Consolidation At Presbyterian Encourages Regional Strategy

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CEO SUMMARY: Presbyterian Laboratory Services represents one of the more advanced business models of laboratory consolidation found today in the United States. Owned by an integrated delivery system, the laboratory division serves six hospitals and a variety of outreach clients. Several elements set Presbyterian apart from other laboratory consolidations, including its consistently successful laboratory outreach program. First of a special two-part series, this installment explores how Presbyterian became the local laboratory powerhouse in Charlotte, North Carolina. In the next installment, we will explore how Presbyterian is adapting to managed care and looking to remain viable in future years.

CONSOLIDATION of hospital laboratories is the dominant trend in the laboratory industry today. Yet few consolidation projects truly deliver the service benefits and improved revenues which should logically result from a well-executed consolidation.

An exception can be found at Presbyterian Laboratory Services (PLS) in Charlotte, North Carolina. In recent years, PLS gained recognition as one of the more innovative and financially successful examples of hospital laboratory consolidation to be found anywhere in the United States.

It is no accident that PLS is doing well at a time when most hospital laboratories are under extreme financial pressure. Leadership at PLS and its parent healthcare system, Presbyterian Healthcare, consistently chose to be proactive. Initiatives launched by administration received solid support from laboratory employees.

This combination of visionary administration and supportive laboratory staff enabled PLS to evolve from a traditional focus on inpatient testing to a viable regional laboratory organization with extensive outreach business.

In this first installment of THE DARK REPORT’S special two-part series on Presbyterian Laboratory Services, we look at why PLS originally consolidated its laboratories and how it’s evolved since that time. Many of PLS’s management strategies can be applied with equal success by consolidated laboratory organizations in other cities.

The change in philosophy goes back to 1985. “I started at Presbyterian in December of 1984,” stated Bob Hamon, Administrative Director of PLS. “In February I got the first memo from our medical director suggesting that we should get into the outreach business.

“That memo launched a serious evaluation of what was required to be successful in outreach,” he continued. “We soon realized that we needed to improve our inpatient services before going outside.

“By 1988, our outreach testing had climbed to $1 million annually. When Presbyterian acquired a 62-bed speciality hospital,” said Hamon, “it gave us the opportunity to enhance both inpatient and outreach testing services. We convinced administration that it made sense to consolidate laboratories in both hospitals.”

The next milestone for PLS was a common LIS platform. “In 1989 we made the decision to switch to Cerner. That was a major commitment of money by the administration. It was based on their belief that we could achieve our projections for continued growth in outreach specimen volume. They also allowed us to scrap an LIS system which had been installed only four years earlier. That illustrates the faith our hospital administration was willing to place in the laboratory.

“During 1990, as the LIS implementation project went forward, Leslie Sprick was hired to be our outreach marketing manager,” continued Hamon. “This was one of the most important things we did to make our strategic plan succeed. We hired a professional who had experience in both the hospital-based reference lab as well as commercial laboratory sales and marketing.”?

Consolidation of the two hospital laboratories was accomplished by creating a core laboratory using a 15,000 square foot building located on the hospital property. This became operational in 1991, along with the new LIS system.

“The off-site core laboratory was important to us for more reasons than just consolidation of hospital testing,” explained Hamon. “As our outreach efforts took root, we could see a certain amount of confusion among outreach clients and prospects as to who we were and how outreach services were provided from our inpatient laboratory. By moving the laboratory to a stand-alone building, we created an identity in the minds of our clients. Just as importantly, the physician community saw our core lab as a long-term commitment by Presbyterian to serve the physician office market.”

Obviously PLS was doing something right, because outreach revenues topped $3.5 million in 1992. “We sat down again in 1993 to reassess ourselves. Three strategic priorities resulted,” Hamon said. “First, we initiated a cytogenetics program. We could see the competitive balance this would provide us. Second, we developed a toxicology program and got NIDA (now SAMSA) certification. Third, we undertook a major redesign of our laboratory management structure.”

Restructuring management at this time was an interesting strategic move. Obviously PLS was successful and enjoying rapid growth. Why the need to shake up the status quo? “We subscribe to the ‘Darwin Theory’ of management,” noted Hamon. “This means we evolve and respond as we go. In 1993, we recognized that ongoing evolution of our reporting structure in recent years had left us with multiple layers of management. These impeded our ability to move forward.”

