By purchasing this laboratory outreach business, Quest Diagnostics defends its turf in central Massachusetts and creates opportunity to consolidate testing from three medical lab facilities
Late yesterday, Quest Diagnostics Incorporated (NYSE: DGX) formally announced that had signed a “definitive agreement today to purchase the clinical laboratory outreach business of UMass Memorial Medical Center.” The laboratory is located in Worcester, Massachusetts and the parties expect the transaction to close within 90 days.
For UMass, the sale of its medical laboratory outreach business comes as part of an ongoing effort by UMass Memorial Health Care (UMMHC)—the parent health system—to divest a number of service lines that were in its health ventures division. This included home health and hospice services, along with the medical lab outreach business.
Opens the “Rusckowski Era” for Quest Diagnostics
For Quest Diagnostics, the acquisition is an opportunity for its new CEO, Steve Rusckowski, to demonstrate a new strategy and direction for his company. In recent years, Wall Street Analysts have been critical of Quest Diagnostic’s ability to grow, both in specimen volume and revenue. Rusckowski would like to establish that a new regime is firmly in control and capable of delivering significantly better financial performance.
A sales price was not announced. Dark Daily believes that UMass Memorial Laboratories, Inc., as the business is known, had annual revenues of about $90 million. However, if the laboratory was billing with UB-40 claim forms, then the value of these specimens will be much less to Quest Diagnostics, which uses the CMS-1500 claim form—as much as 40% to 50% less.
In fact, with health insurers across the nation pressuring hospital laboratories to accept much lower prices, such payer price pressure probably is one reason why UMMHC was motivated to sell its lab outreach program at this time. In that regard, pathologists and clinical laboratory managers at other hospitals and health systems may want to learn more about the circumstances that led this health system to sell what, by all outward appearances, had been a steadily-growing outreach business.
In January, 2012, UMMHC’s CEO, John G. O’Brien told the Worcester Business Journal that UMass had enjoyed premium prices for the ancillary services in its health ventures division. But, “recent scrutiny of price variations among providers has put pressure on the venture arm,” wrote reporter Matt Pilon in his story. O’Brien explained to Pilon that, “What’s happening with some of the ancillary services, like lab and imaging, you’re seeing that the business community and insurers no longer want to pay that premium.”
Looking at the possible motivations of Quest Diagnostics, there are several circumstances that likely played a role in its willingness to outbid other buyers:
First, Quest Diagnostics has two laboratory facilities operating within a short drive of the UMass laboratory in Worcester. One is the Athena Diagnostics lab, also in Worcester. The other is the Quest Diagnostics lab in Cambridge.
Consolidating Clinical Laboratory Testing into Single Lab Facility
Second, the addition of the UMass specimen volume creates an opportunity for Quest Diagnostics to consolidate all this testing in a new facility. That fact was confirmed in the press release, where Quest Diagnostics declared that, within 18 to 24 months, it expected to have a new laboratory facility up and running that would consolidate testing from these three sources.
Third, with its purchase of UMass Memorial Laboratories, Quest Diagnostics has removed its toughest competitor in the mid-Massachusetts region. Over the past 15 years, much of the specimen volume and revenue that fueled the growth of the UMass outreach lab came from former clients of Quest Diagnostics.
Fourth, both UMMHC and Quest Diagnostics indicate that the door is open for further collaboration between the two organizations. In the coming age of accountable care organizations (ACO), Quest Diagnostics may have found a way to be included in the provider team that makes up any future ACOs that involve UMMHC.
Fifth, this deal creates an opportunity to Quest Diagnostics to use its low-cost advantage to secure the lab testing business it is buying, while leveraging its economies of scale to win additional specimen volume throughout the region. In its press release, Quest Diagnostics mentioned “lowest cost delivery model” as one benefit that would accrue because of its future collaboration with UMMHC.
Not Likely to Be Opposed by Anti-Trust Regulators
One interesting aspect of this transaction is whether any anti-trust considerations will come into play. Across New England, Quest Diagnostics has held a significant share of the market for the lab test referrals from office-based physicians. Laboratory Corporation of America (NYSE: LH) has not made major inroads in this region. And, as noted above, UMass Memorial Laboratories had carved a sizeable share of the central Massachusetts market for itself over the past fifteen years that will new shift to Quest Diagnostics.
Historically, the Department of Justice and the Federal Trade Commission have seldom challenged a laboratory acquisition announced by any of the nation’s larger clinical laboratory companies on anti-trust grounds. However, that could change anytime anti-trust regulators decide that market concentration has reached unacceptable levels.
What is true is about the acquisition of UMass Memorial Laboratories is that, in a pattern that is different from recent years, Quest Diagnostics was willing to outbid other interested buyers for what is one of the few remaining sizeable independent clinical laboratory organizations. In that regard, it may be that Rusckowski has set his first marker on the table to serve notice that, going forward, the lab marketplace will see a very different Quest Diagnostics, compared to recent years.