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Sonic Healthcare JV Providing Competitive Boost to Western Connecticut Health Network Labs


NEW YORK (360Dx) – Nearly two years into a joint venture lab agreement with Sonic Healthcare, Western Connecticut Health Network has begun to see cost and efficiency gains that enable it to better compete with commercial labs, hospital lab officials said.

The agreement between Sonic Healthcare and Western Connecticut, first announced in February 2017, resulted in the creation of Constitution Diagnostics Network, a joint venture lab network that combines the clinical and anatomic pathology testing capabilities of Western Connecticut's three community-based hospitals – Danbury Hospital, Norwalk Hospital, and New Milford Hospital, with esoteric testing capabilities offered by Sonic Healthcare USA through its Sunrise Medical Laboratories and other affiliated Sonic laboratories. Constitution Diagnostics network began operations in April of 2017.

The transformation of Western Connecticut's lab services to the new Constitution Diagnostic Network is still a work in progress, Western Connecticut and Sonic officials said.

"It's not a home run yet but we think it's going to be a very good home run," said Noel Maring, vice president, hospital affiliations, for Sonic Healthcare USA said during a presentation at the G2 Lab Institute conference in Washington, DC last week.

But changes that have been made so far have already begun to better position the lab services to compete in the market.

"We have improved client services; we have better relationships with payors; we now feel that we can be competitive with commercial labs in our area," said Paul Fiedler, chair of the department of pathology and laboratory medicine at Western Connecticut and chairman of the board of Constitution Diagnostics Network.

The new Constitution Diagnostics Network was constructed around a three-pronged approach for improving efficiency, reducing cost, and growing opportunities for lab testing, according to Maring and Fiedler.

"We structured out proposal for the joint venture with really three key areas," Maring said. "That is leveraging economies of scale through centralizing more work in the Danbury core laboratory, growing the outreach business to bring in more volume, and leveraging Sonic's global cost structure and lab knowledge to improve processes and streamline operations within the hospital."

For the first priority, Sonic saw opportunities to improve economies of scale by better integrating the three hospitals and their use of the core lab at Danbury Hospital. The core lab offers microbiology, cytogenetics, immunology, molecular diagnostics, and flow cytometry testing, Fiedler said. Two of the hospitals' lab services were well integrated, but the third hospital was not, presenting opportunities to improve efficiency through better integration, according to Maring.

In addition, Sonic advised Constitution Diagnostics to find further efficiencies by moving some outreach testing into the core lab.

"We knew there were additional opportunities to reduce unit cost per test through economies of scale by actually bringing more work into the hospital from the outreach environment," he said.

The outreach business is being strengthened through the addition of outreach support services, including an outreach sales team and client support. "We have a person who drives between all physician offices and there are 63 offices in our medical group," Fiedler said. "We never had a client services person before this ... but this has really improved satisfaction among customers and clients."

Constitution Diagnostics has begun to leverage Sonic's larger negotiating power in interactions with vendors, he added, noting the lab venture has implemented new chemistry and immunochemistry analyzers. He declined to name the analyzers' manufacturers.

"We were not getting all the attention that we needed and deserved from manufacturers until we partnered with Sonic and we really got their attention," he said.

Constitution Diagnostics has also drawn from other Sonic professional support services, Fiedler said. Constitution Diagnostics' website was created much faster than it would have been using the hospital's marketing services, and the venture has also benefited from Sonic's broader experience in payor interactions.

"When [payors] come out with an edict regarding prior authorization, in the past something like that would have overwhelmed us. Now we can make a phone call to our partners at Sonic and ask them what is happening across the country," Fiedler said.

The partnership is starting to deliver quantitative results, Maring said. The venture has reduced supply costs by more than $1.5 million since its formation and he expects that number to climb. In addition, the venture hit 98 percent of its budget targets in its first year, he added.

While Western Connecticut is seeking efficiencies, the venture has benefitted Sonic through higher reference testing volumes and greater access to the Connecticut market, Maring said.

But the venture has also faced challenges, Maring and Fiedler acknowledge.

IT integration was slower than anticipated because of a major Cerner PathNet lab information system upgrade, Maring said. As a result, the connection of some of Sonic's preanalytic and post-analytic services was a slower than expected. These services include client services and specimen delivery services on the preanalytic side, and connectivity to electronic medical records, web-based reporting, billing services and financial management on the post-analytic side.

Western Connecticut also faced challenges aligning the management structure of the hospital with the joint venture.

"It's hard for us to get the attention we need for our joint venture from other partners within the hospital that we are dependent upon," Fiedler said. "Obviously we are hugely dependent upon HR, IT, legal services and finance, and getting the information that we need in a timely way to move forward is a challenge. We are still very much embedded within a hospital bureaucracy," he said.

A shared management structure

Constitution Diagnostics is 51 percent owned by Sonic and 49 percent owned by Western Connecticut.