Presbyterian Laboratory Services

Off-site Core Lab: on Presbyterian Campus: 15,000 sq. ft. for lab; 10,000 sq.ft. for operations/sales.
6 hospitals.
2 hospital rapid response labs.
34 physician office labs.
6,350 SNF Beds
300+ outreach clients
100 toxicology clients
2 off-site patient service centers
Couriers: 7.5 FTEs, 7 vehicles
Employees: 330
Sales/Marketing: 1 Director, 3 reps
Billing: 6 FTEs, bills under hospital.
Service Area: 90 mile radius
Managed Care: 30% of market
Billable tests: 2.2 million
Inpatient/Outreach Mix: 45%/55%

Two Ground Rules

“Our response was to throw the organizational chart in the garbage can and start from a clean sheet of paper” he noted. “To pull this off, we had two ground rules. First, no existing job title could be used in the restructuring. Second, everyone in a management position would have to reapply for whatever new positions were defined. A total of 11 management positions ceased to exist as a result of this reorganization.”

The restructure was successful, accomplished with a minimum of fear, internal politics and disruption. Hamon credits this to a universal recognition by all laboratory employees. They could see the need to be more efficient and understood that a new management structure was necessary to sustain existing growth rates.

“Our growth should not be overlooked as a success factor in the management reorganization,” Hamon said. “Employees in the laboratory saw that our consistent growth over several years improved employment stability and created new career opportunities. They compared our laboratory experience with nearby hospitals. When they saw staffing cutbacks at those hospital and commercial laboratories, they appreciated the security and positive working environment available at Presbyterian Laboratory Services.”

PLS backed the management reorganization with support for the new managers. “In 1994, we brought in a teamwork consultant to help us develop a new way of doing business and working together,” explained Hamon. “If we were to run the laboratory in a new way, we had to learn new management techniques of working together, organizing work flows and processes, and helping our staffs adapt. This teamwork consultant worked with us for about two and a half years.”

In the year following the reorganization, Presbyterian acquired two more hospitals. “People visit us today and comment on how fortunate we were that our administration mandated that we consolidate all the hospital labs,” recalled Hamon. “Nothing could be further from the truth. Remember, in 1994 few hospital laboratory consolidations were in existence. Back then lab consolidation was a radical idea. We had to be real sales people to convince the powers-that-be of the benefits of consolidating these new hospital laboratories into our existing structure.

“We got administration’s buy-in because it was the right thing to do,” he continued. “Consolidation permitted us to improve service, expand the test menu and lower test costs each year since then to all the hospitals we serve. However, in 1994, before all this happened, it was difficult for administration to recognize the value of these benefits and believe it was worth the trouble to consolidate the laboratories.”

Backed New Managers

During 1994, PLS also took on another major chunk of business. “We contracted to run the laboratories for the Nalle Clinic. Managed by PhyCor, it operates in eight locations with 120 physicians,” said Hamon. “This was a big deal for us. Besides the laboratory, Presbyterian was providing x-ray and EKG services.

“It was the highest profile client in town,”? he continued, “and we learned quickly that we were not totally prepared to properly serve such a client. For example, after we began providing services, we learned that our materials management system didn’t support remote sites. On the positive side, we made a commitment to work through all these issues and give Nalle Clinic top service. Our success seems confirmed by the fact that Nalle Clinic recently renewed its contract with us for five years.”

During 1995, PLS got the opportunity to expand its activities in physician office laboratory (POL) management. After 13 months of negotiations, PLS signed a contract to consolidate and operate 16 POLs for Presbyterian’s physician network. “This gave us a real boost,” stated Hamon. “We hired the best POL manager we could find. She helped us learn how to succeed with this segment of the business, and we focused our marketing to sign up more of these arrangements. Now we manage 34 laboratory sites in the community.”

The results are impressive. In 1995, outreach revenues topped $13 million. This climbed to $18 million in 1996. “As 1996 rolled around, we decided to acquire a small laboratory,” Hamon explained. “We also did two other things for the first time. We opened our first patient service center and we began providing laboratory services to our first non-affiliated hospital. These both support our regional growth strategy.”

Since then, PLS has recognized the need to expand the core laboratory and develop a more extensive network of patient service centers. Build-out of a new 54,000 square foot off-site core laboratory is under way and expected to be ready in the spring of 1998. Additional patient service centers are opening as marketing studies indicate the need. All of this continues to fuel steady growth. Since 1996, outreach revenues climbed another $4 million, to $22 million.

