CEO SUMMARY: Catholic Health Initiatives (CHI) wants to expand its presence in outpatient and outreach services. It sees hospital laboratory outreach programs as a key component of this strategy. It will use an equity investment in Pathology Associates Medical Laboratories (PAML) as the foundation of a series of laboratory outreach joint ventures between its 78 hospitals and PAML. Along with generating a new source of revenue, CHI expects these lab JVs will help it establish tightly-integrated electronic links with office-based physicians.
EXPANDING THE REACH and profitability of hospital laboratory outreach pro- grams is a primary strategy at Catholic Health Initiatives (CHI) of Denver, Colorado, one of the nation’s largest multi-state health systems.
CHI signaled its plans to aggressively develop laboratory outreach programs by becoming an equity owner of Pathology Associates Medical Laboratories (PAML), based in Spokane, Washington. Last month, both organizations announced their intent to develop laboratory outreach joint ventures anchored by some of the 78 hospitals CHI owns and operates in 20 states. (See TDR, October 12, 2009.)
To learn more about why Catholic Health Initiatives has such a strong strategic interest in building up lab outreach testing programs, THE DARK REPORT caught up with Paul Edgett, CHI’s Senior Vice President, National Business Lines. Edgett explained that CHI has three goals for its new relationship with PAML. “One, CHI wants to boost the revenue our hospitals get from laboratory outreach programs,” stated Edgett. “PAML excels in this area.
“CHI wants to have a robust laboratory outreach business,” he continued. “We have some lab outreach programs that are very successful in selected markets. But, as a system, we consider laboratory outreach to be an undeveloped opportunity for CHI hospitals. We believe there is tremendous growth potential in the outreach markets that reside within our network.
Growing Market Share
“We estimate that we currently get about 10% of the lab testing outreach volume available in the local markets where we operate hospitals,” he continued. “We are now taking the steps necessary to lift that market share to between 30% to 40% by developing a series of laboratory outreach joint ventures that would be managed by PAML as the partner in each local JV.
“Two, CHI intends to diversify its income stream from one that is currently heavily dependent on inpatient care to one that relies more on revenue from outpatient care,” declared Edgett. “This strategy is built on the knowledge that inpatient care has increased at a slower rate than outpatient care for more than 20 years. This trend in favor of faster growth in outpatient procedures is likely to continue.
“Three, CHI aims to improve patient care by integrating data from laboratory test results with information from diagnostic imaging to improve care management for pre-acute and post-acute patients,” he noted. “It is much easier to achieve this type of clinical and service integration—that also bridges inpatient and outreach settings— when our hospitals have dynamic laboratory outreach programs.”
First Wave Of Laboratory JVs
Catholic Health Initiatives will waste no time in ramping up the first wave of lab outreach testing programs involving its hospitals. “In the immediate next few months, we will start joint venture outreach programs with PAML in Colorado and Arkansas,” explained Edgett. “This will be followed by lab outreach joint ventures with CHI hospitals in Kentucky and Oregon. “These four markets are our near term priority. We could be operating in those markets in the first quarter of next year.
“Our goal with PAML is to be deliberate in opening outreach joint ventures so that we are driving the market as opposed to reacting to it,” Edgett added. “The amount of lab work that can be done locally will vary by market. To the extent that it can be done locally, we will maximize that ability. To the extent that it needs to be shipped out, we will have the infrastructure do that too.
“While negotiating our equity position with PAML, a parallel lab outreach development effort was taking place in selected regional markets,” he said. “This is why, with the execution of the agreement with PAML, we can hit the ground running with the relationship. We are excited to begin this process.
In fact, what allows us to accelerate the launch of these lab outreach programs in multiple states is that PAML already has the capability and management resources required to establish and operate a professionally-managed lab outreach program,” added Edgett. “For example, when it comes to information technology (IT) and connectivity, PAML has robust systems.
“On its own, CHI was developing LIS- to-EMR interfaces to meet connectivity needs with physicians’ offices, but the pace was not fast enough,” he observed. “PAML has developed hundreds of interfaces for the broad spectrum of electronic medical record (EMR) systems that exist. Integrated IT is one of PAML’s core competencies.
“In today’s competitive marketplace, connectivity is the key to making any lab outreach effort successful. We intend to use connectivity and integrated IT solutions as a strong selling point in our laboratory outreach programs in each community.”
Catholic Health Initiatives is one of the first major health systems to recognize how a thriving laboratory outreach program can contribute to better financial performance, even as it strengthens the relationships between a hospital and the physicians practicing in the local community. “The relationship with PAML is significant from a strategic point of view because it allows CHI to pursue a revenue diversification strategy,” noted Edgett.
“Currently, 52% of CHI’s revenue comes from inpatient acute care services,” he stated. “CHI has a deliberate strategy to get 65% of its revenue from non-inpatient acute care services. Our long-term future requires this revenue diversification so that we are not as heavily dependent on the acute care inpatient model as we are today.
“By the way, the target of 65% is a 10-year goal,” emphasized Edgett. “CHI will not be shrinking its acute care side. Rather, CHI aims to reach that 65% goal by disproportionately growing non-acute care services at a faster pace than the acute care side.
“This strategy recognizes another truth in the healthcare marketplace,” he commented. “It is extremely important to have good integration of the diagnostic platforms in the care delivery model. CHI understands how the data generated from laboratory testing and diagnostic imaging must be integrated as a way to more effectively drive improvements in patient care. This is true in both the pre-acute and post-acute settings.
