CEO SUMMARY: One of the clinical lab industry’s most successful for-profit joint ventures will close its doors after 20 years of operation. The demise of Consolidated Medical Laboratories again demonstrates how difficult it is to overcome the different political agendas of hospital partners. Strong financial performance is frequently not enough to motivate hospital administrators to continue such laboratory joint ventures.
EVEN HEALTHY PROFITS and happy physician-clients were not enough to keep Consolidated Medical Laboratories (CML) open and in business.
Based in Lake Bluff, Illinois, CML will close its doors for good on June 1, 2000. The closure is a direct result of the acquisition, by Evanston Northwestern Healthcare (ENH) of Highland Park Hospital, one of the two partners in the CML joint venture, and ENH’s desire to integrate its hospital lab services.
“It’s an unfortunate situation,” said Matt Hamlin, Executive Director at CML for the past four years. “Financially, 1999 was our best-ever year. And in each of the past four years, we’ve steadily increased revenues. CML closes at the height of its business and service success.”
The two owners of Consolidated Medical Laboratories are Highland Park Hospital and Lake Forest Hospital. Located about eight miles apart, they compete intensely for patients.
When Evanston Northwestern Healthcare merged with Highland Park Hospital on January 1, 1999, it changed the competitive situation between CML’s two partners. Evanston operates a consolidated laboratory system which services its integrated health system, including three hospitals and affiliated physician practices. Evanston obviously wanted to bring Highland Park’s lab testing into its consolidated lab system.
“After much discussion, Lake Forest Hospital decided that it wanted to maintain control over its own laboratory testing,” noted Hamlin. “As a result, it is already preparing to expand testing performed within its own lab.
“Meanwhile, CML is preparing for a total shut down,” he explained. “On June 1, we will close our offsite core lab and terminate services to our clients. Letters were sent to all clients notifying them of the need to make other arrangements for their lab testing needs.”
CML’s shutdown leaves a service vacuum for physician clients located in medical buildings on the campuses of the two hospitals. Within this service area, for at least 10 years CML enjoyed a market share approaching 90%.
Intense Sales & Marketing
Evanston’s lab organization is marketing heavily to CML clients. Quest Diagnostics Incorporated also spotted the opportunity to capture new business. Intense sales and marketing between the two labs is ongoing.
Because these physicians were strongly loyal to CML, it will be tough for both Evanston and Quest Diagnostics to match the service provided by CML. As noted by THE DARK REPORT in past years, physician loyalty to CML was so strong that most major HMOs had to carve CML out of their national contracts.
For example, when the national Cigna Healthcare contract went to SmithKline Beecham Clinical Laboratories (SBCL) in 1995, doctors around the Highland Park and Lake Forest medical office campuses insisted that CML be made a provider. Cigna agreed, and allowed CML to provide testing under a fee-for-service arrangement.
One interesting aspect to the closure of CML involves the pathology arrangements. The same pathology group served both hospitals. With Highland Park Hospital becoming part of the Evanston Northwestern Healthcare System, six pathologists from the group practice have chosen to sign a contract with Lake Forest Hospital. They will also do work for Quest Diagnostics.
The demise of Consolidated Medical Laboratories is unfortunate. It was created in 1980 when Lake Forest Hospital and Highland Park Hospital formed a for-profit laboratory partnership. Both hospitals were served by the same pathology group, which saw the benefits from eliminating duplication The two hospitals, located about eight miles apart, were, and continue to be, ardent competitors.
During the past 20 years, CML achieved a strong reputation among doctors in its service area. THE DARK REPORT considered it to be an excellent example of how two intensely-competitive hospitals could still cooperate to share laboratory services.
There are probably two relevant lessons to be drawn from the experience of CML. One, it is possible for competing hospitals to collaborate, on a long-term basis, with shared laboratory services that include a profitable outreach testing program.
Two, the politics and market dynamics between competing hospitals can still outweigh the economic benefits that come from a laboratory joint venture. The need to control the total aspect of a hospital’s clinical activities seems to be a stronger motivation than all the service enhancements and financial benefits that accrue from a successful laboratory joint venture.
Finally, the intense loyalty which physician clients directed toward CML is an important reminder for all hospital administrators. Every well-managed hospital laboratory outreach program has a strong competitive advantage in its selected service area over commercial laboratory competitors. CML is just one example of this industry-wide management truth.