Quest Diagnostics, Sonora Join Phoenix Operations

Joint venture between the two laboratories forms basis for new organizational model

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CEO SUMMARY: When Quest Diagnostics Incorporated and Sonora Laboratory Sciences announced their joint venture, it confirmed that Quest Diagnostics is the first of the national laboratories to begin serious restructuring of its national network of regional laboratories. Such restructuring will include local partners. Expect similar arrangements to occur in other cities during the next two years.

PHOENIX GAINS a new laboratory competitor when Quest Diagnostics Incorporated and Sonora Laboratory Sciences combine operations to create their new joint venture.

In a press release issued July 9, the companies announced that the two laboratories would merge into one service organization. The venture will be called Sonora Quest Laboratories, LLC. It formally begins operations on September 1, 1997.

The announcement that Quest and Sonora would combine laboratories is a key event in the rapid evolution of the clinical laboratory marketplace. It marks the first time in recent years that the laboratory of an integrated hospital system and a national laboratory are pooling resources in a shared equity venture.

This joint venture will offer laboratory services throughout the state of Arizona. It validates THE DARK REPORT’s prediction that regional laboratory systems will emerge as the dominant form of laboratory services in metropolitan areas everywhere in the country. Such regional lab systems are designed to offer testing across a specific geographical area served by the major managed care plans in that city.

In fact, geographical service enhancements gained by both laboratories was one reason behind the merger. “Each laboratory was strong in different regions of Arizona,” stated Earl C. Buck, Chief Executive Officer of Laboratory Sciences of Arizona. “Our combined network of draw sites, stat labs and courier services give us comprehensive reach throughout the state.

“Also, we now have improved access to managed care patients,” he continued. “Each laboratory held con- tracts with different managed care plans. As the two laboratories combine, it will permit us to serve an extended range of managed care programs.”

“This joint venture is driven by the mutual appreciation of both partners for the value which an integrated healthcare system brings to the community.”
-Earl C. Buck

Earl Buck will be the Chief Executive Officer of the combined laboratory. Judy Burgess, now Vice President and General Manager of Quest Diagnostics of Arizona, will become Chief Operating Officer at the joint venture. Employees of Quest will become employees of the integrated laboratory.

The joint venture will be chartered as a limited liability company (LLC). There will be seven members on the Board of Directors. “It will be equal representation on the Board,” explained Buck. “Sonora and Quest each have three directors. A seventh board member is the medical director of the joint venture. He provides input on medical issues relevant to the organization.”

“One strategic goal for Quest is to align with strong partners who share our values,” stated Judy Burgess, now COO of Sonora Quest Laboratories. “The Samaritan Health System, with its values and management objectives, is a good fit with Quest. Both partners are excited about the opportunities opened up by this joint venture.”

It is not surprising that Phoenix is the first market to see a shared equity joint venture between a local integrated healthcare system and a national laboratory. During the last ten years, Phoenix has consistently been one of the most aggressive and competitive markets for managed care.

Regular readers of THE DARK REPORT know that capitated laboratory service contracts popped up in Phoenix as early as 1987. (See TDR, December 26, 1995, January 15, 1996.) By the early 1990s, most physician offices used multiple laboratories because of various managed care contracting arrangements.

Three Dominant Labs

During this time, three commercial laboratories emerged as dominant in the Phoenix marketplace. National Health Laboratories (now Laboratory Corporation of America), Damon (now Quest) and Sonora Laboratory Sciences. SmithKline Beecham Clinical Laboratories never achieved the critical mass in Phoenix necessary to support a significant laboratory organization. Currently the bulk of its business in the area comes from its exclusive national contract with Cigna Healthcare.

Sonora Laboratory Sciences was an outreach laboratory operated as a for-profit division of Samaritan Health Systems. Samaritan is a major healthcare provider in Phoenix, with six acute care hospitals. Its healthcare plan, HealthPartners of Arizona, covers 425,000 lives and is the second largest plan in Arizona.

Second Consolidation

For Sonora, the consolidation with Quest will be its second major laboratory consolidation in two years. Historically, Samaritan had kept hospital in-and outpatient testing separate from Sonora’s outreach activities. However, it became apparent to Samaritan’s administration that the benefits from consolidating all laboratory testing within the system could no longer be ignored.

Starting about two years ago, Earl Buck guided consolidation of testing between the hospitals and Sonora’s off- site core lab, using an organization called Laboratory Sciences of Arizona (LSA) as the vehicle to meet operational, legal and regulatory requirements.

“Within our system, we recently brought together two distinct laboratory employee groups,” said Buck. “It helped us achieve a high degree of clinical and operational integration. We want to be careful to preserve this success through the consolidation with Quest’s laboratory operations. For that reason, we have a deliberate and careful consolidation plan for the two organizations within this joint venture.”

Both companies are aware of the high client turnover which historically follows mergers and consolidations. It is a major goal of the joint venture to maintain seamless service to clients while integration of the two companies is under way.

To that end, the sales and field service groups at Quest and Sonora will be retained and focused on attending to existing clients. “Additionally, one sales and marketing resource we intend to add is a managed care specialist,” said Buck. “Neither Sonora nor Quest had a full-time individual in Phoenix assigned to develop and maintain relationships with the managed care plans and payers.”

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High-Profile Issue

Laboratory information systems (LIS) is also a high-profile issue. “LIS is the most critical element in bringing our two companies together,” declared Buck. “At Sonora, we use HBOC’s ALG software. Quest is using Menlab, along with a billing program called SYS that we like. We recently hired a Chief Information Officer (CIO) whose role will be to work through all these issues in coming months.”

Laboratory space is another important consolidation priority. “Due to our situation at LSA, we do not have additional space to incorporate all testing at our existing laboratory,” noted Buck. “We are looking at a new site for the core laboratory. Our target is to make it operational by the second quarter, 1998.”

For managers and staff at Quest, the joint venture provides a new set of challenges. “By joining an integrated healthcare system, we now must serve a new group of clients,” stated Burgess. “These are clients normally not served by a commercial laboratory, so we have much to learn about how to best meet their needs and expectations.

“However, this is a fun challenge for us, she continued, “because we are now part of an integrated, community-based provider system. Laboratory services we provide are going into a clinically integrated environment, both inside and outside the hospital. There are new opportunities for us to add value.”

Earl Buck agreed with those insights. “Both partners appreciate the strengths which each offers to the joint venture. We have identified specific synergies which we will work to extract from this merger.”

Buck also realizes the groundbreaking nature of this joint venture. “Because there is no similar laboratory partnership like this that we know of, we have the opportunity to demonstrate the viability of this model. Clinical integration and regional laboratory services are the future of healthcare. This joint venture has the potential to marry the best of a large hospital laboratory system with the special capabilities of a national reference laboratory. We have all the resources to evolve with our marketplace.”

Joint Venture’s Progress

Progress of this joint venture between Quest Diagnostics and Sonora Laboratory Services merits close attention for two reasons. First, it represents the first working model of Quest’s emerging market strategy. Quest seeks to create similar partnerships throughout the country. Quest’s competitors also have plans to develop similar ventures, so this model could become widespread within a few years.

Second, as the first working model of an integrated system joining forces with a national laboratory in an advanced managed care market, Sonora Quest Laboratories, LLC will demonstrate whether synergies from both types of laboratory organizations can be successfully captured and applied to the benefit of clinical practice.

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