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All for one, one for all? Laboratory consolidation

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Anne Paxton

June 2016—Consolidation among hospitals and laboratories can sometimes seem like too massive a tide for independent and hospital-based laboratories to effectively resist. What are the advantages that large size provides to a hospital system or national lab in a competitive marketplace? And will there be any space left in which smaller laboratories can survive?

Second of two parts. Last month: Fresh options fuel lab asset reshuffle

In interviews with CAP TODAY, laboratory executives who have been involved in building large hospital labs to fend off competitors or in making the choice to sell to a large national lab suggest that size can bring more than just economies of scale and volume discounts. Among other things, when competition and economic conditions tighten, larger entities have a much easier time shrugging them off, and can be ready to offer a solution for smaller labs that are struggling.

Dr. Lui

Dr. Lui

Alfred Lui, MD, a co-founder of Pathology Inc., recently bought by Laboratory Corp. of America, has built two successful independent laboratory enterprises and sold off part of one and all of the second. In 1980, Dr. Lui and partner Richard Ellis, MD, started an independent laboratory across the street from the hospital to which they provided pathology services. They expanded it to a clinical and anatomic pathology laboratory and simultaneously founded a pathology group that grew from two to 35 pathologists covering 18 California hospitals, then sold the clinical lab business to LabCorp in 2000.

After the non-compete clauses in that deal expired, Dr. Lui built an anatomic pathology only company that, after recapitalization by a private equity firm, focused on women’s health, and restarted a routine clinical lab business that became a head-to-head competitor of LabCorp. But the potential market for Pathology Inc. began to change, making the ongoing sustainability of the laboratory very difficult, Dr. Lui says.

“In our area, there are several large systems, including UCLA Health, Cedars-Sinai Medical Center, and USC Health, buying physician practices, and once they do that, the practice is no longer controlled by individual doctors. Then there were incredible cuts to payment rates, particularly by the Blue Cross affiliate in Southern California. It’s very hard to survive competitively in the outpatient market if you’re not contracted with major insurance carriers.” In addition, Dr. Lui says, it became increasingly hard to compete with noncompliant labs, which he finds to be rife in the region. Where enforcement is lax—as it can be when smaller operations are involved—it becomes a major source of pressure on independent labs trying to survive.

So on the second round, Dr. Lui and partners sold the entire independent lab portions of the business to LabCorp. The associated pathology group with its hospital-based practice remained intact. It was a different corporation and provided services to the independent lab on a contractual basis.

But Pathology Inc. was anything but an early seller. “We were one of the last holdouts. In terms of the pathologist-built, pathologist-owned, and pathologist-operated labs, we were virtually the last one. They are being absorbed by bigger organizations that have lower overhead and can perform tests, because of immense buying power, for fractions of the costs of little labs.”

It’s a phenomenon similar to Walmart’s or Amazon’s takeover of a large segment of the retail business in their segments, Dr. Lui says. But he prefers to analogize the laboratory industry to the food industry. “Despite the big Kroger and Safeway stores with their cost advantages, there’s still room in some markets for some specialty stores like butchers or fishmongers. But what’s happening in the lab business is that the customers who are able and willing to pay for what they might perceive as quality are becoming fewer and fewer. The people who are shopping are primarily interested in price and the convenience of one-stop shopping.”

The trend toward accountable care organizations accentuates these pressures by way of bigger and bigger integrated organizations, Dr. Lui believes.

For hospitals with outreach businesses, it’s looking like the time is ripe to monetize that asset. “It gets very tempting for hospital owners to look at their outreach business as potentially a crop of fruit waiting to be harvested at a good price and sell it. It’s hard to argue with that logic. Hospitals would rather have that cash now because they can reinvest those funds in other higher priority hospital services or infrastructure.” Building a new laboratory will likely fall further down the scale of hospital priorities, Dr. Lui says.

He sees the current wave of mergers and acquisitions as merely the leading edge of a trend that will continue: “The big will get bigger and the smaller will need to consolidate or be acquired.”

On the opposite coast, perhaps an exemplar of that predicted pattern is Northwell Health Laboratories, part of newly reorganized Northwell Health (formerly North Shore-LIJ Health System), headquartered in Great Neck, NY. Northwell Health is one of a few large hospital networks that realized they already had the makings of a commercial partner within their organizations, says Robert DeCresce, MD, MBA, director of clinical laboratories at Chicago’s Rush University Medical Center and the Harriet B. Borland professor and chair emeritus, Department of Pathology, Rush Medical College.

At Northwell Health Laboratories, at ACL Laboratories (Advocate Health Care) in Chicago, and at PCL Alverno in Hammond, Ind., “they’ve decided they can do what Quest would do. They don’t need a commercial partner because they’re becoming commercial labs themselves” by forming one laboratory for all their hospitals, Dr. DeCresce says.

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