Management of Pathology Practices
Hospital Outreach Laboratory For Sale
Who’s Buying Now?
By Mick Raich, Vachette Pathology
There seems to be a growing trend for hospitals and health systems to sell their outreach laboratory business. There is an attitude change in the industry with hospitals viewing these labs as a tangible asset instead of a “necessary evil.” In most cases these are viable, separate, business units that can be worked to show a tidy profit margin.
According to a 2005 survey conducted by Health Care Development Services, Inc., 81% of not-for-profit hospitals operate outreach labs. It is estimated that each of these labs generate $25 million annually.
Hospitals now look at the sale of these labs as an opportunity to raise capital. If you look at the current hospital trends, many hospitals are struggling financially in order to stay competitive in today’s market. The latest trend for quick cash is for hospitals to build successful outreach programs and “flip” them. Some are even selling their histology labs for a quick buck.
In a report titled “Are Hospital Laboratory Outreach Programs For Sale?”, Health Care Development Services did a survey in 2005 and found the need for cash was noted as the single greatest reason to consider selling lab outreach programs.
Reasons for considering sale:
Cash Infusion: 40%
Does not fit mission: 20%
Management difficulties: 13%
Regulatory impact: 7%
Selling these lab services has a two fold effect. First it allows the hospital to gather some direct cash from the sale, and second the hospital receives a significant savings on overhead. As a bonus, the system frees up much needed physical space within their hospitals to expand in other healthcare areas.
A classic example of this was noted in The Dark Report / June 25, 2007, “NCH Healthcare Systems sells to DSL Laboratories, Inc.”
This story reports that the health system chose to sell its laboratory outreach program in order to raise capital that it would reinvest in other areas of the health system’s primary business.
According to a new research report issued by Laboratory Economics, the U.S. anatomic pathology market is forecast to grow an average of 8-10% per year between 2007 and 2011. There were at one time 10-15 large national lab providers that independent labs had to compete with. Today, due to acquisitions and consolidations, there are now three strong laboratory corporations competing on a national scale for this business: LabCorp, Quest Diagnostics and Sonic Healthcare (Australia).
Large commercial labs view hospital outreach programs as liquid income. Remember these are large, publicly traded companies that need to show growth to appease their shareholders. They have been very successful doing so by purchasing hospital outreach and histology systems in an area near you. In 2007, Quest Diagnostics’ income statement posted revenue of $6,705 million which was up 6.9% from 2006. LabCorp’s 2007 revenue was $4,068 million showing a 13.3% increase from 2006. Finally, Sonic Healthcare showed revenue of $1,886 million for 2007, a 14% increase from 2006. Sonic also stated that due to acquisitions in the 2007 year, and those announced after year-end, plus ongoing strong organic growth, their revenue for 2008 is expected to be 20-25% above the 2007 figure.
These national labs and several others are on the lookout for any and all outreach labs that are for sale and regularly have representatives make cold calls to hospitals and health systems with outreach and histology labs to discuss a potential sale. Furthermore they have entrenched themselves as “managers” in numerous labs across the nation so they have an inside approach to these sales. This “rooster in the hen-house” strategy seems to be working quite well.
The argument can be made that these large labs have actually devalued the laboratory industry by selling their services as a price driven commodity. Their ability to provide services on a larger economy of scale model has caused anatomic pathology price wars in many areas.
What to do now? As an independent lab, or a pathology group, it is important to be more aggressive toward the business aspect of a practice and become a powerhouse in the area.
Several options exist:
· Work to investigate the possibilities that exist in your area. There may be an option for your practice or laboratory to purchase outreach from your current hospital or health system. In today’s market, weak stock evaluations from the national labs are likely to lead to lower acquisition prices.
· Develop joint venture business options with the area hospitals and health systems whereas you can capitalize on the beneficial features of both corporations.
· Build working relationships with the national laboratories in your area and become a partner with them as they acquire these businesses.
The trend is towards further consolidation of the outreach laboratory business. Laboratory Economics reports under today’s conditions, buyout prices for routine labs could fall to less than one times annual revenue for routine clinical labs; purchase prices for anatomic pathology labs could fall to less than two times annual revenue. Pathology groups and independent laboratories cannot afford to ignore this trend and must work to find the strategy that benefits them in the future.
Mick Raich is President / CEO of Vachette Pathology, a national pathology and laboratory management and consulting firm. He can be reached for further inquiry toll free at 866-407-0763 or e-mail [email protected]