“We understand that we must be close to our customers if we are to succeed,” said Hamon. “One important secret to our success is that we carefully study the needs of our customers, then try and exceed their expectations. Our largest customer is Presbyterian Hospital. Everyone on our laboratory team understands the importance of meeting the customers’ needs and expectations, whether it is a hospital customer or an outreach customer.”

Hamon probably understates the stress placed upon meeting customer expectations. PLS rigorously tracks a number of performance monitors. “In outreach, we guarantee that stats will be turned around in 45 minutes, 85% of the time. We publish a report that lists our service level. Our average stat turnaround time for the downtown campus hospital is 21 minutes. We meet our stated service level 91% of the time.”

Elimination Of A Laboratory Takes Place After Remodeling

WHEN PRESBYTERIAN ADDED an orthopedic laboratory in 1994, PLS immediately moved to consolidate microbiology and pathology into the core laboratory. PLS also quickly recognized that it was feasible to close the laboratory completely while simultaneously improving lab services provided to the hospital.

At this time, the laboratory had 21 employees. “We proposed a total closure of the laboratory,” stated Bob Hamon, Administrative Director of PLS. “We committed to three goals: 1) decrease the laboratory cost of providing services to this site’s lab users; 2) maintain or improve turnaround time; and 3) avoid any lay-offs of lab employees.

“Despite these commitments, administration was not totally convinced,” he said. “Instead, the decision was made to remodel the laboratory and keep it open. Because it was an older design, with many small rooms, we needed to open the space and create a modern rapid response lab.”

Here is where unplanned events often create positive outcomes. “In order to remodel the space, we had to totally shut down the laboratory for four months. Testing was done at the hospital across the street,” explained Hamon. “We maintained service levels during the remodel. After remodeling expenditures of $180,000, the laboratory was reopened.

“It remained open for only 90 days! Service on-site was no better than what we had delivered during the time the laboratory was closed, so administration decided to permanently close it,”? he continued. “This generated annual savings of $325,000.”

Hamon’s story illustrates a major frustration common to proactive laboratory directors. It is often difficult to get administration and physicians to support a radical change. Yet, radical changes are commonly the source of great improvements in service and reductions in cost. In the case of Presbyterian, it led to an unnecessary remodel of the on-site laboratory.

On the flip side of the coin, Hamon’s story illustrates the importance of always doing the best job possible. It was the consistent performance of the laboratory staff to maintain services while the remodel was under way which convinced administration that an off-site laboratory could effectively support that hospital’s testing needs.

Critical Success Factors

The sustained, multi-year growth of Presbyterian Laboratory Services is not accidental. It happened for several reasons.

First, the medical director, Dr. Schwartz, and hospital administration recognized, as early as 1988, that outreach specimens were essential if PLS was to increase testing services and provide Presbyterian with year-to-year decreases in testing costs. Unlike many institutions, at Presbyterian a common commitment by the pathologists, lab management, lab staff and hospital administration was critical in moving PLS forward.

Second, there was early recognition that money would have to be invested if an outreach program was to succeed. Scrapping a four-year old LIS system indicates the serious level of financial support administration was willing to provide the laboratory.

Third, laboratory administration recognized early that full consolidation of the laboratories was essential if the entire laboratory organization was to excel and grow. As early as 1988, laboratory administration advocated consolidation of laboratories at key sites.

Four, leadership in both the hospital and the laboratory were willing to take risks to pursue their growth strategy. This meant major capital dollars invested in an off-site core laboratory, LIS enhancements and to create a professional marketing staff.

Five, PLS was willing to look at successful management models anywhere in and out of healthcare to import the most effective management techniques into the laboratory. PLS actively sought out appropriate “best practices,”? then imported them into the laboratory. Using the team facilitator consultant is an example of this openness to outside management thinking.

Six, and this is a critical success factor. PLS recognized the importance of a professional sales and marketing program. Accordingly, they invested money to bring aboard a qualified, experienced marketing manager. PLS also insisted that the marketing program achieve production targets, with penalties for failing to achieve those targets.

As a critical success factor, the performance of the marketing department must be recognized. From its initial start in 1992, with outreach revenues of $3.5 million at year’s end, PLS will do $22 million in 1997! That is 600% growth in just five years.

All of these successes are due to the team effort, strong leadership and a supportive administration at the parent health system. Our second installment of this two-part series will delve into the management strategies which Presbyterian Laboratory Services hopes to use to remain an effective competitor in the managed care world of the future.


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