More Hospitals Consider PAML’s Lab JV Model

Decision of two major health systems to ally with a partner demonstrates renewed interest

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CEO SUMMARY: One joint venture at a time, PAML is convincing hospital and health system CEOs about the benefits of building a thriving laboratory outreach business. For their part, facing budget cutbacks and a decline in Medicare reimbursement, more hospital administrators are beginning to recognize how and why laboratory outreach testing programs can bring substantial clinical and financial benefits to their organization. These are auspicious developments for hospital labs across the nation.

INDEPENDENT DECISIONS by two multi-billion-dollar health systems to expand their laboratory outreach programs via partnerships with Pathology Associates Medical Laboratories, LLC (PAML), may represent a significant lab industry market milestone.

For PAML, both new laboratory joint venture agreements—one with Providence Health & Services of California, and the other with Centura Health of Denver—are important validation of its unique business model. Having these health systems as partners will add to PAML’s credibility and make it easier for the Spokane, Washington-based lab company to enter similar deals with other major multi-hospital health systems.

For Providence Health-California and Centura Health, their respective partnerships with PAML will allow them to accelerate the expansion of their laboratory outreach efforts. The direct benefit will be an increase in lab specimens and revenue from the outreach market. But an equally important benefit will be how the lab out-reach program supports each health system’s strategy of fostering tighter clinical integration with office-based physicians in their service areas.

For the nation’s laboratory testing industry, these two lab joint venture companies might well signal the earliest days of a new competitive factor. The emergence of two well-financed and well-positioned new laboratory companies in the metropolitan areas of Los Angeles and Denver demonstrates how quickly local hospitals and health systems can change the competitive balance in their local lab testing marketplace.

Lab JV In Seattle Succeeds

That has certainly proven true in Seattle. Since its formation in 1996, PACLAB Network Laboratories (with PAML as partner and general manager), has captured market share at a steady rate. It has grown to encompass 11 participating hospital members. Its annual revenue is close to nine figures.

PACLAB is now one of Seattle’s three largest lab testing enterprises. It holds a market share in the Seattle region that is at least equal to Laboratory Corporation of America and Quest Diagnostics Incorporated. This is a notable accomplishment, since both national lab companies operate a major lab facility in Seattle and are considered “local labs” to office-based physicians in the region.

Of course, the organizers of the new laboratory companies in Los Angeles and Denver hope to match or exceed the financial success of PACLAB in Seattle. Were that to happen, it would be powerful validation of PAML’s laboratory joint venture business model—and an encouragement for other hospitals and health systems to intensify their own laboratory outreach programs.

Lab administrators and pathologists will want to track the market share progress of both California Laboratory Associates, LLC (CLA–the JV involving Providence and PAML), in Los Angeles and Colorado Laboratory Services, LLC (CLS–the JV between Centura and PAML), in Denver. Neither of the two national labs wants to see a replay of the Seattle market share re-alignment happen in Los Angeles and Denver. For that reason, there is likely to be intense competition for physician office clients in both cities.

News Offers Two Stories

There’s a double story within the news that PAML has new laboratory joint ventures in Los Angeles and in Denver. The first story is that two of the nation’s larger and respected health systems are willing to expand their laboratory outreach programs—and went outside their organizations to find the expertise they wanted to optimize success.

The second story is that, at the stroke of a pen, new laboratory ventures—involving a multi-hospital player in a major metropolitan region and PAML—can instantly emerge to become a credible competitor to existing labs in the area. Should new lab JVs like these two develop in other cities, backed by major health systems in that region, this would not be an auspicious trend for the two blood brothers.

Other Lab Firms Pursued Hospital Lab Joint Ventures

OVER THE PAST 30 YEARS, a number of commercial laboratory companies pursued the strategy of developing laboratory outreach joint ventures with hospitals. Only Pathology Associates Medical Laboratories (PAML) seems to have enjoyed long-term success with this business strategy.

In the 1970s and 1980s, International Clinical Laboratories, Inc. (ICL), gained a reputation for establishing successful and long-lasting lab JVs with hospitals. Although it was acquired by SmithKline Beecham Clinical Laboratories in 1988, several of the ICL-created lab JVs continue to operate.

During the 1980s and 1990s, two Canadian lab companies entered the United States with a primary strategy of creating lab outreach JVs. MDS Diagnostics Services and Dynacare, Inc., each devoted years to wooing hospitals with the goal of recruiting them into a laboratory joint venture.

MDS did have operational lab JVs in Poughkeepsie, Memphis, Atlanta, and Miami, which it developed with different hospital partners over a 12-year period. It exited the United States in the mid-2000 period and sold its interests in these laboratory operations.

Dynacare similarly tried to develop hospital laboratory joint ventures, but found it faster and easier to acquire labs that came up for sale. It had a true hospital lab joint venture in only a few locations. Dynacare was acquired by Laboratory Corporation of America in 2002.

Another interesting attempt to have a commercial laboratory company support hospital laboratory outreach programs was a partnership between Premier, Inc., the group purchasing organization (GPO), and Quest Diagnostics. It was organized in 1998 for the purpose of consulting with hospital and health system labs and creating lab JVs. Despite a concerted marketing effort by both partners, there was inadequate interest by hospitals and the partnership was quietly disbanded.

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