More Hospitals Consider Options for Their Labs

More hospitals and health systems assess possibility of lab sale or lab management deals

CEO SUMMARY: Is it a new sign of the times? After decades of reluctance to sell their lab outreach businesses or enter into inpatient lab management agreements with commercial lab companies, a surprising number of hospitals and health systems are taking that step. Since the first of the year, sales of several major hospital lab outreach programs have been announced. Executives at commercial lab companies are bullish on their prospects to nail down more such deals.

SINCE JANUARY, SEVERAL HOSPITALS AND HEALTH systems moved aggressively to shore up their finances, restructure their lab operations and, in some cases, to jettison long-established lab outreach programs.

Just since the New Year, Laboratory Corporation of America, Quest Diagnostics, and Sonic Healthcare USA each announced deals to acquire lab operations from hospitals or to partner with health systems seeking expertise in the lab business, stated Noel Maring, Sonic’s Vice President of Hospital Affiliations.

Strategic Decisions

“Hospitals and health systems are making strategic decisions about their clinical laboratories and, as they act on those decisions, the market for partnerships and outright sales of lab operations has become very active in recent years,“ commented Maring. “Consider the partnerships Sonic established, along with different announcements of hospital lab outreach sales and hospital lab management agreements from LabCorp and Quest Diagnostics. Collectively, these agreements demonstrate the bigger issues hospitals and health systems are facing.”

Market pressures are motivating some hospitals and health systems to sell their lab outreach businesses or seek a joint venture or lab management arrangement with commercial lab companies.

“Take, for example, LabCorp’s deal in January to acquire the assets of Mount Sinai’s Clinical Outreach Laboratories in New York,” Maring said. “In February, Quest Diagnostics announced a deal to buy the lab operations of PeaceHealth and manage 10 PeaceHealth labs in Alaska, Oregon, and Washington. And, more recently, LabCorp said it was acquiring an ownership interest in Pathology Associates Medical Laboratories, (PAML) of Spokane, Wash., and most of PAML’s partnerships.”

In February, Sonic announced agreements with Western Connecticut Health Network and with Baptist Memorial Health Care, in Memphis.

“This activity reflects a strong trend that we can attribute to three factors,” Maring explained. “First, hospitals are asking themselves if they will remain in the outreach business in the future. Can they run it profitably, particularly considering the potential for reimbursement reductions?

“Most hospitals have competent people running their inpatient lab operations,” he continued. “But running a successful lab outreach business can be a struggle for them. Then there is the looming threat of the Medicare Part B lab test fee cuts that will happen in 2018. Hospital administrators are modeling the negative financial effect these cuts will have on labs.

“We know the Protecting Access to Medicare Act (PAMA) was an important issue in PeaceHealth’s decision to sell its outreach lab business,” he added. “Most hospital administrators recognize that, in the long run, the higher commercial lab reimbursements will go away, particularly as we move from fee-for-service to value- or risk-based reimbursement models.

Are Labs A Key Service?

“So, they ask themselves if their lab outreach business is a core competency, and, if it is, can they run it profitably in the future,” he added. “Those are difficult questions for any hospital to answer.

“The second question they ask is whether the clinical lab—and outreach lab testing in particular—is a key service line for the health system,” explained Maring. “Frequently, the answer is equivocal. They may determine that the outreach lab business is not a key service line. However, outreach lab testing typically does utilize unused capacity and generates economies in a hospital laboratory. So the associated outreach business certainly does help to keep inpatient laboratory costs down.

“That discussion then leads to this question: Do we sell it, maintain the status quo, or enlist a partner to help us run more efficiently?” he said.

“There seems to be a significant potential in monetizing outreach businesses right now simply because of the value that the two national labs are putting on that business,” he said. “Some hospitals need to monetize their outreach operations to shore up their balance sheets. Other hospitals see the value in keeping the outreach business, leveraging the lab data, and maintaining a profit line down the road, if they can maintain it as profitable.

“Each hospital, each lab outreach business, and each market is different. So, there are no simple answers,” he commented.

