Revamped Houston JV Validates Industry Trend

Hospital systems becoming more willing to participate in laboratory joint ventures

CEO SUMMARY: Change is notoriously slow in both the hospital and the clinical laboratory industry. The announcement of a revamped laboratory joint venture between Houston’s Memorial Hermann Healthcare System and Dynacare demonstrates that market pressures continue to encourage the rationalization of laboratory services. It doesn’t hurt that this joint venture also expects to post healthy profits.

IT IS SIGNIFICANT THAT the laboratory joint venture between Hermann Hospital and Dynacare, Inc. was revamped and continued by Memorial Hermann Healthcare System.

Hospital administrators traditionally have been hesitant to cede control over their clinical laboratory operations to an outside partner. This is why the commercial laboratory industry has only created a handful of these hospital lab/commercial lab joint ventures.

But deteriorating economics in the hospital industry will soon change this fact. THE DARK REPORT predicts that the pace at which new hospital/commercial lab joint ventures are announced will increase during the next 12 months.

What will surprise many observers, however, is that most of these announcements will not involve the two blood brothers, Laboratory Corporation of America and Quest Diagnostics Incorporated. Instead, most of these agreements will be with the two Canadian laboratory companies, Dynacare, Inc. and MDS Laboratory Services. The reason is that Dynacare and MDS offer hospital laboratories a different value proposition than Quest and LabCorp.

These two labs also do not have the emotional baggage that is a legacy of the commercial lab industry’s past 15 years of mergers and acquisitions, which caused so many service breakdowns for their hospital laboratory customers.

Market Validation

Because the new deal between MHHS and Dynacare represents a market validation of the concept of laboratory regionalization, it is important to look at what motivated MHHS administrators to expand and continue the joint laboratory venture.

This decision was based on two primary factors. The first was the operating track record of the original Dynacare-Hermann Laboratories enterprise. During a four-year period, it delivered measurable results in terms of profit distributions, enhancements to lab services, and operational efficiency. That meant MHHS administrators were looking at a known quantity. It reduced the risk of the proposed new joint venture.

Second, both MHHS and Dynacare looked at the market potential of continuing into the future. Both parties recognized the opportunity to reap considerable profits, particularly given the experience of the past four years.

THE DARK REPORT believes that five worthwhile benefits were achieved by the original Dynacare Hermann Laboratories joint venture. These same benefits are attainable by any other hospital system that is open- minded enough to pursue them.

BENEFIT #1
Outreach testing generates net profits to the participating hospital partners.

No matter how many times THE DARK REPORT highlights similar success stories, hospital administrators seem to deny this indisputable fact. At a time when reimbursement for hospital services is declining, surely any worth- while flow of real profits from laboratory outreach sources is worth pursuing.

BENEFIT #2
Increased specimen volume from outreach testing lowers the average cost per test for hospital inpatient lab tests.

This is another indisputable fact. Shrewd hospitals used this tool to consistently lower their laboratory costs over a multi-year basis. It also provides the added benefit of employment stability for loyal lab employees.

BENEFIT #3
Increased specimen volumes from outreach testing allows the lab to expand the in-house test menu and improve turnaround times for test results.

Impact of these two benefits upon the hospital are undeniable. Enhanced test menus and faster turnaround times contribute to reduced hospital costs. It improves inpatient care and contributing to faster patient discharges. These lab enhancements also improve doctor satisfaction with hospital services, which is also a desirable outcome.

BENEFIT #4
Having multiple laboratory partners in a joint venture permits the development of a core lab.

The more laboratory sites available for combining test volumes, the greater the resulting benefits for all participating laboratories. It provides the opportunity to reduce redundant lab resources and eliminate excess laboratory capacity while generating economics of scale from the expanded core laboratory.

BENEFIT #5
An effective outreach laboratory test program finances computer links between the hospital and physician offices.

This computer link can funnel other clinical data between hospital and physician. It further reinforces the service bond between hospital and physician. Case studies presented in THE DARK REPORT and at the Executive War College demonstrate how powerful this feature can be improving physician-hospital relationships.

Pathologists Also Win

It should be further noted that pathologists can also be winners in these hospital lab/commercial lab joint ventures. Whether pathologists are given an equity position or not, the pathology practice will generally see an increase in specimens and case referrals as the joint venture’s sales force develops new client accounts.

This was precisely what pathologists associated with the Dynacare-Hermann Laboratory venture experienced. The increased volume and associated revenues helped offset general declines in pathology reimbursement and other sources of revenue erosion.

Thus, the expanded Houston joint venture is a reminder that good business opportunities still exist for perceptive hospital administrators.

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