Details Emerge About End of 31-Year Lab JV

Hospital, pathology group, Quest Diagnostics were partners in CompuNet lab joint venture

CEO SUMMARY: Quest Diagnostics is no longer an equity partner in the CompuNet Clinical Laboratory joint venture, which has operated successfully since its founding in 1986. Typical of other lab JVs and inpatient lab management agreements that the hospital or health system partners do not renew, none of the owners of CompuNet will comment on why the lab JV ended. Several sources offer informed perspectives on the reasons why this joint venture changed, but the truth is largely unknown.

IT IS ALWAYS SIGNIFICANT when a laboratory joint venture involving a commercial lab company, a hospital, and a pathology group survives for more than three decades—then comes to an unexpected end.

That is the case with CompuNet Clinical Laboratories of Dayton, Ohio. Last month, after 31 years as a lab joint venture, that partnership dissolved when Premier Health bought out the ownership stake that Quest Diagnostics held for many years. When the deal becomes effective in June 2018, it will leave Premier Health and the Valley Pathology Group as the two equity owners of CompuNet.

When new lab joint ventures are announced involving a hospital or health system and a commercial lab company, they typically get ample publicity. At the start of these ventures, the parties grant interviews and express optimism about the great synergy and results the partners expect.

But the opposite happens when a laboratory joint venture between a hospital and a commercial lab company terminates. These JVs or hospital lab inpatient management agreements often end quietly, typically without an announcement from any of the parties.

In the case of CompuNet, the health system partner issued a news release about its purchase of Quest’s equity interest. This public statement contained useful hints about why it acted to end Quest’s role in this lab joint venture. (See TDR, June 26, 2017)

Declined To Be Interviewed

But, when approached for additional comment, each of the three equity owners declined to grant an interview with THE DARK REPORT. One reason to decline such an interview may have been the existence of tough non-disclosure clauses in the termination agreement. Such agreements are common in lab joint ventures and inpatient lab management contracts that involve a commercial lab company failing to renew its contract with a hospital or health system partner.

To get more insights into the events at CompuNet, THE DARK REPORT interviewed several individuals knowledgeable about the lab JV’s recent history and some unlikely issues that may have played a role in Premier’s decision to end Quest’s role in CompuNet by purchasing its equity share. Each source asked to remain anonymous.

History Of CompuNet JV

One source said, to have context for the recent events, it was important to understand the history of CompuNet and how the three owners were themselves acquired during the 31-year existence of the lab joint venture.

“In 1986, the three original members of the partnership were International Clinical Laboratories (ICL), the Valley Pathology Group, and the for-profit arm of Miami Valley Hospital,” said the lab historian in an interview. “At that time, this for-profit venture was called Med America Health System. The partners stayed together even though the names of the parties changed. The entities remained the same.

“One name change among the CompuNet partners came in 1988 when SmithKline BioScience Labs purchased one of its biggest competitors, ICL. Later renamed SmithKline Beecham Clinical Laboratories (SBCL), it became one of the largest public lab companies in the United States.

Large Dayton Health System

“Next, in the 1990s, Med America became Premier Health, which today is one of the largest health systems in Dayton. After Med America transitioned to Premier, it formed an alliance with three other area hospitals: Good Samaritan Hospital, Atrium Medical Center, and Upper Valley Medical Center,” the historian noted.

“At about the same time, Kettering Hospital, which was the other major health system serving the Dayton area, did the same thing,” she added. “That resulted in the development of two powerhouse health systems in Dayton: the Kettering Health Network and Premier Health. A few smaller hospitals have remained independent, but not many.

“Over most of the 30 years of the CompuNet lab joint venture, 845-bed Miami Valley Hospital was the largest hospital in the area,” she said. “It was like the mothership, and its size was a factor when Premier Health was formed because Premier Health eventually decided to use the Epic electronic health record system.

“You wouldn’t think the choice of an EHR would be a major problem for the lab JV, but it was because, in recent years, Premier wanted to push Epic’s Beaker LIS into all the laboratories that were part of the Miami Valley federation of hospitals,” she explained. “I believe what aggravated the problem was the fact that Premier and its partner, Miami Valley Hospital, didn’t fully appreciate the clinical value and financial asset they had in CompuNet. They were focused on unifying the data and clinical management under one IT infrastructure.

Lab Value Is Unrecognized

“With CompuNet, Premier and Miami Valley Hospital had a capable clinical laboratory that served the inpatient, outpatient, and outreach sectors in effective ways,” stated a different source with knowledge of these events. “But recognizing that fact—the clinical value that labs can leverage—can be a challenge for some hospital administrators. They don’t have a thorough understanding of the complexity of the lab business and may have nothing with which to compare it. Therefore, they don’t recognize the full value of the lab as an asset.

“Thus, around 2015, when Premier began pushing the Epic Beaker LIS into the different lab locations and the hospital administrators didn’t recognize the value of the CompuNet JV lab, those two factors started to break down the partnership,” he said.

“Of course, many lab professionals will recognize that the Epic Beaker LIS has specific strengths, but it is not yet a complete and effective solution for labs that need full LIS functionality,” observed the source. “That was the problem with forcing the Premier lab sites to run the Epic Beaker system.”

Separately, and starting 18 years ago, another development happened that would eventually play a role in this story. “In 1999, following Quest Diagnostics’ acquisition of SBCL, it became the equity partner in CompuNet,” noted the historian. “Just as SBCL had inherited the lab joint venture from ICL, Quest inherited the joint venture when it purchased SBCL.