“One large health system that decided to go all in with its lab business—including outreach—was Northwell Health, formerly the North Shore Long Island Jewish Hospital System,” he said. Northwell made a significant investment in its core lab. Two other health systems making similar decisions are Aurora and Advocate Healthcare, joint owners of ACL laboratories in Milwaukee and Chicago.

Two Deals Show Hospitals’ Move Toward Partnerships

IN FEBRUARY, SONIC HEALTHCARE USA announced two new agreements that show how one lab company is seeking joint-venture partners. Sonic did not release details on the financial arrangements for either partnership, both of which will become final next month.

One agreement is with Western Connecticut Health Network, a three-hospital system serving Norwalk, New Milford, and Danbury, Conn. The other agreement is with Baptist Memorial Health Care, in Memphis, in which Sonic will operate a bacteriology center of excellence to 17 of Baptist’s hospitals in Arkansas, Mississippi, and Tennessee, and Sonic’s referring physicians in the southern states.

When it announced the Baptist deal, Sonic said the partnership would be called BMHSI/AEL Microbiology Laboratory GP in part because it would build on an existing relationship that Sonic’s subsidiary, American Esoteric Laboratories, has with Baptist. In that relationship, AEL is Baptist’s principal reference laboratory. Under the new arrangement, AEL will manage the bacteriology laboratory.

“We’ve been developing hospital partnerships and management agreements with health systems across the country and around the world,” commented Noel K. Maring, Sonic’s Vice President of Hospital Affiliations. “In fact, we’re working with more than 100 hospitals around the world, including the lab partnership we completed in 2014 with University College Park Hospital in London. That one is similar in structure to our partnership in Connecticut. We also manage labs for university hospitals in Germany and Australia.”

Inpatient Revenue Declining

“Consider what hospitals face today, such as declining revenue per inpatient,” continued Maring. “They may want to stay in the lab outreach business. But if they do so, they need to shore up that business and cut their costs. Once they get to that point, they have more questions to answer. Can they do that on their own or do they need a partner? Or should they get out of the business?

“The national lab companies recognize these issues and have begun to provide answers where they can,” Maring said. “From what we’ve seen of LabCorp’s recent deals—such as the Mount Sinai deal—LabCorp may tend to want to buy hospitals’ outreach businesses. They seem to have relatively little interest in managing inpatient laboratory operations. Nor do they seem to have interest in making partnership deals with health systems. They appear to just want to buy and run outreach lab operations.

“Quest Diagnostics also seems to be shaping up as a company that has an interest in acquiring lab outreach operations,” he added. “But they are a bit different in that they also have made a concerted effort to manage inpatient lab operations. In addition, Quest has some partnerships, but going forward I predict they will have less interest in partnerships.

“Here at Sonic Healthcare, we positioned ourselves to acquire lab outreach businesses,” he said. “We’ll also look at inpatient management contracts, but that’s not our primary focus. Depending on a health system’s immediate financial needs, we are not convinced it is always in their best interests to sell their outreach lab business or outsource their labs.

“In addition, inpatient lab management agreements have historically been short-term solutions and hospitals have tended to take their labs back within five to seven years,” he added.

“More importantly, health systems need to streamline their lab operations, reduce costs, and leverage lab data,” Maring explained. “We believe this can be accomplished through a partnership with aligned incentives designed to maintain testing in the hospital while leveraging Sonic’s global purchasing, technical expertise, and labor optimization abilities.

“Hospitals need onsite lab testing for their inpatients,” he added. “Outreach lab testing is not going to go away, and it can help a hospital reduce inpatient testing costs. We think health systems simply need a partner to help reduce costs and insource the lab outreach business.

Pursuing Value-Based Care

“So, the first two issues for hospitals are: do they want help managing outreach or inpatient testing?” he said. “The third issue is how to prepare for value-based reimbursement.

“Although spending on clinical lab testing is only 3% to 4% of the typical health system’s budget, some innovative hospital administrators now recognize that, by utilizing lab data more effectively, they can impact the other 96% of healthcare costs,” Maring concluded. “They also recognize that they can use an outside lab partner who can help them identify these patients proactively.”

Contact Noel Maring at 512-439-1677 or


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