Will hospital outsourcing target labs next?

Hospitals have been outsourcing a lot of services in recent years. If you walk into a major medical center in virtually any sizable city in the country, its cafeteria and food kiosks are being run by major outside vendors such as Marriott or Sodexo.

However, there are financial pressures on hospitals to outsource clinical services as well. And based on an investor's meeting held in New York last week by Quest Diagnostics, laboratory services may soon be added to this outsourcing trend.

Quest is the largest national laboratory in the United States, with revenues approaching $8 billion a year. It brought in a new chief executive officer earlier this year and is in the midst of shaking up the rest of its executive staff.

Quest has made two major moves in the hospital field this year. In January, it acquired S.E.D. Medical Laboratories from Lovelace Health System, the Albuquerque-based hospital operator. Last month, it entered into an agreement to buy the clinical outreach laboratory business from UMass Memorial Health Care system in Worcester, Mass. Quest plans to build a new lab in the region to handle UMass Health's volume along with its own. Altogether, it has six joint ventures with hospitals in the United States.

It won't stop there, based on remarks made at the investors' meeting by Quest Chief Medical Officer Jon R. Cohen, M.D. Cohen, a vascular surgeon by training, joined Quest in 2009. Prior to that he was a former top-ranking executive at North Shore-Long Island Jewish Health System and implemented many outsourcing changes that proved to be both beneficial to the bottom line of the system and those of the outside contractors. He noted, for example, that the Au Bon Pain at Long Island Jewish Medical Center is the second-highest grossing store in the entire chain (the fast food chain has kiosks at about two-dozen hospitals nationwide and at the National Institutes for Health).

"There are sitting CEOs and COOs at hospitals asking, 'how do I increase my revenues? How do I decrease my costs?" Cohen said. "We can go in and reduce their fixed costs, reduce their variable costs and increase their cash flow."

By using Quest's economies of scale for supplies and equipment purchasing and moving hospital lab employees to their payroll, it promises to cut between 8 percent and 20 percent of the costs of running a laboratory from a hospital's bottom line, Cohen added.

"We believe hospital lab outsourcing is the future," he said, adding the company would focus on the roughly 2,700 hospitals with between 100 and 500 beds.

Industry analysts have noted Quest and other major national laboratory, LabCorp, have bought up most of the large and medium-sized independent labs. That leaves primarily the hospital-operated labs. They comprise more than 50 percent of the market--a segment ripe for outsourcing and takeover.

So, if you're a hospital CFO, don't be surprised if the phone rings in the near future and a big national lab wants to talk turkey. - Ron (@FierceHealth)

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