“After Quest became part of the lab JV, it often deferred toward the two local owners of the lab,” she explained. “That may have been, at least in part, because Quest had only a 33% share of the partnership.

“As a result of Quest’s hands-off approach, the CompuNet partnership stayed together for many years,” she said. “The original CompuNet joint-venture contract in 1986 was for seven years, but there was always an out clause on the initial and recurring renewal contracts that allowed any party to leave the partnership after giving a one-year notice.

“So it happened that, about three years ago, Premier wanted to renegotiate the agreement or get out of this laboratory joint venture,” commented the second source. “It’s not known exactly what Premier planned, but they may have made an agreement with the Valley Pathology Group to gain a larger ownership stake in CompuNet. At that time, it was believed that Premier wanted to increase its stake from 33% to 51%.

Contract Renegotiated

“Sometime in 2014, the contract was renegotiated,” he added. “As a result of the negotiations, the physicians at Valley Pathologists agreed to sell about half of their 33% equity share to Premier. The pathologists retained a 15% ownership stake. Premier got 51% and Quest retained its 33%. That was the agreement in 2014.

“But Premier wanted to gain complete control of CompuNet management,” he stated. “Despite the fact that Premier held a 51% stake, each partner still had an equal vote on the board. When Premier realized it couldn’t gain complete control of CompuNet, and it couldn’t force CompuNet to accept the Epic Beaker LIS because it may have had a negative effect on the outreach business, Premier called for a second renegotiation of the CompuNet business agreement.

“This second round of negotiations began in January 2016,” he recalled. “The result was the press release in June announcing the changes in ownership for the lab joint venture. The final contract wasn’t completed until just last month for reasons that are unknown.

“By this time next year, Premier will have an 85% stake in CompuNet and Valley Pathologists will have the remaining 15%,” he added. “Quest will have no role in the ownership of CompuNet.

Quest Keeps Reference Tests

“While Quest will not have an ownership role in CompuNet for the first time in 32 years, it will still have a place in this market because it may continue to be the reference laboratory for CompuNet in about 10 counties in southwest Ohio,” explained the first source. “In addition, Quest has a few long-term hospital contracts that have existed since before the joint venture was formed.

“In addition, Quest could now compete with CompuNet for the outreach business in this region,” she explained.

“Of course, now that Quest has left the Premier Health system, technically it could make a deal with Kettering Health Network, which is something that has long been speculated,” she offered. “Quest couldn’t do that while it was under contract with Premier Health. Now, it’s free to do so.”

Whatever the truth about this situation, the statements in the Premier press release remain the most definitive official statements about motives to end this long-running lab joint venture.

Why Would a 31-Year-Old Lab Joint Venture End? The Three CompuNet Partners Are Not Talking

MANY CLINICAL LAB PROFESSIONALS are interested in the lessons learned from each lab joint venture or inpatient lab management contract when a hospital or health system partner ends its JV with a commercial lab company partner—such as happened recently at CompuNet Clinical Laboratories.

Such interest is well founded. There are many hospitals and health systems where pathologists and lab managers are aware that their hospital administrators meet with commercial lab executives who pitch the benefits of selling the hospital’s lab outreach business, creating lab joint ventures, or entering an agreement for a commercial lab to manage the hospital’s inpatient laboratory.

In the case of Quest Diagnostics’ exit from the CompuNet lab joint venture, the only public statement that any of the three partners made was a press release that Premier Health issued. Premier Health is the partner that had just purchased all of Quest’s interest in CompuNet. It will own 85% and Valley Pathology Group will own the remaining 15%.

The news release contains language that suggests there were several key issues that the remaining two partners hoped to resolve by having the commercial lab partner exit this lab JV. In its analysis of these topics in its previous issue, THE DARK REPORT wrote, “Taken at face value, Premier Health was saying in the announcement that, without Quest as a partner, it would:

    • “Gain ‘local oversight of lab testing services… to meet patients’ needs.’
    • “Ensure more rapid turnaround times for patient lab results.
    • “Achieve greater economies of scale.
    • “Control the costs of lab services.
    • “Have 100% local control to enhance testing capabilities which impact the local community.”

All of these statements imply that Premier

Health believed it was not realizing these benefits in the three-way lab joint venture.

None of the three partners will comment on this situation. Several individuals with knowledge of events at CompuNet have opinions and wish to remain anonymous. One source believes that service issues were not the deciding factor, stating that, “In my personal opinion, Quest was a good partner. The greater problem was Premier’s desire to implement the Epic Beaker LIS in all lab facilities.

Battle of IT Departments

“In recent years. there was a constant battle involving the IT departments from Quest, Epic, and Premier IT on how to make the Epic Beaker LIS work,” she continued. “The management team at CompuNet insisted that they needed to use Quest’s secure lab system for the outreach business and billing. Currently, Beaker does not have comparable functionality that meets the needs of a competitive outreach laboratory business.

“I also think that administrators at Premier may not have fully grasped what an asset they had with CompuNet and its potential to become a core lab that could serve the entire Dayton area, possibly even including the labs that were part of the Kettering Health Network,” she said. “That is a moot point now, in part because there were so many disagreements in the IT departments, and now Premier is the majority owner of CompuNet.”

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