THERE’S A NEW TRANSITION JUST GETTING STARTED in the laboratory testing industry. For the past two decades, laboratory acquisition activity has primarly centered around independent clinical laboratories—often owned by local pathologists. This was true in both the size of the transactions and in the volume of transactions. Our stories on pages 3-9 describe these processes.
That is about to change. From 2010 onward, laboratory acquisition activity is likely to center around two different segments of the laboratory testing industry. One segment involves the laboratory outreach businesses owned and operated by hospitals and health systems. The second segment is comprised of the regional and local anatomic pathology laboratories and group practices owned by pathologists. For both segments, a new cycle of acquisition activity is now beginning.
In segment one, in the 14 months since January 2009, four significant acquisitions of hospital/health system-owned lab outreach businesses have taken place. Plus, there is the investment by Catholic Health Initiatives (CHI) in Pathology Associates Medical Laboratories (PAML) that happened in November 2009.
Collectively, these laboratory acquisitions and investments demonstrate that hospitals and health systems are waking up to the substantial value that is created from a profitable laboratory outreach program. It is reasonable to expect that—as hospital CEOs learn about these acquisitions and the prices realized by the sellers—more hospitals and more health systems will be willing to entertain the sale of their laboratory outreach businesses.
For segment two involving anatomic pathology laboratories, the simple fact that will drive laboratory acquisitions is the pending retirements of baby boomer pathologists who are partners in these laboratories and pathology group practices. That motive played a role in most of the pathology laboratory acquisitions announced during the past 14 months. (See table on page 5.)
I believe the longer-term impact of these developments will be the further consolidation of both segments of the laboratory testing industry. Deal-by-deal, hospital laboratory outreach business will be sold and resold into the hands of the nation’s largest lab operators. A similar process will unfold in anatomic pathology. It will take some time to consolidate the 3,300 independent pathology practices that exist today, but that cycle of change is now under way.