of executives from these organizations. These activities are the visible evidence that something might be happening. On the other hand, because no executive at these organizations has been willing to definitely state, “No sale is under discussion,” rumors have persisted.