Attendees Given Insider’s Look at a Hospital Laboratory Joint Venture

Hospital systems are increasingly exploring joint ventures as a means to monetize some of the hospital outreach laboratory’s assets without exiting the business.

Attendees at G2’s 36th annual Laboratory Institute (Oct. 24-26; Washington, D.C.) were treated to an insiders look at the development of Constitution Diagnostics Network joint venture from three unique perspectives: the hospital, the commercial laboratory, and the lawyer.

As health systems examine ways to monetize the hospital laboratory, there is a spectrum of possible arrangements, ranging from shared testing arrangements, contractual arrangements (like those for management services), and joint ventures, with joint ventures sharing the highest degree of both financial and clinical integration.

“It was a frustrating process to grow,” said Paul Fiedler, M.D., chair of the Department of Pathology and Laboratory Medicine at Western Connecticut. “We reached the limits of what we can do on our own.”

The hospital outreach laboratory at Western Connecticut Health Network knew it needed to change its structure, but didn’t know if going to sell or enter a management agreement.

“It is pretty typical for laboratories to not be absolutely sure what direction to go in,” explained Noel Maring, vice president of hospital affiliations at Sonic Healthcare USA. “We don’t use cookie cutter approach because if you’ve seen one joint venture, you have seen one joint venture.”

Sonic’s strategy was to design the partnership to scale global cost structure and resources to reduce lab costs. Specifically, Sonic proposed leveraging economies of scale through centralization at a core lab and additional outreach growth. Further, the joint venture could leverage Sonic’s global cost structure, commercial and technical knowledge, and its outreach tools, including sales and marketing resources, electronic medical record interfaces, and outreach billing.

Constitution Diagnostics Network began operations in April 2017. Sonic has a 51 percent ownership stake, but the board is a 50-50 split with Western Connecticut. Testing has been centralized at Danbury Hospital core lab, with more than 90 percent of testing performed at Western Connecticut hospital labs for both patient convenience and more rapid turnaround times.

“We basically just bolted on our pre-and post-analytical capabilities to the hospital labs and ended up with a program that is competitive with commercial labs,” said Maring.

Maring says that the benefits to Sonic include:

• Greater access to a new geographic market
• Additional reference laboratory volume opportunities to enhance its esoteric capabilities
• Joint venture profits for years to come

In the first year, the joint venture reduced supply costs by more than $1.5 million.

Fiedler adds that Western Connecticut sees benefits in

• Sharing cost savings for inpatient/outpatient testing services managed or affected by Constitution Diagnostics
• Retaining lab licenses and staff
• An immediate cash infusion
• Preferred contracting and premium service from lab vendors
• Access to expertise in lab medicine, lab management, and population health (test utilization), as well as client services
• Enhanced outreach information technology and electronic medical record integration

David Gee, a health care attorney at Davis Wright Tremaine LLP, cautions the two biggest legal issues in forming a joint venture are anti-kickback and antitrust risks. He says, “You must make sure there is balance. Both parties provide something to more efficient delivery of testing and management of testing and both parties bear risk.”