Community Hospital Builds Thriving Lab Outreach Program

New leadership builds lab capabilities, then grows revenue

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CEO SUMMARY: When 330-bed Botsford Hospital of Farmington Hills, Michigan, got interested in laboratory outreach 10 years ago, it brought in a new laboratory leader, invested in new analyzers and informatics, and then let the quality of the operation attract new business from the community. Today, Botsford’s outreach program performs 2.4 million tests per year and generates annual revenues in excess of $14 million. Here’s a look at the key business strategies that fueled this lab’s growth.

WHY WOULD A COMMUNITY HOSPITAL enter the laboratory testing outreach business with a regional laboratory of one of the two blood brothers located nearby?

Just a few years ago, that was the question facing Botsford Hospital of Farmington Hills, Michigan. It was almost in the backyard of the Quest Diagnostics Incorporated regional laboratory, located in Auburn Hills, just nine miles away. Botsford Hospital was preparing to compete against a national laboratory on its home turf.

Then again, how many community hospital outreach programs have the clinical lab director go out personally to meet with referring physicians to attract new business? When the chairman of Botsford Hospital’s pathology department visits an office-based physician to discuss clinical lab outreach, the positive effects on the physician are significant.

Profitable Outreach Program

Today, Botsford’s laboratory outreach program generates in excess of $14 million in annual revenue and boasts an automated, state-of-the-art laboratory. Its ability to overcome the challenges in its market and profitably capture market share demonstrates that community hospitals can build successful and thriving laboratory outreach programs. In addition, Botsford’s experience provides several useful management lessons for any community hospital preparing to enter the laboratory outreach business.

The story starts in 1997, when administrators at 336-bed Botsford Hospital decided they wanted a robust laboratory outreach program. Their first business priority was to give the laboratory new leadership. “I was hired in 1997 to do several things,” stated Gilbert E. Herman, M.D., Ph.D., Chairman of the Department of Laboratory Medicine and Medical Director of the laboratory. “One of the most important tasks was to build an outreach laboratory.

“To succeed with a lab outreach program requires appropriate infrastructure,” he noted. “Our laboratory was equipped to serve the inpatient needs of the hospital, but, in most respects, we were starting from scratch with what was necessary to create a profitable, high-service lab outreach program. Fortunately our administration was prepared to support the significant investment that we would need to develop our outreach program.”

When he embarked on the project, Herman had an inpatient and small outpatient hospital lab. His laboratory now performs 2.4 million tests annually, of which 50% are outreach or outpatient. It also offers an expanded test menu that benefits both hospital inpatients and outreach clients.

The key to such strong growth is using automation judiciously and integrating robotics and automated analyzers with sophisticated informatics, including billing systems, Herman explained. In addition, the laboratory uses innovative reagent rental strategies for equipment financing and strives to always have more processing capacity than it can use.

Improving Lab Infrastructure

“None of this happened overnight,” observed Herman. “When I arrived, a significant number of tests were referred to outside labs, which was a drain on the lab budget. So a first priority was to bring those tests in-house.

Also, it required about four to five years of operational development to give our laboratory the technical capabilities it needed to handle outreach testing effectively and efficiently. That was why our first steps were to improve the infrastructure. We needed the right instruments, assays, and software.

“Our goal was to acquire instruments and analyzers that were tech friendly and could do mass production,” he added. “Back in 1997, our lab had only the most basic modules of the SCC Soft Computer LIS (laboratory information system) and other standard corporate-issued software. “To boost our technical capabilities, we did several projects in sequence,” continued Herman. “We upgraded the servers to support a strong flow of information throughout the lab. Doing so allowed us to connect more instruments to the LIS. We instituted a fully computerized anatomic pathology (AP) system, which allowed us to eliminate the antiquated word processor in use at the time. Also, we added billing programs that would be robust enough to handle outpatient billing.

Intense Use Of Informatics

“When I arrived at Botsford, the lab used programs from SCC Soft Computer, a laboratory information system vendor in Clearwater, Florida,” recalled Herman. “We have regularly added software modules to support our increased work volume and growing outreach program. Software modules have been added to support lab automation, rules engines, SoftWeb (to enter orders and view results), ODBC, AP, accounts receivables, GUI blood bank, and quality management monitoring. We are increasingly sophisticated in our use of information technology and that technology helps set us apart in the outreach marketplace.

