Home >> ALL ISSUES >> 2017 Issues >> Outreach: Forge ahead or accept purchase bid?

Outreach: Forge ahead or accept purchase bid?

image_pdfCreate PDF

Anne Paxton

July 2017—With the laboratory industry in flux—and many critical determinants of the next few years waiting on policy moves by the new administration and third-party payers—hospital outreach programs could wish for a better time to make existential decisions such as accepting an offer to be purchased.

Following on last year’s surge of purchases of hospital outreach programs by Laboratory Corp. of America, Quest Diagnostics, and Sonic Healthcare, the pace of acquisitions has only picked up in 2017.

“When someone comes in and offers you a really big number for your lab, it makes you take a pause,” says Jason Newmark, vice president for diagnostic services at Baystate Health, Springfield, Mass. But he thinks many laboratories should not be in a hurry to say yes. “Whether you sell or not should depend on the circumstances of your organization.”

As one of the largest reference labs in New England, Baystate has been approached numerous times by the national commercial labs interested in a joint venture or a purchase. Major competitors of Baystate have already accepted such offers, including UMass Memorial Health Care’s lab outreach and Hartford HealthCare’s outreach operation, Clinical Laboratory Partners, which were bought by Quest over the last few years for “gigantic sums of money.”

First of two parts

Baystate, which has notched double-digit growth in recent years, has so far opted not to sell. Some hospital outreach programs that did sell were experiencing financial challenges and had reached a crossroads, Newmark says. “They felt they had grown as big as they could and to grow bigger would require a big investment.” In contrast, “We feel uniquely positioned as really the last standing large-scale operation in the region that can compete with the national labs.”

Hospital labs’ turnaround-time advantage over the national labs is not as significant as in the past, he points out. “In our region, Quest has a brand-new, state-of-the-art lab on a major highway just outside of Boston, and while turnaround time may have been a problem historically on send-outs, now the testing is really within a one-hour drive of most areas of the state.” Some tests like troponin, D dimers, and those for oncology will always be kept on site, but it’s more difficult to keep the more esoteric microbiology or some of the new molecular testing on site because of the low volume or the expertise needed to run it.

Medicare’s new payment scheme under the Protecting Access to Medicare Act of 2014 could have a multimillion dollar impact on Baystate and other labs, Newmark says. “That forces us to really look at our own efficiencies and processes. Do we have the right equipment? Are we doing the right tests on site? Are we staffed appropriately and processing specimens in an efficient manner?”

Efficiency or growth are the only two alternatives for a lab to offset the losses expected with PAMA, Newmark believes. “Looking at what differentiates us from someone else in the marketplace, we’re focusing on getting an understanding of referral patterns, algorithms to provide clinical decision support, and how we can help people order the right tests that will drive down costs.”

But, he says, “if we can’t efficiently maintain a certain level of service, that’s going to put us in a very different position of maybe saying we should outsource more testing.” Many organizations will struggle as a result of the PAMA cuts, slated to be effective Jan. 1, 2018, if they lack a sound infrastructure and sound space to work from.

Both Quest and LabCorp, Newmark adds, can choose between trying to compete in a market or aligning with hospitals and potentially purchasing their outreach program. The large labs have the money to do that and bring a lot of the testing to their main hubs in North Carolina or New Jersey, and not worry about the competition anymore. “I imagine they’ve run the numbers on it to show that whatever they spend to buy an outreach program, they’re going to make a return on investment pretty quick.”

Newmark

Newmark

However, Newmark suspects some clients have moved on after the recent acquisitions in his region. “We’ve been approached by many clients that used to send work to UMass or Hartford in the past and they’re saying they’re looking for an alternative. I can’t tell you we’re better than Quest, but I think we have a local presence, and a very good, responsive level of service.” At this time, he adds, Baystate is also financially viable, has recently hired additional sales and service representatives, and is seeking efficiencies within the laboratory to streamline its workflow.

