Tenet, SBCL Discussing 33 Hospital Lab Contract

Proposed service agreement would involve all Tenet’s Southern California hospital labs

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CEO SUMMARY: Tenet Healthcare’s decision to entertain proposals for improving laboratory operations in its Southern California division triggered a year-long discussion with national laboratories. If a deal results, it would represent one of the largest “re-engineering” projects between a hospital company and a national laboratory.

GRAPEVINE BUZZ in Southern California says that SmithKline Beecham Clinical Laboratories (SBCL) inked a deal to manage the clinical laboratories in 33 Tenet Healthcare hospitals. But Tenet officials state that no definitive agreement exists between the two companies.

“As of today, we are still negotiating with SmithKline,” stated Bob McDaniel, Corporate Director of Laboratory & Respiratory Services at Tenet. “We’ve only signed a letter of intent to discuss the project and define the scope of the conversations.”

According to McDaniel, SmithKline has been invited to study the existing laboratory operations at the Tenet hospitals and provide a range of suggestions for service improvements and cost savings. Because the proposed project involves at least 30 of Tenet’s Southern California hospitals, it represents a sizable business opportunity.

Tenet launched this process several months ago with an RFP process. “We entertained proposals from several large laboratory companies,” said McDaniel. “As this process unfolded, SmithKline gradually emerged as a potential partner. With so much detail to evaluate for this project, it is time-consuming to develop a precise plan of action. That is why it is taking so long.”

According to McDaniel, Tenet’s original goal for this vast project was to go beyond direct purchasing to identify potential reductions in laboratory operating expenses. “SmithKline already has our national reference lab contract,” observed McDaniel. “What we wanted to do with this proposal process is to explore other opportunities for reducing operating expenses in our labs.

“When we looked at our 33 hospitals in Southern California, we recognized that our ‘laboratory system’ had specific elements in common with a commercial laboratory,” he said. “We do the same tests in many locations. Does it make sense to centralize some testing? How do specimens get transported between facilities? What about integrating data systems between sites?

“The national laboratories have lots of experience in precisely these areas. That is why we asked them to look at our existing laboratory infrastructure and help us identify ways to operate more efficiently while improving service.”

Interestingly enough, Tenet did not look to laboratory consultants for this input. “The commercial laboratories not only understand this business, but they have the capability to teach us what we don’t know and help us implement the improvements,” said McDaniel. “It seemed logical to partner with a laboratory which can bring all these resources to the table.”

“The national laboratories have lots of experience in precisely these areas. That is why we asked them to look at our existing laboratory infrastructure and help us identify ways to operate more efficiently…”

The enormity of the task facing Tenet and its final laboratory partner should not be underestimated. The number of hospital laboratories involved, as well as the extensive geography to be covered, make this an unprecedented project in both size and scope. Hospital and laboratory executives throughout the United States will closely watch how Tenet proceeds.

The huge scope of this project is one reason the development process has taken months. During the spring, word on the street was that Quest Diagnostics Incorporated looked to be the favored partner with Tenet. Given that the former Nichols Institute laboratory in San Juan Capistrano was favorably sited to serve Tenet’s hospitals, there seemed to be some natural strategic strengths to a Quest-Tenet arrangement. No Tenet officials would comment on that situation, nor why SmithKline emerged as the leading candidate at this stage of the negotiations.

Lab Joint Ventures

Unlike Columbia/HCA, which has done a number of laboratory joint ventures, Tenet has historically focused attention on the direct purchasing side of the laboratory business. The proposed laboratory project in Southern California will be Tenet’s first non-traditional laboratory partnering arrangement.

According to McDaniel, Tenet is not actively soliciting similar arrangements in other parts of the country. “This Southern California project is complex. We want to gain more experience with this project before we look for others.”

The main initiative within Tenet’s hospital laboratory division is standardization, including a reduction in the number of “SKUs” within supply categories. “Beyond simply negotiating lower prices for common supplies, we want to concentrate on reducing the unnecessary variety of items used in our laboratories,” explained McDaniel.

“On the lab side, these efforts have been worthwhile,” he continued. “We obtain excellent compliance and utilization with our contracts. In fact, our initiatives are less about procurement and more about utilization.”

With the proposed Southern California laboratory project still under development, much is still unknown about how Tenet and its laboratory partner will proceed. But there is another aspect to this potential relationship which should not be overlooked.

Tenet and MedPartners have a major agreement which links MedPartners’ 4,000 affiliated physicians with Tenet’s 33 hospitals. As part of this agreement, MedPartners’ 1.4 million patients will have access to Tenet’s hospitals.

Assuming that Tenet chooses a laboratory partner like SmithKline and intertwines its laboratory operations with that partner, it would create an opportunity for the commercial laboratory to do an exclusive deal with MedPartners’ physicians.

Were this to come about, the result would be a fascinating linkage between the commercial lab, Tenet’s hospital labs and MedPartners’ physician offices. It would represent a unique laboratory services business model adapted to California’s managed care marketplace.

Before that can occur, Tenet must chose a laboratory partner and successfully integrate that partner into its multi-hospital system. The challenges facing Tenet and its partner in these first steps are complex. It will require adept management skills to effectively make any eventual partnership succeed.

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