“Having good information systems puts us on a level playing field with the commercial labs,” Herman explained. “The commercial labs have had at least three decades to develop their own software to expedite ordering, tracking of specimens, billing and reporting. Our present SCC computer software is every bit as good as the proprietary commercial laboratory software. That means we can compete with them.

“It took four to five years of dealing almost exclusively with these infrastructure issues before we felt we were ready to introduce the laboratory outreach program,” recalled Herman. “It was 2000 when we started the outreach business.

“The first sales objective was to market our laboratory to physician groups that the hospital owned. At this time, all these physicians used other laboratories, predominantly Quest Diagnostics,” stated Herman. “Our job was to entice these practices into referring specimens to our lab. There was no edict by hospital administration for these physicians to use our lab.

“That meant our laboratory had to be as good as or better than their existing lab providers,” he explained. “Ultimately, we won over our doctors. By 2003, the next target was the private doctors on our medical staff. It didn’t take long before we started adding them as clients of our outreach program. After that, we began marketing to all the physicians in our community, whether or not they were on the medical staff of Botsford Hospital.

Volume Growth

“This sales strategy produced successive increases in our outreach volume,” Herman said. “We went from zero in 1999 to about 445,000 tests by 2003. In the past four years, the outpatient program added 300,000 tests. Today, our outreach and outpatient program performs over 1.0 million tests annually and generates over $14 million per year in revenue.”

Herman’s care in building the lab’s infrastructure before entering the outreach business paid big dividends in another way. “Because of our infrastructure of instruments and informatics, the laboratory has absorbed these additional specimens without an increase in employees who perform tests,” observed Herman. “In fact, our medical technologist FTE count today is actually less than what it was in 1998!”

Laboratory Staffing

The Botsford Hospital laboratory department employs about 100 staff members, including four pathologists and 27 medical technologists (MTs).

Herman is particularly proud of the productivity of his full-time billing staff. “For all this outreach work, we have only four full-time billers,” he stated. “They do everything, including initial billing, posting, secondary billing, and professional and technical billing. Many laboratories doing our outreach volume would have about 20 people in billing. Even as our hospital-based lab provides services to meet the inpatient mission, our outreach laboratory has managed to be fully competitive with any commercial laboratory in the country.”

In building up the lab’s capabilities, Herman used several management strategies to add functionality while minimizing capital investment in the laboratory. “We understood this basic fact about the outreach business,” declared Herman. “Commercial labs run on volume, and this gives them several competitive advantages. To service volume, a laboratory must have the instruments and analyzers that can handle the work flow and deliver economies of scale.

“In building our capabilities to handle expanded volume, we wanted to pursue economies of scale,” he continued. “Because of judicious purchasing strategies, the new lab equipment did not require a significant financial investment from the hospital. One source of savings was improving on the contracts that the hospital had negotiated during the 1990s. In many cases, the hospital was paying more than it should have paid. As we added equipment—and capacity—we negotiated tremendous deals that actually saved money on almost every instrument acquisition.

“It took four to five years
of dealing almost exclusively with these infrastructure issues before we felt we
were ready to introduce the laboratory outreach program.”

“For example, prior to my arrival, the hospital would purchase its lab instruments. Our business strategy now is to negotiate reagent rental agreements. This allows us to pay for the instruments with every test performed. Doing so greatly reduces our capital spending on laboratory equipment.”

Using Volume To Advantage

Volume plays a role in the reagent rental strategy, and Herman understands why outreach specimen volumes are important in helping the laboratory manage its costs. “Our reagent rental contracts are done in a staircase fashion,” he commented. “For example, the first 30,000 tests are the most expensive because you’re paying off your instrument and your service charges. The next 30,000 are cheaper, and the next 30,000 are even cheaper because, as you do more volume, the costs go down for the instrument, as do the contracted service fees for each test.

“Obviously, it’s expensive to have a reagent rental with low volume, because the cost of the instrument must be defrayed against the low volume,” Herman continued. “But when you get to higher volume, you actually pay less per test for the instrument surcharge.

“Increased specimen volume also contributes to lowering—on a ‘per test’ basis—your labor, equipment, electricity, and square footage costs,” he explained. “Having instruments and automation that can handle this volume without additional labor is essential to be competitive in the outreach market. If your laboratory hires another med tech every time you bring in 30,000 more tests, you won’t be competitive, and you won’t deliver good financial results to your parent hospital.”

