Developing Lab Outreach Programs and Then "Flipping" Them

The Hospitals and Health Networks web site posted an article recently about lab outreach programs (see: The profit potential of Hospital Labs). Read the whole article -- it's worth your time. The portion of the article that caught my attention dealt with the tendency of some hospitals to "flip" their outreach business (i.e, sell it to a commercial reference lab) to acquire ready cash. Below is an excerpt from the article that addressed this topic (boldface emphasis mine):

Once a hospital lab has built an outreach program into a major regional player, there’s another step to consider: “flipping” the program by selling out to one of the national players. In late 2007, for example, LabCorp purchased three hospital outreach programs—PA Labs, Muncie, Ind., partially owned by Cardinal Health; Midwest Clinical Laboratories, a for-profit lab owned by Wheaton Franciscan Healthcare, Glendale, Wis.; and DSI Laboratories, owned by NCH Healthcare System of Naples, Fla....Some people may disdain the idea of selling something they’ve worked hard to build into a viable, revenue-generating business, especially to a fierce competitor. But [a lab executive commented that] hospitals with viable outreach programs owe it to themselves to at least evaluate the situation....Better yet, [he] notes, most of those purchases don’t involve any real assets; the acquirer is buying the hospital’s outreach customer list, while the hospital inpatient lab continues to run. After a standard noncompete period (usually five years), that lab can start doing outreach again.

I believe that it would be a major strategic error for a hospital lab to develop a successful outreach program and then sell that asset to a national reference lab. For me, such an action illustrates the short-term thinking of many hospital executives. Below is a list of reasons why I believe a successful lab outreach program should be both retained and nurtured as part of a hospital portfolio:

• Selling a successful outreach program to Quest or LabCorp is tantamount to inviting an aggressive competitor to camp out on one's doorstep. No astute executive would pursue such a strategy. In Business 101 you are taught that you buy strategic assets to keep them away from competitors -- you don't sell them to competitors.
• Economies of scale and optimal utilization of resources are an important component of the clinical lab business. Most labs have unused test capacity. To quote from the article cited above: A hospital already must spend a lot of money to staff and equip its laboratory 24 hours a day; in economics, this is called the sunk cost. Since the cost of performing additional tests [variable costs] is relatively low, most of the revenue generated from lab outreach theoretically goes straight to the bottom line.
• In my view, medical diagnosis is rapidly moving to the center of the stage as a critical component of healthcare delivery. I have posted many notes about this process (see: early health model, molecular medicine, full service diagnostics). Diagnoses will increasingly be developed in ambulatory care and office settings. A lab outreach program thus forms a critical link in the healthcare continuum.
• When a hospital lab develops an outreach program, lab personnel are exposed to the more service-oriented approach to physicians that is the norm in this competitive industry, an attitude often lacking in many hospitals. Such a service mentality tends to be contagious -- the entire hospital lab operation is improved.
• There are a host of compelling arguments for integrating test results obtained in physician office settings into hospital LIS databases. Such integration links community physicians to the hospital and promotes continuity of care.

Comments

[J Oppenheimer]

The outpatient physicians generally decide to send their specimens to the lab which can kick-back the most to them in the form of free office staff (i.e., "phlebotomists"), computer software , mark-up opportunities, placements of in-office pathologists, charitable donations, or payoffs to family members). Commercial salesfolks are more likely to comply with the outlandish requests of clinicians than are hospital employees with a different ethos.

It's not that hospital outreach programs see a chance to make some much needed cash; its more likely that they just can't compete.

http://ethicalpathology.blogspot.com/

[anonymous pathologist]

Or, the hospital system could do what my former one did, and outsource the entire laboratory - lock, stock and barrel, to Quest. Talk about losing strategic assets....