CEO SUMMARY: Pressure is intense for hospital buying consortiums to justify themselves and deliver added savings and services to their members. The recent announcement of a new national contract between Premier and Quest Diagnostics Incorporated demonstrates that both buying groups and laboratory industry suppliers are showing increased flexibility in creating new service menus.
LONG-STANDING RUMORS of a major new relationship between Premier, Inc. and Quest Diagnostics Incorporated were confirmed last Monday. The companies announced establishment of a two-part strategic alliance.
The Reference Testing Agreement is one component of the alliance. It is a five-year national contract which takes effect August 1, 1998. It involves a traditional range of pricing and services for reference testing and makes Quest Diagnostics the primary reference provider for Premier.
The second component is unique. It is the Strategic Services Contract. It creates the framework for any willing hospital, Premier, and Quest Diagnostics to work together to create additional value within the hospital laboratory. It is an exclusive agreement with Quest for a ten-year term.
For Premier, the unorthodox strategic alliance signals a new focus on how the buying service intends to reshape national contracts for laboratory products and services. Premier is developing new forms of cost reduction opportunities to offer its members.
For Quest Diagnostics, this new strategic alliance demonstrates the company’s serious intent to reconfigure traditional business practices and create new value-added services. Quest Diagnostics views the Premier alliance as an opportunity to provide hospital reference testing through a partnering approach.
According to Ken Freeman, Chairman and CEO of Quest Diagnostics Incorporated, this alliance is a logical result of its strategic business plan. “Partnering with large buyers of laboratory testing is one element in our three-pronged corporate strategy,” he told THE DARK REPORT. “Premier, representing about 1,700 hospitals and similar institutions, certainly fits that category.”
The Strategic Services Agreement between Premier and Quest Diagnostics is intended to create an ongoing relationship between the participating hospital, Premier and Quest. Built upon the quality management philosophy of long-term customer-supplier relationships, the arrangement provides incentives for all three parties to add value and share in the benefits.
“Quest Diagnostics has significant capabilities and resources,” explained James Chambers, Senior Vice President, Marketing and Business Development at Quest Diagnostics. “Premier worked with us to develop a way for hospitals to utilize these assets to their best advantage.”
“Yes,” affirmed Freeman, “the goal of this alliance is to shift the focus from strictly price to value. Historically it was easier for our industry to sell on price rather than value. Premier and Quest want to bypass price as the major deciding point. To access the increased value represented by other opportunities, hospitals must be willing to invest more management effort into evaluating and implementing these options.”
Aligned Interests Metaphor
Laboratory executives can better understand this strategic services agreement if they picture it like an alignment of interests. The individual hospital laboratory benefits directly from the arrangement. Premier will receive its share in the form of cash and equity in Quest Diagnostics, proportional to the volume of testing involved in the project.
The joint venture concept also affects outreach testing. Quest Diagnostics will purchase the outreach testing of a participating hospital as part of the partnering process. Equally important, Quest can provide additional resources, such as sales and marketing, to expand outreach testing. Because of the ongoing relationship, all partners would share in the benefits of the increased specimen volume.
Both Quest Diagnostics and Premier are sensitive to the traditional animosity that some hospital lab administrators hold against national laboratories. That animosity has fueled rumors about the nature of the impending deal between the two companies.
“We understand the concerns some hospital laboratory managers have about national contracts,” said Freeman. “We know that Premier is also sensitive to this issue. That is why we expect that success in the strategic services alliance will not come overnight.
“We expect to build this one hospital at a time,” he continued. “Because this is a new approach to increasing the lab’s value to its hospital, it will take a few examples to show other Premier hospitals how powerful this new model can be at enhancing service, controlling costs, and fostering clinical integration.”
“It should also be stressed that Premier and Quest Diagnostics underwent an extensive process over the past year to develop this strategic alliance,” Freeman added. “A significant amount of time and management effort went into creating an arrangement that shifts reference laboratory contracting away from a price-based process into something that can add substantial financial benefit to the participating hospital.”
This attempt by Premier and Quest Diagnostics to recast their traditional relationship to hospital laboratories will have one consequence: never again will reference laboratory contracts be driven exclusively by price.