Philosophy On Lab Capacity

“Keeping fixed costs low is an important management secret because that allows you to add the instrumentation your lab needs,” Herman observed. “That’s why we always aim to have more processing capacity than we need. We definitely over- bought in instrumentation. Right now, we could double or triple the volume of testing we do and still not require more instruments because we purchased this additional capacity on purpose.

“Having excess capacity allows us to do two things: First, it means we can handle substantial increases in specimen volume as needed. And, second, it means we don’t max out an instrument,” he said. “If you max out the equipment, you can burn up the instrument, shortening or ending its service life prematurely. Alternatively, you may have to get more instruments and our laboratory doesn’t have space for that. Our plan is to have the instruments run at 20% to 25% of capacity, which means they don’t break down. In this way, instruments last longer and our lab can bring on a huge new account and handle the increased workload without strain or stress.”

Challenges of Manual Testing

Herman also offered insight into how laboratories should respond to the increase in manual testing that an outreach program generates. “Whenever you take on a new doctor’s account, the vast majority of the work is automated,” he explained. “But there are always manual tests too, including microbiology, biopsies, and cytology,” Herman noted. “You must take care not to overwhelm your manual systems. Laboratory staff members with the skills to do manual testing are hard to find and hard to keep.

“Another factor in managing manual testing is the loss of staff due to retirement or a change of jobs,” offered Herman. “Our strategy to deal with this is to have computerized systems behind everything we do. This includes electronic test ordering and electronic reporting of results.

“Like other successful hospital lab outreach programs, we offer our physician clients a number of options for lab test reporting. We support both autoprinting and autofaxing of reports to physician accounts. We offer Web browser-based lab test ordering and results reporting. We use auto-verification to complete the result entry process and issue our data nearly instantaneously without human intervention, if the specimen meets criterion.

“Billing for our laboratory outreach program is totally electronic,” he added. “All our SCC software programs are totally integrated across the laboratory’s entire work flow. To make this operation work, we integrated the instruments and the computers behind them. By having all major instruments interfaced, we minimize the need for manual data entry. That further reduces keypunch errors and increases staff productivity.

“At the end of the day, all completed tests pass electronically to our billing modules,” he added. “On the first pass through our editing software, the yield is consistently 80% to 85% for clean claims. These clean claims pass directly to our third party payers. Most payers remit to us electronically and we use the electronic statement to post the payments to each line item.

“If any patient has an account balance remaining, we electronically roll that over to secondary insurers or directly to the patients,” explained Herman. “Ultimately, we send a file electronically for bad debt and bad debt placement, which saves time and increases cash flow.

Forward Thinking

“In the coming months and years, the best opportunities for hospital lab outreach programs may come from specialty tests,” Herman predicted. “These tests will require a lot of investment in personnel and equipment and will require a large volume to be profitable. We are a meat and potatoes lab that needs only more volume of what we currently do in order to accomplish our goal, which is to be financially viable and contribute profits back to our parent hospital.

“We want a strong afternoon shift so all instrument stations are open for business,” he continued. “That means we can help the hospital reduce length of stay and increase turn around times in the emergency room, all leading to more efficiency throughout the hospital.”

For pathologists and lab directors, the success of the Botsford Hospital outreach program offers three lessons. First, this mid-sized community hospital is an example of a professionally managed laboratory outreach program that has low- ered inpatient lab test costs while offering an expanded menu of lab tests. At the same time, it has built strong relationships with physicians in the community and generated a net profit that puts money back into the parent hospital.

Second, Botsford Hospital challenged a national laboratory (in this case Quest Diagnostics Incorporated) even though Quest operated a regional laboratory facility almost in the same neighborhood as Botsford Hospital. The lab outreach success at Botsford argues well that community hospital outreach programs can compete head-to-head with national labs, as long as they offer physicians comparable or better lab testing services.

Contribution Of Leadership

Third, lab directors and pathologists should not overlook the leadership contribution of the laboratory department’s chairman, Dr. Herman. Not only did he provide a strategic vision of how the laboratory could be organized to serve inpatient, outpatient, and outreach testing needs, but he also demonstrated the value of face-to-face contact between the chairman and referring physicians. Herman regularly visits prospective physician clients in their offices to win their business. The fact that Botsford Hospital has built its outreach program to over $14 million in just seven years, without a full time sales representative, confirms the value of pathologists interacting directly with referring physicians.

