Independent lab companies have continued their transaction spree in 2024, either by forming partnerships with hospitals and health systems or by outright acquiring some of their lab assets.
Quest Diagnostics has announced seven acquisitions this year, including its recent purchase of select lab assets from Minneapolis-based Allina Health. Slated to close later this year are deals with OhioHealth in Columbus and University Hospitals in Cleveland.
Related: Quest Diagnostics' Jim Davis on why the company is buying labs
Meanwhile, Labcorp has closed three acquisitions this year, with Springfield, Massachusetts-based Baystate Health, Renton, Washington-based Providence Health and Services and Naples, Florida-based NCH Healthcare System. It recently announced plans to acquire the lab assets of Johnson City, Tennessee-based Ballad Health in a deal expected to close in December.
Here’s what to know about the consolidation underway as providers negotiate transactions with independent lab companies.
Why are lab companies on the lookout for deals?
Both Quest and Labcorp are looking to grow by finding hospital and health system partners, primarily in markets where the number of independent physicians is dwindling.
“In order to grow our business, we want to be able to do more work with hospitals that are doing outpatient or outreach lab tests ordered by independent physicians outside of their facility,” said Jim Davis, president and CEO of Quest Diagnostics. “If we go into a market, such as where we're doing this work, the characteristic of each marketplace is that there's not many independent physicians. Most of the primary care and obstetrics and gynecological physicians are employed by a health system."
Bryan Vaughn, Labcorp's senior vice president of health systems, said the move to expand began during the COVID-19 pandemic and has continued.
“There really was a spotlight put on [independent] labs because testing for COVID-19 was such an important issue and all health systems realized the importance of their laboratories or their laboratory partnerships to have access to testing,” Vaughn said. “But if you fast forward to now, health care costs just continue to go up, so finding ways to sustainably lower costs to make things more accessible for patients is just hard to do. These laboratory partnerships are a tangible way to achieve cost savings and health access and equity without sacrificing things.”
Why are hospitals selling some lab assets?
The transactions benefit providers in a few ways. It helps them reallocate financial resources from back-end operations to clinical care delivery. Also, health systems are rapidly opening ambulatory care facilities and the partnerships can mean offering access to lab testing without the upfront investment.
Separately, the pace of technological advancements in lab testing and services is quickening, and keeping up with it could become a financial drain on a hospital.
How will this affect patients?
Ideally, the partnerships and expansion could mean greater access to testing and shorter wait times and potentially lower copayments for tests done by an independent lab.
OhioHealth, which in July agreed to sell select outreach lab assets to Quest, said both the healthcare system and its patients will benefit.
“Quest has the size, infrastructure and capabilities to achieve economies of scale and drive competitive price points to achieve lower costs, which will benefit our patients,” the health system said in a statement. “National labs, like Quest, also have significant product offerings and have the capacity to manage a high volume of tests. “
How do the deals affect insurers?
Insurers like the cost efficiency, which is largely due to independent labs’ ability to focus solely on testing and the scale of their operations, said Courtney Midanek, managing director of Kaufman Hall.
“There's so much fixed cost related to these labs, that, if you can imagine, you're doing 10 million tests today. Now you're going to do 12 million because you bought 2 million from [a health system.] You don't really have to add that much cost to do that," Midanek said.
Some insurers, seeking to avoid the higher costs associated with working with hospitals, are pushing patients and providers to work with labs, said Brad Ellis, Fitch Ratings' senior marketing director of North America insurance ratings. "There's a lot of situations [where] they incentivize patients to go to these individual labs to have tests done that don't have to be done at the hospital," he said.
How have these transactions worked out?
The rollouts have not been without obstacles that have included the availability of tests, length of time to get results and trouble entering or ordering labs in electronic health record systems.
“The anecdote that I often hear is health systems that have a lot of this business in-house, they deliver on turnaround time,” said Kaufman Hall's Midanek “You go in for your annual checkup, and they draw your blood at 10 a.m. and you get your results back at 5 p.m. Under [these labs] they're going to be shipping these samples to some of their large labs, and maybe you won't get your results until 8 a.m."
Some employees at Allina Health have complained the system's recent transition to Quest has caused multiple problems.
In separate statements, Allina and Quest said while the rollout has not gone as smoothly as planned, the two organizations have been working to fix issues, including by adding more Quest employees in labs and improving the IT systems used to order tests.
What's next?
The general sentiment is the consolidation is expected to continue, given the potential financial benefits for providers, patients and payers. “[It] seems like there's a fair amount of these outreach assets that could be acquired," said Fitch Ratings' Ellis.
