One of the most common questions from our client base is, “What types of joint ventures or partnerships are available with outside entities, and what are the pros and cons versus going solo?”Let’s start with the most formal, a joint venture, and work our way down to management agreements.
There are less than 20 formal types of laboratory/hospital joint ventures today. The laboratory companies that enter joint ventures are very large regional (PAML), national (LabCorp, Quest Diagnostics), or international firms (Sonic). Joint ventures are the most formal of all relationships, set up as separate LLCs.Typically long-term, these relationships can span up to 30 years. The managing partner is selected based on equity contribution to the business, whether as capital or a book of business. The large laboratory is almost always the managing partner, and profit-sharing is based on equity. There are pros and cons to formal joint ventures as described in the table below:
Pros and Cons of Formal Joint Ventures
In addition, these attributes may be viewed differently as pros or cons by different parties. From a trending standpoint, the vast majority of joint ventures have been in existence for many years. Few new ventures have occurred in the last few years, and there is increasing attrition of current relationships. In the last five years, we have been asked more often to help clients exit such relationships than to enter. The cause for concern is most often fee escalations over time and/or dissatisfaction with the share of profits.
The second category of partnerships are non-equity, multi-year management agreements where the partner helps the hospital grow the outreach business and reduce operating costs. The term of these agreements is typically in the five-year range with options to renew. The benefit of non-equity partnerships over joint ventures is that the hospital retains all profits and simply pays the partner a management fee for assistance in growing the business. We are aware of six companies that offer such agreements today:
- Chi Solutions
- Nichols Management Group
- Quest Diagnostics
- United West Labs
There are pros and cons to each offering. Since Chi is one of the companies, I will give you some questions to consider when choosing a partner rather than make comparisons:
- Understand qualification criteria (such as size of current business, market opportunity, etc.).
- Know the risks and rewards for each party and alignment thereof.
- Determine if fees are fixed or performance-based, and know your preference.
- Ascertain the number of other similar agreements and the company’s track record in working with other hospitals and systems.
- Identify potential conflict(s) of interest and/or willingness to enter into non-competition agreements in your market.
There are a variety of structural options and business models. You may be able to customize your opportunity to avoid or mitigate the known pitfalls. One thing I know for sure: when you’ve seen one, you have seen only one. No matter what anybody tells you, every one of the companies listed may have their “ideal” plan, but everyone has exceptions. It’s up to you to make your deal the best it can be.
As you can see, there are a variety of structural options and business models. You may be able to customize your opportunity to avoid or mitigate the known pitfalls. One thing I know for sure:when you’ve seen one, you have seen only one. No matter what anybody tells you, every one of the companies listed may have their “ideal” plan, but everyone has exceptions. It’s up to you to make your deal the best it can be.
In general terms, partnerships offer hospitals something of value or else there would be no market for these types of services. Most often, the benefits accrue from sales sophistication, the leveraging of existing infrastructure, and access to purchasing agreements or cost reduction strategies. In our experience, the overall performanceis superior to self-managed programs. As always, the devil is in the details.
Kathleen A. Murphy, PhD
Chief Executive Officer
Chi Solutions Inc.