Growth In Lab Outreach

THE DARK REPORT observes that the success of Botsford Hospital’s laboratory outreach program demonstrates why the number of community hospitals with active lab outreach programs is increasing each year. The additional specimen volume from the outreach market allows the laboratory to enjoy economies of scale, expand the in-house test menu, and deliver net profits to the parent hospital.

Botsford’s lab outreach program also is a reminder that physicians will support their local hospital laboratory—but only if the outreach program will deliver services equal to or better than competing laboratories also in the community.

JVHL Network Fosters Outreach Success

ONE REASON THE LABORATORY AT BOTSFORD HOSPITAL has developed a successful outreach program is its association with Joint Venture Hospital Laboratories (JVHL), which is based in Allen Park, Michigan. JVHL represents more than 100 hospital-affiliated laboratories in a variety of managed care contracts. This helps its member labs compete against large national chain laboratories.

“As a member of JVHL, our lab outreach program serves a number of important managed care contracts in this region,” stated Gilbert Herman, M.D., Ph.D., Medical Director and Chairman of the hospital’s Department of Laboratory Medicine. “In this community, there are no inpatient deals [as part of hospital contracts with payers] that directly assist our outreach lab activity.

“All managed care work is handled via JVHL. Doctors tend to send everything to the Botsford Hospital laboratory rather than split,” he continued. “If necessary, we cull out specimens that we cannot test due to insurance restrictions and send to the appropriate lab. The United Auto Workers (UAW), for example, has some restricted Blue Cross Blue Shield groups. The only issue is that these patients may have a higher co-payment if Botsford General Hospital does the analysis.

“We still report and bill this insurance and our doctors have not requested that their work go elsewhere,” Herman explained. “In addition, the UnitedHealth national contract with LabCorp has not had a significant effect on us because, again, JVHL fully participates in the UnitedHealth contract. So, there are no issues. In fact, it would have been more difficult to compete with commercial labs without having managed care contract access through JVHL. It has allowed us to test restricted insurance contract work and open up the market for our hospital to compete.”


Efficiency, Quality Service Combine to Deliver Regular Growth in Botsford’s Outreach Program

IN A COMPETITIVE MARKET, physician loyalty can help a hospital outreach program succeed. But loyalty is just one factor that contributes to success, observed Gilbert E. Herman, Ph.D., M.D., Chairman of the Department of Laboratory Medicine and Medical Director at Botsford Hospital in Farmington Hills, Michigan.

To succeed over time, a hospital outreach program needs to deliver efficient results and high quality service. “There is loyalty, of course,” Herman commented. “But that only goes so far. Office-based physicians expect a high level of customer service. That is a given. In addition, we make sure that our referring doctors know about the benefits of using the Botsford Hospital laboratory outreach program by getting out and visiting them in their offices. It also helps that our hospital’s administrators are highly supportive of our efforts and they encourage physicians to use our lab.”

One fascinating aspect to the launch of Botsford Hospital’s laboratory outreach program is that its lab is located almost in the backyard of Quest Diagnostic Incorporated’s regional laboratory in Auburn Hills, less than 9 miles away. “Of course, Quest tried to keep the accounts to the best of their ability,” explained Herman. “They had numerous sales representatives storm the offices of the physicians in this community, but we prevailed in the end.

“And we have no sales people!” Herman said. “We built a $14 million laboratory outreach program by talking to our medical staff in departmental meetings, in the doctors’ lunch room, and by visits to the physicians’ offices. Medical administration also has several physician liaison members who help sell our laboratory to physicians in the community.

“In addition, our medical administrators routinely take new staff members on tours of the laboratory so these new physicians can see our operation,” continued Herman. “Our Outpatient Services Manager, Tim Morris, C(ASCP), has spent countless hours working the bench and traveling to doctors’ offices to drum up business.

“In addition, I have regularly visited physicians’ offices over the years,” noted Herman. “We find it’s a big deal for a hospital chairman to visit a private doctor’s office. To my knowledge, the medical directors of the big national lab companies do not regularly visit physicians’ offices.

“Having pathologists and hospital administrators helping to sell the program is one reason the income from the outreach lab now accounts for 25% of the entire hospital corporation’s bottom line profit,” concluded Herman.


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