CEO SUMMARY: For months, lab industry rumors said the Memorial-Hermann merger had killed the Dynacare-Hermann Hospital laboratory joint venture, despite its sustained profitability. Now comes news that the Memorial Hermann Healthcare System and Dynacare will expand the laboratory joint venture. It demonstrates that the economics of a successful laboratory joint venture can be compelling.
MANY NAYSAYERS WITHIN THE clinical laboratory industry will be surprised to learn that Memorial Hermann Healthcare System and Dynacare, Inc. will expand their Houston-based laboratory joint venture.
For months, rumors had one consistent theme—that the merger between the Memorial and Hermann systems meant the death of Dynacare-Hermann Laboratories.
“I am pleased to say that Memorial Hermann Healthcare System (MHHS) and Dynacare are forming a new business venture,” said Osama Sherif, Executive Vice President of Dynacare U.S. “It will commence upon the operational start-up of our new laboratory facility in Houston.”
Profitable From Day One
“The new partnership will build upon the success of the original venture between Hermann Hospital and Dynacare, started in 1995,” Sherif noted. “This partnership was profitable since day one, and 1998 was a particularly profitable year for the enterprise. As hospital systems see the continual erosion of revenue from other sources, it makes a profitable laboratory venture more attractive.”
According to Sherif, the original Dynacare Hermann Laboratory venture will continue to operate while a new, state-of-the-art, 60,000 square foot core laboratory is constructed.
50-50 Partnership Venture
“The new partnership is a 50-50 venture between MHHS and Dynacare,” he explained. “It will become operational when the new core lab facility is ready. That should be in the first quarter of 2000.
“Each of MHHS’s 12 hospitals will continue to staff and manage their own onsite limited menu laboratory,” continued Sherif. “Reference and esoteric testing from the hospitals will go to the core laboratory.
“This new core laboratory will also anchor the joint venture’s expansion of outreach sales and marketing,” added Sherif. “With the exception of the Dallas/Fort Worth market, Dynacare is contributing its existing Texas outreach business into the new venture.” (Dynacare already has a joint venture in Dallas with the Baylor Healthcare System.)
It appears that the new joint venture in Houston is designed to accomplish three primary objectives for its partners. One, to generate net profits for its equity owners. Two, to rationalize laboratory infrastructure among MHHS’s twelve hospital laboratories. Three, to bring additional value-added laboratory services to the hospitals and physician offices around each MHHS hospital campus.
“The laboratory joint venture involving Hermann Hospital has been a fast-growth enterprise,” stated Bill Pesci, Chief Operating Officer of Dynacare Hermann Laboratories. “Since its launch in September 1995, our growth rate in accessions has averaged 25% per year.”
Sales And Marketing
“The partnership’s sales and marketing program in Houston and other Texas cities is working well,” he continued. “Total accessions were about 1,200 per night in 1995. Now they top 6,000 per night. This rapid growth has squeezed us for additional space in our existing core lab, currently located within Hermann Hospital.
“Construction of a new off-site core lab gives us the opportunity to expand our test menu,” added Pesci. “For example, the new lab will allow us to create a NIDA-certified drugs of abuse testing capability. We also expect to enhance our esoteric testing.”
Dynacare Hermann Laboratories already acts as a national esoteric testing center for the other Dynacare regional laboratory operations in the United States. Pesci says that the plan is to increase the reference and esoteric capabilities of the new Houston core lab so that it can better serve the other Dynacare regional labs in the United States.
Enlarged Lab Venture
Within Houston, the enlarged laboratory joint venture should increase its competitive position for outreach business. This is because Memorial Hermann Healthcare System is in the process of buying three Houston hospitals from Columbia/HCA Healthcare Corporation. MHHS will then have eight hospitals strategically positioned throughout the Houston metro area.
Further, MHHS plans to add to its member hospitals by entering other Texas markets. As this occurs, the laboratory partnership will gain additional access points and local lab testing capabilities.
“There is another aspect to this expanded laboratory venture which is exciting,” declared Sherif. “Memorial Herman Healthcare System has worked hard at clinical and operational integration. Compared to most IDNs, it is moving swiftly to develop the benefits of clinical integration.
“This integration creates the opportunities to use the laboratory in new ways,” he continued. “For example, Memorial, Hermann, and Dynacare each use Cerner software. All partners want to exploit this common information system platform to link into physician offices and develop a two-flow of information.”
As Osama Sherif’s comments indicate, the revamped partnership between MHHS and Dynacare intends to move beyond a standard core lab/satellite lab business model that offers outreach testing. The partners want to use the clinical laboratory as a leverage point to support the more global needs of Memorial Hermann’s integrated health network.
This makes the future in Houston quite interesting. The remaining two blood brothers will have a nimble competitor to deal with. This new partnership has a good network of access points, lab infrastructure, and physician-hospital relationships. Its sales force has already proven that it can capture new testing business.
These market dynamics in Houston demonstrate that competition is alive and well, but there must be a rational business plan if hospital lab/commercial labs are to succeed.
Joint Venture Projects Average Five-Year Life
“I’ve been almost continuously involved in hospital lab/commercial lab joint ventures since 1985,” stated Bill Pesci, Chief Operating Officer at Dynacare Hermann Labs.
“Whether at International Clinical Laboratories (ICL), Smith-Kline Beecham Clinical Labs, or Dynacare, it’s been my experience these joint ventures have about a five-year life,” Pesci observed. “Somewhere around the five-year point, the hospitals seem to want to either end the partnership or recast it in a fundamentally different way.
“The merger between Memorial and Hermann fell right into that pattern,” he concluded. “The merger created an obvious need to evaluate and redefine this particular laboratory partnership.”