CEO SUMMARY: Even as the best of its lab testing joint ventures with hospitals and health systems prove profitable, MDS Diagnostic Services is taking active steps to resolve its participation as a partner. In a candid interview, its President and CEO acknowledged the best attributes of such joint ventures and identified specific business dynamics which challenge laboratory firms seeking to create similar joint ventures.
WITH ONLY TWO LAB BUSINESS ARRANGEMENTS remaining in the United States, MDS Diagnostic Services is close to resolving its 17-year involvement in hospital lab/commercial lab joint ventures in this country.
What lies ahead for MDS in the United States? Why did it decide to rethink its strategy for clinical diagnostic services in this country? Do lab testing joint ventures between hospitals, integrated delivery networks (IDNs) and commercial lab companies have a future? To learn the answer to this and other questions, THE DARK REPORT caught up with its President and CEO, Cam Crawford.
“Going into 2004, MDS was involved in five laboratory service arrangements,” said Crawford. “Since January, we have sold our interest in three. Moving forward, MDS will continue to work with its remaining partners to insure that the eventual solution is consistent with our commitment to the long-term value of these laboratory ventures. It will be done with our full support for the lab testing services they provide and continuity for the people who make all this happen.”
Crawford emphasized the importance of this goal. “MDS enjoys an extraordinary relationship with all of its partners in these ventures,” he commented. “From the beginning of each lab joint venture, we took methodical and deliberate steps to create and operate a laboratory business model that met the needs of all participants. In resolving our remaining two relationships, our actions will be equally measured and systematic to fully meet the expectations of each of our partners.”
Hospital-Centric Lab Services
For Crawford, this stage of the business cycle represents a bittersweet outcome. “MDS strongly believes in the value of a regionalized laboratory services platform which is hospital-centric,” he explained. “We also believe that Memphis Pathology Laboratories (Memphis, Tennessee), Duke University Health System Clinical Laboratories (Durham, North Carolina), and Integrated Regional Laboratories (IRL–Fort Lauderdale, Florida) are solid performers. Their clinical and financial success validates the concept of a regional laboratory services venture.
“Obviously, if these joint ventures can be successful, why did MDS Diagnostic Services make a strategic decision to wind down this business unit?” asked Crawford. “That’s not easy to answer, because there was no clear and compelling business case for either option: moving forward or moving out.
“Obviously, if these joint ventures can be successful, why did MDS Diagnostic Services make a strategic decision to wind down this business unit?” asked Crawford.
“Let me explain that in more detail,” he continued. “The first business challenge is to educate administrators of hospitals and IDNs about the benefits of participating in such lab testing ventures. This takes time and the process is often interrupted when administrators divert their attention to other more pressing issues.
“Second, where administration does become interested, it is a long and lengthy process to work with them to develop the right business model and create an operational laboratory testing venture. This brings us to a third business challenge. Each joint venture usually ends up with more unique attributes than common characteristics,” explained Crawford. “Individually, each of these joint venture business models can be managed successfully. However, this creates complexity for the executives of the managing partner, who must respond to the unique differences of each joint venture.”
Crawford’s comments reflect the experience learned at MDS over the past ten years. It was in the mid-1990s that MDS Diagnostic Services established a major presence in the United States and began to approach hospitals and IDNs with the concept of a shared laboratory testing services venture.
At that time, MDS wanted to sell its “Total Laboratory Automation” (TLA) technology. Like other vendors offering first-generation TLA solutions, MDS had found hospitals to be a tough sell. It decided to approach the market in a different fashion.
By developing a laboratory joint venture with interested hospitals, MDS could build a core laboratory that included its TLA system. It would provide management support, sales and marketing expertise, and capital. The hospital partner would provide inpatient specimens, laboratory staff and managers, and capital.
MDS quickly found an interested partner: Columbia HCA Corporation (now HCA Inc.). Two central labs were constructed. One was in Atlanta (and sold to Laboratory Corporation of America early this year). The other is Integrated Regional Laboratories.
Too Few Opportunities
However, as Crawford stated earlier, MDS Diagnostic Services found the entire process of developing a lab joint venture with hospitals both very rewarding and very long. That was the contradiction mentioned by Crawford. Most of the joint ventures developed by MDS performed to the expectations of the partners. But from a purely business stand- point, it took too long, and the number of JVs was too few, for MDS to justify maintaining an entire business division devoted to laboratory joint ventures.
As a business case study, the experience of MDS mirrors the efforts of other commercial labs in past years. Creating a lab testing joint venture with hospitals is challenging and time- consuming.