Shared Lab Organizations Evolving Into New Forms

Commercial lab-hospital lab joint ventures giving way to multi-system shared laboratories

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CEO SUMMARY: For two decades, the limited number of laboratory joint ventures that appeared were invariably partnerships between commercial labs and hospital labs. Today’s hostile healthcare environment makes it tougher for these types of joint ventures to prosper and meet the needs all partners. But the concept of shared lab ventures will not disappear. Now hospital systems are entering the game.

THERE’S ANOTHER SHIFT underway in the healthcare marketplace that is of particular interest to hospital laboratory directors.

This shift involves shared laboratory ventures, and THE DARK REPORT’s prediction that a new form of shared laboratory venture is about to supersede the “traditional” JV business model common during the last 15 years.

Since the mid-1980s, the most common model of a shared laboratory organization involved a joint venture partnership between a commercial lab company and a hospital laboratory. That is already changing.

During the next 24 to 36 months, an entirely different shared laboratory business model will become dominant. This will be a shared laboratory services venture. It will be organized, owned, and operated by two or more hospitals or hospital systems within the same metropolitan area.

Commercial laboratories that compete for physician office business will generally not be partners. National reference laboratories will also seldom be equity partners, but may enjoy a special provider status in these multi-sys- tem shared lab organizations.

One example of the multi-system shared laboratory joint venture is Spectrum Laboratory Network, located in Greensboro, North Carolina. It is owned by Forsyth Memorial Hospital, Moses H. Cone Memorial Hospital, and High Point Regional Health System. Combined, these systems represent 2,200 hospital beds.

Examples Of Shared Labs

Another is Shared Laboratory Services (SLS), based in Fairfax, Virginia. It is owned by Chesapeake General Hospital, DePaul Medical Center, Obici Medical Center, Virginia Beach General Hospital , and American Medical Laboratory (AML). AML also is the reference laboratory for the shared lab company.

There are two primary reasons why multi-system lab joint ventures will become the dominant business model. Each is a result of the financial pressures facing all laboratories in today’s healthcare marketplace.

First, commercial laboratory companies are finding the current crop of joint venture projects to be financially disappointing. That is one reason there have been few announcements, during the past 12 months, of significant new joint ventures between the largest commercial laboratories and big healthcare systems.

Complicated JV Politics

When the financial under-performance of these JVs is combined with the complicated politics of partnering with hospital administrators, most well-managed commercial labs will choose to devote their resources to other areas of the laboratory marketplace. Thus, the “traditional” joint venture model between commercial labs and hospital (system) labs will become less common.

Second, the financial pressures which forced individual hospitals to consolidate into integrated healthcare networks (IHN) still exist. When the IHN consolidates its laboratory across its hospitals and physician offices, it generally manages to lower costs and improve services.

But the pressure to cut costs further is inexorable. It is this continued financial pressure which now brings the CEOs of healthcare systems together to discuss mergers between their systems and shared laboratory organizations.

If the period of 1993-1999 was a time of hospital consolidation into integrated systems, then the period of 2000-2005 will be when consolidation among hospital systems occurs.

Perceptive lab executives and pathologists are aware that the catalyst to the next big trend in hospital industry consolidation is already upon us. This is the merger of two or more multi-hospital systems. During the next few years, IHN CEOs will seek to solve their operational problems and improve their market share by merging with other healthcare systems.

Hyphenated system names will become common. Expect more “Memorial-Hermman” (in Houston) types of health systems to emerge.

But THE DARK REPORT believes that most laboratory regionalization will occur at a level below that of multiple-hospital health system consolidation. In other words, it will be more common to find shared laboratory organizations which were started by independent healthcare systems in a metropolitan area.

For example, it was announced just last Friday that Milwaukee’s Aurora Healthcare and Chicago’s Advocate Health Care will “combine their laboratory operations under a single management team through the development of a joint operating agreement.”

Unified Lab Management

This is a perfect example of this new crop of “regionalized, consolidated” laboratory organizations. The systems remain independent, but the laboratory departments are regionalized under unified management. Aurora and Advocate plan to fully integrate these lab functions: LIS, billing, finance, outreach sales and marketing. A centralized management team will direct laboratory operations.

Effectively, the seeds for this new form of laboratory regionalization have already been sown. Some 595 IHNs already control 63.6% of the nation’s hospitals, and these are virtually all the hospitals located in urban, developed areas. Thus, hospital lab directors face a new opportunity, or threat, as they choose to view it.

Regional Lab Networks

Regional laboratory networks will continue to play an important role in the process of lab regionalization. But these emerging multi-IHN shared lab service ventures will probably be the bigger agent of change. Unlike the “United Nations” politics of a lab network which delay business implementation, these shared laboratory service ventures will generally be operated like for-profit business units. They will be faster at responding to marketplace needs.

One key to understanding this new market phenomenon is laboratory over-capacity. Most cities in the United States continue to maintain much more clinical lab capacity than is necessary. More-over, the arrival of automated modular instruments, in tandem with point-of-care testing technology, means there will be an ever-declining need for high-volume core laboratories.

Every year, more and more tests will migrate out of the core lab and move closer to physicians and patients. The laboratory organization will increasingly act as the knowledge resource for diagnostics within the integrated healthcare system.

The need to reduce costs and eliminate unused core lab capacity will drive shared lab organizations. The need to introduce and manage new diagnostic technology will make them increasingly important to healthcare.

Aurora & Advocate’s Lab “Tale of the Tape”

In combining the laboratories of these two large health systems, the executive team will consist of Jay Schamberg, M.D. (Aurora) as General Manager. Cheryl Vance (Advocate) will be Regional VP for Illinois Operations. Marie Cato (Aurora) will be Regional VP of Wisconsin Operations.

Aurora Health Systems:

  • 12 acute care hospitals
  • 500 physicians in Aurora Medical Group
  • Aurora Health Network represents 2,500 physicians
  • 20,000 employees at 230 sites

Advocate Health Care

  • 8 acute care hospitals and 2 children’s hospitals
  • 3 affiliated medical groups with 550 physicians
  • Advocate Health Partners represents 2,265 physicians
  • 21,500 employees at 200 sites


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