MemorialCare Health System Ponders Future For Outreach Labs in Challenging Market

When should a hospital laboratory commit all out to its outreach services? That was the question posed by Hugo Folli, vice president of ancillary services at Saddleback Memorial Medical Center in Laguna Hills, Calif., during G2 Intelligence’s recent Volume to Value conference in Fort Lauderdale, Fla. The answer: When competitive pressures dictate it. Saddleback is not a standalone facility; it is part of MemorialCare based in Fountain Valley, a six-hospital system that is the primary acute health care player in southern Los Angeles and northern Orange Counties. “The area is not very consolidated” compared to other parts of the Southern California market, Folli observed. Nevertheless, it still has formidable competitors such as Kaiser Permanente’s system of both hospitals and medical groups. This prompted MemorialCare to recently purchase a medical group that is now rapidly growing. “Our market is changing quickly,” Folli said. Offering outreach laboratory services is the way to accomplish market differentiation, he added. Both Saddleback and Long Beach Memorial Hospital, MemorialCare’s flagship facility, operate labs that provide outreach services, with both under different management. Although they are less than 35 miles from one another and the Long Beach lab is nearly five times larger than Saddleback’s, neither has a lot of territorial overlap. Combined they cover a 25-mile-wide by 70-mile-long band from about Los Angeles International Airport to the boundaries of San Diego County. They perform about 2.2 million outreach tests annually and realize annual revenue of about $45 million. Altogether, the labs have a 22 percent market share for outreach—a number that offers a lot of growth potential, particularly given they have the capacity to double their volume. But whether or not the labs can compete against the region’s two big players—LabCorp and Quest Diagnostics—remains a question mark. Provider surveys undertaken by an outside consultant placed MemorialCare’s outreach services near the two national labs’, but they still fell short. And even though the parent system had acquired a medical group, Folli said those newly affiliated providers see lab services as a commodity to be chosen primarily based on cost—a focus being redoubled by the region’s payers. Moreover, Long Beach’s outreach volume began to stagnate about 18 months ago. Folli said MemorialCare was approached by an unnamed national lab with offers to upgrade its IT system, and Citi to monetize its lab operations. The latter would yield about $30 million—money MemorialCare did not need, and a sale would likely require the hospital lab operations to perform more sendouts and see its turnaround time increase. Maintaining the status quo would mean a likely loss of 10 percent to 15 percent of outreach volume annually in the coming years, explained Folli. However, making investments in outreach would likely lead to higher prices on inpatient lab services. “We can’t stay where we are,” Folli said. “In five years, we’ll be out of business or just a ‘mom and pop’ operation.” Three Options That leaves MemorialCare with three options: Divest its outreach business, joint venture, or pursue a growth strategy on its own. A joint venture seems unlikely due to lack of interest. The system is considering beefing up its laboratory IT, consolidating operations and switching its outreach billing from hospital rates to a more competitive independent lab fee schedule. It is also communicating with other unnamed parties for a potential deal. “The story is not done,” Folli said.