ARE HOSPITAL LABORATORY
OUTREACH PROGRAMS FOR SALE?
(FALL, 2005)

As part of our representation of our clients, we regularly poll senior hospital and healthcare system executives to learn their perspectives concerning laboratory and pathology issues facing their organizations. Recently, we conducted a survey of hospital and healthcare system Chief Executive Officers, Chief Operating Officers, Chief Administrative Officers, Chief Financial Officers, and Vice Presidents with responsibility for the laboratory. The survey focused on their awareness and views regarding merger acquisition activity involving hospital-based laboratory outreach programs.

SUMMARY OF FINDINGS
Survey responses represent about 7% (181/2500) of all non-military, non-government hospitals with more than 100 staffed beds. Only 51 respondents had been approached to either merge or sell their hospital-based laboratory outreach programs, and of those approached, only 6 (12%) believe that there is greater than a 50% possibility of actually closing a deal

Based on the survey results, we have concluded that there is little interest merging or selling hospital-based laboratory outreach programs at this time. However, if the outreach laboratory marketplace experiences major disruptions (i.e. Medicare Competitive Bidding, managed care plan delegation of laboratory intermediary responsibilities to a commercial laboratory, etc.), it may significantly impact interest in merging selling laboratory outreach programs.

SURVEY RESULTS
We received responses from 181 hospital and healthcare system executives representing providers from across the country. The majority of respondents were Chief Operating Officers, Chief Administrative Officers, or Vice Presidents (65.2%). Most respondents work in healthcare systems where staffed beds exceed 200/hospital. The majority of respondents (58.6%) worked in healthcare systems where staffed beds exceed 300 beds/hospital.

The vast majority of respondents (81.2%) operate laboratory outreach programs. While most lab outreach programs have been in operation from 1-5 years, others have been in operation for over ten years. Interestingly, more than half of survey respondents indicated they had not validated outreach program profitability. For those respondents who had calculated program profitability, more than half found that operating margins (before indirect expenses and UBIT) were less than 20% of net sales.

When asked about their awareness of laboratory outreach program merger and acquisition activity, more than 70% of respondents indicated that they were not aware of any activity. Except for a few laboratory industry newsletters, most hospital and healthcare system executives had not read about lab outreach program M and A activity.

Of the 181 respondents however, 51 (28.2%) had been approached to either sell or merge their laboratory outreach program. The majority of organizations that have been approached include hospitals with more than 300 staffed beds. As shown in the following table, the type of businesses courting hospital and healthcare system executives include commercial laboratories, venture capital firms, as well as other healthcare systems.

Organization Courting Healthcare System	Purpose of Courtship Merge          Sell          Too Early To Tell
Commercial Laboratory	67%	19%	14%
Venture Capital Firm	NA	74%	26%
Other Healthcare Systems	78%	0%	22%

Most often, cash infusion was noted as the single greatest reason to consider selling lab outreach programs. As presented in the table below, other reasons included misfit with mission and difficulty managing the program.

Reasons For Considering SALE	%
Cash Infusion	40.0%
Does Not Fit Mission	20.0%
Management Difficulties	13.3%
Regulatory Impact	6.7%
Other	20.0%

Not unexpectedly, hospitals and healthcare systems considering merging their lab outreach programs want to expand their markets while taking advantage of production economies of scale.

Reasons For Considering MERGER	%
Expand Markets	53.6%
Take Advantage of Economies of Scale	32.1%
Develop More Professional Management	7.1%
Other	7.2%

Not withstanding current, on-going merger and acquisition discussions, less than 15% of respondents believe there was greater than a 50% probability of closing their deals. Most respondents indicated they had little confidence in the financial projections of both merger and acquisition arrangements.

Respondents’ comments ranged over a variety of issues including difficulty in determining lab outreach program operating margins, how national commercial laboratories may be vulnerable in the marketplace, and the possible impacts of Medicare and managed care plan national contracting for laboratory and pathology services. Interestingly, a number of respondents voiced concern about the fact that a lab "consulting" firm (not HCDS) is linked to a commercial for-profit laboratory. Several survey respondents indicated they would never work with a consulting firm partnering with a commercial laboratory.

SUMMARY
We hope you find the attached report interesting and informative. If you would like to discuss the survey results, please call Mr. Barry Portugal, President of Health Care Development Services, Inc. at 847-498-1122.