"That was based on fair market value evaluation and also consideration of what assets would be contributed by each party," according to Fiedler. While financial terms of the arrangement were not disclosed, Western Connecticut received a significant "cash infusion" at the onset of the agreement, according to Fiedler.

"We had a very challenging year a couple of years ago, so this really helped the entire institution weather that storm," Fiedler said.

The board overseeing the venture, is split 50-50 among representatives of Sonic and Western Connecticut, and all key board decisions require unanimous consent, said Fiedler, who is currently chairman of the board. When his two-year term expires, he will be succeeded by a Sonic representative who is also a pathologist, in keeping with the venture's goal of physician leadership.

Western Connecticut retained the CLIA licenses for its labs, which was a priority for the health system, Fiedler said. In addition, the health system's employees did not want to feel that they were being "sold off." As a result, Western Connecticut employees have remained employees of the hospital network, and a single outside manager from Sonic was brought in to oversee lab operations.

Fiedler describes part of the network's revenue sharing as a "shared services model."
"We know what our expenses have been in the past, and anything Sonic can do to help us bring down our costs basis, we split the difference evenly," he explained.

Sonic has formed several joint ventures with hospital groups around the country, most recently, with ProMedica Health System in Ohio. The joint ventures are all different from each other, Maring said.

Hospital and commercial lab joint ventures can involve complex navigation of federal and state kickback and antitrust rules, according to David Gee, a partner in the firm David Wright Tremaine, who was hired as Sonic's outside counsel for the joint venture. Under Sherman Act antitrust rules, for example, labs are not supposed to talk with other labs about pricing, he said. However, the Sherman Act's Rule of Reason permits arrangements that are valued in terms of their consumer interests, in this case patient care. The Constitution Diagnostics venture avoid compliance risk through tight integration, according to Gee.

"The key to the Rule of Reason is integration. It's the same with the anti-kickback statue. Bringing [two entities] together in a way that's financial and clinically integrated avoids risks on both counts," he said.

In addition to outside counsel, Sonic's in-house counsel and the company's chief compliance officer also vetted the agreement, Maring noted.

Joint venture versus outsourcing

Sonic first became aware that Western Connecticut was looking for a partner through an RFP process, Maring said. During preliminary discussions, Sonic found Western Connecticut was balancing concerns about reductions to Medicare reimbursements for lab tests introduced under the Protecting Access to Medicare Act, and the need for a more stable inpatient cost structure, with a desire to keep its lab operations, according to Maring.

"We also found out through discussions that they had some other places where they wanted to spend capital within the health system, and while they didn't want to get out of the outreach lab business, they knew it was an asset that has some value," Maring said. "We determined if they were able to monetize part of that business and stay in the lab business, it might be a benefit."

Sonic also knew that the hospital network was in discussions with competing commercial lab companies that would likely be offering a different model that involved acquiring the hospital's outreach business, and managing its inpatient lab operations.

"We jointly developed a pro forma to evaluate the benefits, not only for Western Connecticut, but also for us," Maring said.

In developing that pro forma, the company also developed a model comparing the benefits of a joint venture to the benefits of selling the outreach lab business to another vendor.

"Our analysis showed, by looking at both sides, that it was actually better for Western Connecticut to enter into a joint venture than to sell the outreach business and get out of the lab business," Maring said, but he noted it would take four years for the benefit to be realized.

"Selling your outreach business, you get a large sum of money up front, but you no longer get the profits from that outreach business going forward," he noted.

Future opportunities

While the joint venture has seen early results, Maring and Fiedler see more opportunities ahead. Constitution Diagnostics Network plans to implement software from Atlas to improve billing and collection, particularly related to outreach billing services, according to Fiedler.

Constitution Diagnostics is also in the process of beginning to develop rapid response laboratories, Marking said, and he believes there are additional opportunities to further grow the outreach business.

In the short term, the three-hospital, 822-bed Western Connecticut Health Network is about to double in size through a proposed merger with Health Quest Systems, a four-hospital health system based in La Grangeville, New York. The merged entity is expected to launch in 2019, pending regulatory approvals. Constitution Diagnostics has not had discussions with Health Quest regarding lab services, but believes it can make a good business case for the mutual benefits of expanding the partnership, Maring said.

Prior to partnering with Sonic, Western Connecticut had explored partnering with other community hospitals, but found nearby hospitals reluctant to join forces with a local competitor, according to Fiedler. He is hopeful that partnering with a national lab may help dissolve some of those boundaries.

"It's very important if you move out of your borders to have some name recognition and gravitas that goes beyond the local competitive landscape," he said. "The key to growth in the future is to be interconnected with group practices and to share institutional initiatives in a network configuration as opposed to trying to go it alone. We really felt that we had reached the limits of what we could do on our own."