1. Access to capital, among other reasons, has led some hospitals to monetize their laboratories. Hospitals provide a multitude of services, but their main bread-and-butter comes from providing exceptional inpatient and outpatient care. As a result, some institutions struggle with managing the other service lines in their business. Hospitals are also now challenged in the current economic environment with finding additional capital for improvement or expansions of current services. Many have considered selling their outreach business and either only retaining or outsourcing their inpatient lab services.
“Today’s hyper-competitive laboratory market requires a very focused and specific effort to ensure profitability and growth,” says Mr. McBurney. “The high volume, low margin, compliance sensitive nature of laboratory services sometimes is beyond a hospital’s core competency.”
Hospitals may have also maximized their outreach in the local community, and they either don’t have the time or the skills to grow the laboratory beyond their immediate service area. Mr. Hirsch adds, “They may also find it less expensive and effective to have someone else worry about the staffing, technology and expertise required, so that they can concentrate on their core services.”
Laboratory revenues, especially the outreach segment, represent an asset highly valued by commercial and independent laboratories. Mr. McBurney notes that “combined with favorable valuations of lab services, selling becomes a desirable option, particularly if the hospital is in need of capital.”
Mr. Hirsch says many hospitals sell their outreach program to improve their balance sheet and bond ratings as well potentially improving their lab services through better connectivity solutions for physician offices an acquirer may possess.
2. Well-established laboratories usually are valued higher. Hospitals will typically benefit the most from selling off their outreach or full laboratory services when they have maximized the potential of their abilities. “Hospitals that have endeavored to grow their outreach laboratory services through marketing and promotion to employed, affiliated and local physicians or clinics have an asset that regional or national laboratory organizations value,” says Mr. McBurney. “These efforts typically leverage existing lab capacity.”
Hospitals with 100 percent of their market will typically receive more money from interested buyers because they will pay for the full value of the marketplace, according to Mr. Hirsch. “A hospital that only has 50 percent of their market will leave something on the table as far as how much money they could realize from selling their services,” he says. “The acquiring party will only pay for the value you have created, so hospitals will not be fully compensated for the value created when and if the acquiring company gains the rest of the market share.”
For hospitals in this situation, Mr. Hirsch suggests considering a joint-venture arrangement with a partner. “They will provide the marketing and sales knowledge, and you can help them by leveraging your local relationships,” he says. Joint-venture partners can include laboratory service companies, hospital pathologists, private equity firms or a combination.
3. Hospitals need to understand the business they are selling. One of the biggest challenges for hospitals looking to monetize their laboratory services is they don’t truly understand the business component(s) they are trying to sell. A big part of the problem is hospitals are not aware of the actual revenues of the services they are considering divesting.
“The laboratory business is usually integrated with the hospital, and the services are billed under the hospital’s tax ID number, which is then sent and tracked through a hospital’s central billing organization, often translating into suboptimal collection and reporting capabilities,” Mr. McBurney says. “Employees in this area are typically geared toward tracking large hospital inpatient bills that can be $10,000-$15,000 versus a laboratory bill that is only $40.” Because of this system, many hospitals can lose track of patient bills and receivables from the laboratory’s activity.
Hospitals that do not have good management information and accounting systems in place, therefore, will be unable to accurately quantify the impact of selling all, or part of the facility’s laboratory revenues, Mr. Hirsch says. “Hospitals need to fully understand their laboratory’s business, because you don’t want to undervalue certain revenue streams. This will also help hospitals understand how selling the whole ‘can of worms’ or just the outreach will effect the hospital overall,” he says.
4. Separate billing and collections are needed for a profitable laboratory business. A key to knowing the true value and impact of selling a hospital’s laboratory services is dedicating the resources to properly track billing and collections, according to Mr. McBurney.
“The laboratory needs to be operated on a separate and clear profit and loss statement, and costs should be monitored closely,” he says. “Hospitals should be able to use available technology to segregate that lab component from the rest of the billing and ideally differentiate outreach revenues from inpatient and outreach activity.”
Once a hospital separates the laboratory’s billing, many issues become more self-evident, such as the challenge of obtaining proper patient demographic information from patients drawn outside the hospital registration system. “It takes discipline to chase down missing information and follow up on every patient on the A/R,” says Mr. Hirsch. “Since there can be hundreds or thousands of encounters on a daily basis, strong operating controls are necessary to effective manage the billing process.”
5. Make sure the laboratory business is optimized if a sale is being considered. As with any other service that hospitals may look to divest, laboratory services, whether only the outreach or the entire lab, should be properly optimized. This includes investing in appropriate resources required to develop a strong service capability and expand market share, according to Mr. McBurney and Mr. Hirsch.
Mr. Hirsch says, “You want to prepare the lab by doing all of the little things that will improve service and increase EBITDA. A well-run and scalable business is more attractive to an outside partner than a lab with potential but many issues. The buyer would rather build on your strengths than to have to manage the risk of rebuilding the business they have acquired.”
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