CEO SUMMARY: It’s another example of a commercial laboratory taking over the laboratory assets of a multi-hospital consolidated laboratory. Will LabOne manage these assets and get more growth, more cost savings, and more profit? If this happens, it will mark the third time in recent years that leadership by individuals with commercial laboratory skills and experience has “turbo-charged” this type of lab organization.
FOR AT LEAST THE THIRD TIME in recent years, a consolidated hospital laboratory with an extensive outreach program is coming under the management of individuals with commercial laboratory experience.
As reported last month, LabOne, Inc. of Lenexa, Kansas has acquired certain laboratory assets of The Health Alliance of Cincinnati. It also signed contracts to manage six rapid response laboratories based in hospitals owned by the Alliance.
Hospital laboratory directors and pathologists should closely watch the changes that LabOne will implement to the Health Alliance laboratory operations. If the experience of two similar consolidated hospital lab organizations is any guide, LabOne’s management expertise will trigger a significant and sustained period of growth in both outreach revenues and net profits.
If this happens, it will be the third example THE DARK REPORT can identify where managers with commercial laboratory experience have “jump started” a relatively moribund, multi-hospital laboratory outreach testing program. If this particular “lightening” strikes for the third consecutive time, it might make a persuasive and specific argument for hospital laboratory administrators and pathologists.
The argument would be this: commercial lab managers have certain management tools and methods which hospital outreach program directors should identify, acquire, and deploy within their own laboratory. By using these management tools, their hospital outreach programs can grow at a faster rate, net profit margins can improve, and the average cost-per-test can decline for both inpatient and outpatient testing.
Two Similar Hospital Deals
The two earlier examples similar to the Health Alliance/LabOne arrangement are familiar to many in the laboratory industry. The first example is Sonora Quest Diagnostics, based in Phoenix, Arizona. The second is Spectrum Laboratory Network, located in Greensboro, North Carolina.
It was in 1999 that a deal was struck between the eight-hospital Samaritan Health System in Phoenix and Quest Diagnostics Incorporated. Both parties contributed their outreach (physicians’ office) laboratory testing business into the joint venture. Laboratory operations were consolidated and a new laboratory facility was built near the Phoenix Airport.
Only one half of the story about why this joint venture was created has ever been revealed. Quest Diagnostics Incorporated had determined that its existing laboratory operation in Phoenix was unlikely to be the source of either significant volume growth or greater profitability. Thus, merging this laboratory with another local player would allow it to realize the benefits of consolidation.
Sonora’s Untold Story
What has never been publicly revealed until now is the reason why Samaritan Health System was willing to fold Sonora Laboratory Services into a joint venture with a competing commercial laboratory. Lab industry presentations given by Sonora laboratory executives in the late 1990s generally painted a picture of basic success, with the hoped-for goal of eventually consolidating Sonora’s outreach testing volume with Samaritan’s inpatient lab specimens.
The financial reality at Sonora Laboratory Services was actually much different. In the years leading up to the creation of the joint venture with Quest Diagnostics, Sonora Lab Services had lost as much as $6 million. Samaritan needed to stem the ongoing financial losses and the joint venture with Quest Diagnostics was a way to accomplish that.
Not surprisingly, some months after the two laboratory businesses were combined, a lack of clear, sustained operational and financial improvement resulted in a management change at the top. The existing CEO, with a strong hospital laboratory background, was assigned other responsibilities. The new CEO, an employee of Quest Diagnostics, was someone with 20 years of experience in commercial laboratory operations.
What happened in the next two or three years may be one of the most spectacular laboratory turnaround stories of the past two decades. THE DARK REPORT is under confidence and cannot reveal details. But it can be said that operating profits were restored within six months of the management change. More spectacularly, in a 24- month period, outreach revenues doubled, from a base of around the mid- $20 million range to over $60 million!
THE DARK REPORT was privileged to have a full tour of this laboratory. Its revenue growth continues on a sustained basis. The morale and operating environment are exceptional when compared to similar types of consolidated laboratory operations. Six Sigma projects are contributing to service enhancements and the entire laboratory staff is motivated, focused, and accomplishing goals considered unattainable under earlier management regimes.
The second example of a multi- hospital laboratory organization coming under the leadership of an executive with commercial laboratory management experience is Spectrum Lab- oratory Network. In a separate story which follows, THE DARK REPORT provides a more complete picture of the progress made at this laboratory.
Certainly the speedy, 180- degree turnaround in both cases suggests that a vital ingredient was missing prior to the arrival of the new CEOs.
Spectrum was formed in 1997 by three health systems in North Carolina. The goal was to consolidate laboratory testing to harvest economies of scale and pursue outreach opportunities. Unfortunately, for the first three years of its life, Spectrum Laboratory Network was a financial disappointment.
The turnaround came when Spectrum hired a new CEO, an individual who had been CEO of a publicly-traded laboratory company and had decades of commercial laboratory experience. In the four years since his arrival, outreach revenues have jumped from about $18 million per year (net collections, not gross billings) to more than $60 million. Profit margins for a hospital-based laboratory are on par with that of the two blood brothers.
THE DARK REPORT observes that both the Sonora and the Spectrum stories share significant similarities: 1) a consolidated, multi-hospital laboratory organization offering outreach testing; 2)sustained financial difficulties; 3) following the arrival of a CEO with commercial laboratory experience, both Sonora and Spectrum were quickly restored to profitability; and 4) both Sonora, and Spectrum then started a multi-year period of aggressive growth in revenues and sustained increases in profit margins and net profit.
Is this a coincidence? Did lightening strike twice in the same fashion? Or did the commercial laboratory executives possess skills and experience which were not known to the hospital lab administrators they replaced? Certainly the speedy, 180-degree turnaround in both cases suggests that a vital skill or talent was missing prior to the arrival of the new CEOs.
THE DARK REPORT suggests that the financial and service outcomes from the Sonora and Spectrum stories are too powerful to be ignored by thoughtful hospital lab directors and pathologists. There are useful management lessons to be learned from these two examples.
Watch Events In Cincinnati
If this assumption is correct, then the Health Alliance/LabOne relationship provides an opportunity to watch, in real time, whether LabOne’s commercial laboratory expertise stimulates significant, rapid, and sustained growth in lab outreach revenues, while at the same time operational improvements boost overall margins.
It may be time for hospital laboratory managers to be less skeptical about the management skills of their commercial laboratory counterparts. Notwithstanding the failure of commercial laboratories to be more successful in their collaborations with hospital laboratories, the Sonora and Spectrum examples demonstrate, at a minimum, that leadership does make a difference.