SmithKline, AmeriPath, Quest, Tenet

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TENET AND MEDPARTNERS CONTINUE TIGHTENING THEIR SO. CALIF. ALLIANCE

Remember THE DARK REPORT’S prediction that Tenet Healthcare Corp. and MedPartners, Inc. would use their initial alliance to further move towards an integrated clinical relationship?

It didn’t take long for the two companies to expand their partnership. Early last month, Tenet and MedPartners announced that MedPartners would close its Friendly Hills Regional Medical Center (FHRMC) in La Habra by May 15, 1998. The 116,000 patients served by that facility will instead be served by two Tenet hospitals in nearby Whittier and Placentia.

Further, Tenet will purchase the movable assets of FHRMC. Both companies will share risk in caring for the 116,000 patients. An additional 45,000 patients in MedPartner clinics in West Los Angeles and the San Fernando Valley will also be included in this arrangement.

Within southern California, Tenet operates 32 hospitals. MedPartners has 4,000 physicians in the same area, serving 1.4 million patients. MedPartners’ HMO, Pioneer HMO, now uses Tenet hospitals exclusively. These arrangements were announced last April.

Tenet’s management strategies for its 32 hospitals in southern California demonstrate a new model for how a for-profit hospital operator can build an integrated clinical services capability. Tenet is currently consolidating laboratory services at the 32 hospitals, using SmithKline Beecham Clinical Laboratories as the consultant and implementer in the project. (See TDR, January 19, 1998.) Expect to see further developments with Tenet’s 32 hospitals in southern California.

SMITHKLINE LABS OFFERS NEW TWIST TO TESTING FOR DRUGS OF ABUSE

To distinguish itself from other laboratory competitors, SmithKline Beecham Clinical Laboratories (SBCL) announced a new capability in drugs of abuse testing. SBCL will now offer to test for nitrate adulterants as well as drugs of abuse on the same specimen.

The new test service is called Test Sure™. Employers will need to specify in advance that they want the adulterant test performed. Potassium nitrate is the most common adulterant, due to a widespread belief that it prevents a positive drug test result. Currently when a laboratory encounters adulterants, it labels the specimen as “unfit for testing.” At the request of the employer, SBCL will now report the results of the drug screen and whether nitrites were present in the sample.

In offering this new service, SmithKline has figured out a way to add value to a drug screen, and get paid more for the service. This demonstrates how laboratories can create new services which have extra value over existing products.

AMERIPATH BEEFS UP ACQUISITION CREDIT LINE

AmeriPath, Inc. of Riviera Beach, Florida continues to move ahead of its competitors in the race to build a successful pathology-based physician practice management (PPM) company.

Last week the company announced agreement on a $200 million revolving credit facility with a bank syndicate anchored by BankBoston and Nations Bank. This new credit line is a sizeable increase to the company’s war chest. It will permit AmeriPath to continue its aggressive acquisition of pathology practices.

AmeriPath is using the new credit package to refinance its existing bank debt of $81 million. The remaining $119 million credit line is available for AmeriPath to fund pathology practice acquisitions.

Pathologists should note that the remaining credit line is 150% more bank borrowing power than it used to build up its current system of 18 pathology practices and 145 pathologists. It should be expected that AmeriPath will not hesitate to use this expanded war chest to pursue high profile pathology practices which it wants to acquire.

In a separate announcement last week, AmeriPath reported first quarter earnings. Company revenues were $38.0 million. Income from operations was $8.6 million and net income was $3.8 million ($0.12 per share). These numbers were substantially above those of first quarter 1997.

Significantly, the company reported that “same practice” revenues for first quarter 1998 versus first quarter 1997 were up 14%. “Same store” growth is a concern for Wall Street analysts who follow the company.

Higher Medicare reimbursement accounted for 2-3% of the increase. Approximately 7%, or half of the increase, was attributed to the additional SmithKline Beecham Clinical Laboratory contract in Florida. This contract was formerly held by Pathologists Reference Laboratory (PRL) of Tampa. The loss of this anatomic pathology contract, and its associated revenues, was a contributing factor in PRL’s subsequent sale to DIANON Systems, Inc. in January.

QUEST DIAGNOSTICS PAYS $6.8 MILLION TO SETTLE WHISTLEBLOWER SUIT

Last month Quest Diagnostics Incorporated agreed to pay the federal government $6.8 million to settle a qui tam lawsuit alleging that it billed Medicare and Medicaid for tests without proper physician authorization.

The lawsuit was originally filed by Donna Dorer, formerly an employee of Quest’s Rockford, Maryland laboratory facility. Dorer was awarded $1.5 million of the settlement for her efforts.

The allegations involved improper billings from 1989 through 1997 at six Quest laboratory sites: Rockville, MD; Baltimore, MD; Teterboro, NJ; Detroit, MI; and Horsham, PA. The $6.8 million represents twice the loss incurred by Medicare/Medicaid, plus penalties of about $3 million for violating the False Claims Act.

Laboratory executives should note an interesting aspect of this settlement. Quest Diagnostics Incorporated signed a compliance agreement with the federal government. It has worked diligently to improve compliance since it paid its first settlement agreement in 1993 (as MetPath). Yet, despite these efforts, a whistleblower was able to identify non-compliance on billing procedures within Quest involving claims as late as 1997.

This indicates that laboratory executives should continue to consider whistleblowers within their own laboratory as a serious possibility.

More importantly, it means that laboratory executives should carefully listen to employees who identify billing and compliance procedures they believe are inappropriate. It is a lot easier to evaluate and correct the problem through internal efforts than to endure an investigation by the federal government and pay a settlement involving multiples of the inappropriate billings, plus a large penalty.

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