“As we achieve this integration of diagnostic services, we will become more effective at improving the health status of the communities we serve,” added Edgett. “It is why CHI is making these active investments in strategies like laboratory outreach testing. We want to be well invested in those areas.”
Turning back to the new business relationship PAML, Edgett pointed out why Catholic Health Initiatives was comfortable establishing an equity position in PAML and working closely with it on laboratory outreach joint ventures. “Just looking at the two organizations—CHI and PAML—it is clear that our equity investment is a good fit for both of us,” Edgett said.
“From the standpoint of values, PAML is owned by Providence Health & Services of Seattle, and CHI is the second largest Catholic healthcare facilities operator in the United States,” he noted. “That means we are two faith-based organizations with similar values and operating principles. That was the beginning foundation between our organizations.
“But we also have a track record of working with PAML through our long-standing relationship through the Franciscan Health System in Tacoma, Washington,” he continued. “Franciscan hospital laboratories have been members of PACLAB Network Laboratories, which PAML founded in 1996,” he added. “Through PACLAB and other laboratory outreach joint ventures that PAML operates, they have a demonstrated track record of growing profitable laboratory JV businesses.
Long Working History
Edgett emphasized that the strength of the new business relationship is four complementary core competencies that PAML brings to Catholic Health Initiatives. “First is PAML’s established track record with lab outreach testing joint ventures,” he said. “For more than a decade, and in multiple markets with different hospital partners, PAML has produced sustained growth in specimen volume, revenue, and profitability.
“Second, PAML has an impressive competency in information technology and connectivity,” he continued. “Its ability to seamlessly move data back and forth between physicians and multiple hospitals is state-of-the-art. This is a critical component for any hospital seeking to align the data it collects from physicians, the hospital itself, and the laboratory.
“Third is the backbone that they have developed in billing and infrastructure,” observed Edgett. “In healthcare today, it is essential to have an efficient revenue cycle management (RCM) system that can handle hundreds of thousands of very small claims every day and do this work effectively. PAML does this well.
Marketing And Logistics
“The fourth competency that was attractive to us was PAML’s marketing and logistics systems,” he noted. “Each is well developed and effective. Marketing and sales is the essential component to expand the lab outreach business. An effective logistics effort delivers a high level of customer service.
“In addition to the advantages we saw as a result of the competencies that PAML has, other components of the relationship made it attractive to us,” Edgett commented. “One example is the ability to combine a patient’s lab test data from inpatient, outpatient, and outreach testing into a single electronic health record (EHR). This will allow us to better trend outcomes. It should also help us reduce repeat tests. That is a patient-friendly outcome which also makes us more efficient.
“In addition to all of these advantages that I have outlined, there is one other way in which this partnership is synergistic,” Edgett observed. “Among the many strengths that PAML possesses is a strong research and development effort in labo- ratory testing and laboratory medicine.
New And Earlier Diagnostics
“We recognize this as a strength because CHI has an R&D function for creating various care delivery models,” contrasted Edgett. “We plan to build upon the R&D capabilities of both companies to develop new and earlier diagnostics, along with new care models and new care programs. We consider the ability to bring PAML’s R&D expertise in laboratory medicine together with CHI’s R&D in care models to be a very exciting aspect of the relationship—and one that we could not do separately.”
THE DARK REPORT predicts that the strategic business relationship between Catholic Health Initiatives and PAML will be closely watched by hospital and health system administrators across the country. Not only does it affirm the importance of hospitals addressing opportunities in laboratory outreach testing in their communities, but it also provides an example of how a respected health system is willing to engage a partner with complementary core competencies to build a successful laboratory outreach testing program.
Will the New CHI-PAML Lab Partnership Prove to Be a “Marriage Made in Heaven?”
SOME MIGHT CONSIDER THE DEVELOPMENT of a joint venture between Catholic Health Initiatives (CHI) and PAML, a lab company owned by another Catholic health system, as a marriage made in heaven because of shared values. But there is more to the story.
“This venture between CHI and PAML is the natural progression of a relationship that has grown over many years,” said Thomas Tiffany, Ph.D., CEO and President of PAML. “Because CHI operates the Franciscan Health System in Tacoma and is part of our PACLAB network, we have worked together for many years.
“Another source of interaction was the consulting PAML did for several CHI hospitals in eastern Oregon,” he added. “As we got to know each other, that led to discussions about how to develop a national strategy involving our two organizations.
“From our standpoint, CHI’s strategies align very closely with our own,” commented Tiffany. “Each organization has a mutual goal of growing this venture into a successful service that advances clinical care in a financially-sustainable manner. The joint venture agreement that we have with CHI supports the missions and the ministries of both Catholic health organizations.
“What makes this venture particularly exciting is that it allows both companies to take advantage of a strategy that ever more hospitals are pursuing today,” Tiffany explained. “Hospitals are investing in, and buying, physician practices.
“Because of this tighter relationship with office-based physicians, hospitals recognize that they need a link to those physicians in order to generate referrals,” he continued. “If hospitals have strong diagnostics—both laboratory testing and diagnostic imaging—as part of their offerings, that has value to physicians and gives hospitals a foundation upon which they can build tighter relationships with local physicians even as they support the success of physicians’ practices.”