Do Hospitals Want to Sell or Outsource Their Labs?

Wall Street is often told that many hospitals have reasons to sell or outsource their laboratories

This is an excerpt from a 883-word article in the August 20, 2018 issue of THE DARK REPORT. The complete article and two related articles are available to all readers, with a three-article cap.

CEO SUMMARY: Common wisdom on Wall Street is that many hospitals and health systems question the value of continuing in the lab outreach business or continuing to manage their inpatient laboratories. These questions lead them to explore selling their outreach labs or consider having a commercial lab manage their inpatient labs. This year, however, there have been few such deals announced and the recent lab joint venture involving ProMedica and Sonic challenges that popular wisdom.

NEWS OF A NEW LABORATORY JOINT VENTURE involving ProMedica Health of Toledo, Ohio, and Sonic Healthcare USA, of Austin, Texas, should be of interest to lab administrators and pathologists managing hospital or health system laboratories.

This joint venture is evidence that forward-looking health systems and hospitals recognize the importance not only of retaining control of their laboratory services, but of leveraging and expanding lab testing to support integrated clinical care in all locations.

Stated differently, this laboratory joint venture is evidence that the health system partner is making a substantial commitment in capital and resources to establish a truly-integrated lab testing service that brings together inpatient, outpatient, and outreach lab tests in ways designed to meet the needs of value-based care and precision medicine. The other notable aspect of this joint venture, as we report in the following articles, is that ProMedica wants to expand its laboratory outreach business in two neighboring states.

Another interesting attribute of this partnership involves how ProMedica decided to buck the conventional wisdom by forming a laboratory joint venture with Sonic Healthcare USA and thus retain control of its inpatient laboratories and its outreach laboratory business.

After all, the oft-repeated message of national lab firms to Wall Street analysts and investors in recent years is that hospitals and health systems want to sell their lab outreach businesses and outsource their inpatient labs to commercial lab companies.

This message is based on the assertion that many hospitals and health systems do not see their labs as either a core competency or a profitable clinical service line. Therefore, they would be better off selling their labs or outsourcing management of these labs to enterprises that can run them more efficiently.

In presentations to Wall Street investors, and in their quarterly conference calls to report earnings, executives at Laboratory Corporation of America and Quest Diagnostics regularly state that they each have opportunities to buy hospital laboratory outreach businesses and enter into management contracts to operate the inpatient labs of hospitals and health systems.

LabCorp’s Outlook

For example, last year, published a story and quoted LabCorp’s Chairman and CEO Dave King saying that, in conversations with hospitals, “We’re seeing a big push to being able to procure [hospital lab] services, the highest quality [lab] services at the most effective cost. And as hospitals and smaller laboratories are recognizing that trend, I think a lot of them are relooking at, do we belong in this business? Is it a core competency? Are we bringing value to the patient?”

But how many health networks and hospitals are actually in the market to sell or outsource their lab testing services? Even as Medicare was preparing to implement deep price cuts on Jan. 1 of this year, in the past 24 months, there were fewer than 15 transactions in which a hospital or health system contracted with a commercial lab company to sell its lab outreach business or have a commercial lab manage its inpatient laboratory.

During 2018, significantly fewer contracts have been announced involving a hospital or health system and a commercial lab company. If many health systems and hospitals are questioning whether they should unload their labs in some fashion, then why has there not been a steady regular stream of such deals?

Substantial Lab Commitment

For these reasons, THE DARK REPORT considers this latest pact involving ProMedica and Sonic to be significant for four reasons. First, this top-tier health system (with 13 hospitals in multiple states) is making a substantial commitment to ensure that its laboratory continues to be a key clinical service into the future.

Second, ProMedica is putting up substantial capital as its part of the new lab joint venture, an indication it expects the outreach laboratory business to be financially-viable, even as payers continue to pay less for lab tests.

Third, its lab joint venture with Sonic aims to reduce lab costs, but the goal of serving inpatient, outpatient, and outreach patients with a standard menu of tests and reference ranges can result in a unified patient lab test record. Such a lab test database will give ProMedica competitive advantage in the coming era of integrated care and precision medicine.

Shared Savings With Payers

Fourth, ProMedica gains access to Sonic’s advanced analytics. Sonic has already worked with large physician groups to use its analytical tool and lab test data in ways that improve patient outcomes and generate shared savings payments from certain insurers to itself and the participating physician groups. ProMedica will certainly want to implement similar programs with physician groups, payers, and employers in its communities.

Clearly, ProMedica is not following the popular wisdom that hospitals don’t see their labs as essential assets. By placing this bet on the role that lab testing can play in ProMedica’s success going forward, this health system is stating clearly that lab testing is a core competency and essential to its success.


Leave a Reply


You are reading premium content from The Dark Report, your primary resource for running an efficient and profitable laboratory.

Get Unlimited Access to The Dark Report absolutely FREE!

You have read 0 of 1 of your complimentary articles this month

Privacy Policy: We will never share your personal information.