Baystate’s relationship with Mayo Medical Laboratories, its reference lab, is not based strictly on bottom line considerations, Newmark emphasizes. “We have a very good synergy with Mayo.” Under the labs’ multiyear contract, “We agree to send them a percentage of our total send-out, so they are by definition our primary reference lab. Mayo is never going to beat Quest or LabCorp on price, but we don’t want to just be a client; we want a partnership, or collaboration where we can look at ways of doing innovative data analytics, utilization management, population health, and so on. We’ve found that partner in Mayo.”

Staff efficiencies are part of the game plan in the takeover deals, he says. “I would assume there’s definitely a loss of jobs and that would be a big concern for us.” As one of the major employers in western Massachusetts, Baystate has about 700 people working in the laboratories, six percent of the organization’s total employees, and many have a long tenure with the system. However, Baystate is carrying out its own plans for streamlining workflows and assessing opportunities to rightsize staffing models, Newmark says.

When microbiology, histology, cytology, and esoteric molecular and genetics testing at all five hospitals were consolidated into Baystate’s core lab, staffing was reduced. “We needed to take an honest and deep dive into staffing and the testing we do on site. For example, we made the very difficult decision to outsource all cytogenetic testing last year, for lack of volume and weak reimbursement. Eight to 10 people were displaced in that decision, but financially it made a lot of sense.” The laboratory saved $500,000 to $600,000 in a year by dropping its in-house cytogenetics testing.

Overall, Baystate’s laboratory removed more than a million dollars of salaries between last year and the current year, even while its year-to-date testing has risen by six to seven percent. “We are improving our efficiencies and finding ways to reduce our non-wage expenses as well. However, the truth remains that our primary expense is people,” Newmark says. “You’re going to have to grow exponentially because everything in the lab is volume to drive down the overall cost of testing. There’s a ‘sweet spot’ where you can bring in lots of volume without having to add people. Then there’s that ‘step function’ where you’re probably going to have to add a little more than you need; then you just have to crash on volume until you get to that next step function.”

Like most outreach programs, Baystate’s program originated with the laboratory’s excess capacity, and Newmark believes the magic question has not changed: “Can you bring in enough volume to take advantage of the capacity?” With the right infrastructure, especially IT connectivity, the market to maintain sales, and the ability to differentiate one’s program from other labs, he says, hospital outreach can thrive.

There’s still room for Baystate’s laboratory to grow. But it has already extended its catchment area all the way to Boston and almost to the border with Rhode Island. “And that creates a whole new set of logistics for us.” Could that be too far? “If we get to the point where we just don’t know if we can compete anymore, or to get to the next level requires capital investment, we may pause and ask should we partner with somebody or do we really, truly have the horsepower to continue on our own?”

In some ways, hospital lab outreach programs are ripe for the plucking, says Stan Schofield, president of NorDx, the core laboratory of MaineHealth in Scarborough, Me. Laboratories are being sold off for three main reasons, in his view. “First, they can’t compete at the much lower reimbursement that’s in store” when PAMA kicks in. Second, many insurers have narrowed their networks for testing providers to just Quest and LabCorp, hindering hospital labs from making a profit on their services.

“And third, hospitals have much higher service and technology demands than revenue coming in, and they may have to have a garage sale somehow. They can’t sell off janitorial or easily outsource imaging and radiology, so the lab is one of the first things to get served up.”

NorDx began 20 years ago as the core laboratory for three hospitals and now serves the 10 hospitals of MaineHealth, a quarter of the hospitals in the state. So it’s been 20 good years, says Schofield, who is co-founder and managing principal of the Compass Group, whose lab members represent more than 500 of the nation’s most prestigious hospitals and health systems. He is proud of the process improvement that has taken place at NorDx and believes it has given the lab the resources to fend off bids from Quest and LabCorp, which have knocked at the door several times. “We’ve reduced costs 15 to 20 percent below what the hospitals used to run their labs for, and we’ve standardized equipment, information systems, procedures, and staff training and competency. All those things Quest and LabCorp say they will do to improve operations, we’ve been doing successfully.”

CAP TODAY
X