When a group of investors founded MedLab in 2007, the intent was to morph a small group of laboratories in Midwest enclaves such as Cincinnati and Terre Haute, Ind., into a national presence. Although MedLab stretched itself into eight states and the District of Columbia and grew its workforce to more than 1,000 employees, reality snapped it back down to earth. Relentless cuts in reimbursement from the Medicare program caused a cash flow crunch and missed debt payments. That prompted MedLab to shed its physician outreach business last summer as part of an intended restructuring. LabCorp quietly snapped up the business last June for $10.7 million and additional payouts that may total $1.2 million. Much of MedLab’s leadership departed right afterward due to a disagreement with its board of directors—the company’s current chief executive officer suggested the sale price was lower than what had been envisioned. Its investors also decided they could no longer continue funding expansion. As a result, MedLab’s parent company, Laboratory Partners, and its subsidiaries filed for Chapter 11 bankruptcy protection on Oct. 25. It listed about $32 million in secured and unsecured debts. While it appeared on the face of it that MedLab was going to […]
When a group of investors founded MedLab in 2007, the intent was to morph a small group of laboratories in Midwest enclaves such as Cincinnati and Terre Haute, Ind., into a national presence.
Although MedLab stretched itself into eight states and the District of Columbia and grew its workforce to more than 1,000 employees, reality snapped it back down to earth.
Relentless cuts in reimbursement from the Medicare program caused a cash flow crunch and missed debt payments. That prompted MedLab to shed its physician outreach business last summer as part of an intended restructuring. LabCorp quietly snapped up the business last June for $10.7 million and additional payouts that may total $1.2 million.
Much of MedLab’s leadership departed right afterward due to a disagreement with its board of directors—the company’s current chief executive officer suggested the sale price was lower than what had been envisioned. Its investors also decided they could no longer continue funding expansion.
As a result, MedLab’s parent company, Laboratory Partners, and its subsidiaries filed for Chapter 11 bankruptcy protection on Oct. 25. It listed about $32 million in secured and unsecured debts.
While it appeared on the face of it that MedLab was going to use bankruptcy filing in federal court in Delaware to regroup and reorganize, Chief Executive Officer Bill Brandt said that’s not actually the case. Instead, MedLab’s last two significant assets are on the block. They include its long-term care testing business and significant lab operations in Terre Haute, where it services Union Hospital. Both are in such high demand that Brandt expects the long-term care piece to be sold by next month and the Terre Haute operations sometime in January.
“Everything will be sold; we’re assembling the proceeds and performing a Chapter 11 liquidation plan,” said Brandt, who is also chief executive officer of Development Specialists Inc., a prominent Chicago-based firm that specializes in corporate turnarounds and workouts and was retained by MedLab earlier this year.
One of MedLab’s original lenders, Marathon Special Opportunity Fund LP, is providing a $5 million debtor-in-possession line of credit for the company to continue operations. Some $2.85 million was drawn down immediately, in part to make the Nov. 1 payroll, according to the legal publication Law360. Brandt said Marathon is owed slightly more than $20 million.
The story of MedLab’s demise is not uncommon these days, as labs are facing declining utilization, cuts in reimbursements from payers such as Medicare, and steerage to preferred labs from private payers, according to Michael Snyder, principal with Clinical Lab Business Solutions, a New York-area consulting firm.
Add to that MedLab’s business concentration: “They were heavily into testing for nursing homes, which is a high-service, low-profit business,” Snyder said. Other industry observers noted that the cuts in skilled nursing facility payments have been so steep that it is unclear whether that segment will be appropriately serviced in the future.
As to why MedLab’s assets are in high demand when it couldn’t cut it as a whole entity, Brandt attributed it to economies of scale.
“We started out in a regional footprint and tried to staff out for a national footprint, and we never got there,” he said. As a result, the remaining assets would be attractive to a national player looking to add on for minimal cost, or a smaller regional player that could use cash flow to cover its overhead and try to expand. With MedLab “between and betwixt” those two scenarios, it could not continue making a go of it, according to Brandt. He suggested that a “household name” in the lab business would play a role in the pending transactions.
The only other alternative for MedLab was to continue to contract, eventually ceasing operations and putting all of the employees out of work, Brandt observed. Dismantling was the preferable legacy for everyone—except the company’s original founders.
“A great number of jobs will be preserved,” Brandt said.
Takeaway: The current business environment for labs is stifling the growth and dreams of newer players.
