Hospital Lab-Commercial Lab Partnering Is Upcoming Trend

IN-DEPTH ANALYSIS & COMMENTARY

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CEO SUMMARY: At this year’s Executive War College in New Orleans, laboratory innovators convened to study hot new trends in the industry.They were surprised to learn that partnering relationships between hospital laboratories and commercial laboratories are finally gaining wider acceptance. Laboratory executives involved in partnering arrangements had good things to say about the success of these ventures. THE DARK REPORT predicts that partnering will soon be part of every successful regional laboratory provider system.

SPOTTING TRENDS in the clinical laboratory marketplace is seldom easy. But that’s not the case with partnering arrangements between hospital labs and commercial labs. This trend is unmistakable…and it is here today!

Only a finite number of such partnering arrangements actually operate at this time. But we believe that partnering in the laboratory industry is currently at the slow part of the geometric curve. THE DARK REPORT predicts that the number of partnering arrangements between hospitals and commercial laboratories will mushroom during the next 18-24 months.

For more than two years, THE DARK REPORT has chronicled the successes and setbacks of the limited number of such partnerships which began operating. It is our firm conviction that economic forces and managed care trends will force hospital laboratories and commercial laboratories to combine resources at the community level. This conviction is based on our site visits and consultations with leading hospital laboratory administrators throughout the United States and Canada.

One source of unchallengeable information about management strategies and marketplace trends is the annual Executive War College on Laboratory & Pathology Management we host each year in New Orleans. It brings together more than 25 speakers and presentations by leading laboratory administrators, pathologists and executives.

On May 12-13, almost 300 senior laboratory administrators and pathologists gathered for this year’s Executive War College. Case studies at this meeting provided convincing evidence that a tidal wave of partnerships will soon flood the laboratory industry.

A brief summary of the key presentations demonstrate the unique nature of partnering arrangements now sprouting throughout the country. These case studies reveal how hospital laboratory resources are being combined with commercial laboratory capabilities to best meet healthcare needs in different communities.

The War College’s opening presentation was UMASS Health System Laboratories of Worcester, Massachusetts. Dr. Michael Snyder, Chief of Hospital Laboratories and Clinical Pathology, described how this academic and tertiary medical center created a dynamic program to offer both reference testing to nearby hospitals and outreach laboratory services to physician offices. The lab division’s success caused the hospital administration to form a for-profit subsidiary to expedite expansion of the laboratory’s outreach program.

UMASS Health System Laboratories is partnering with Specialty Laboratories of Santa Monica. Specialty Labs provides assistance with logistics and courier arrangements, as well as LIS linkage between hospital laboratory sites and physician offices.

Next on the War College podium was Pathology Medical Laboratories, Inc. (PML) of San Diego, California. This independent regional laboratory has remained profitable, despite the heavy inroads of managed care in San Diego County.

PML President Bob Prosek shared with War College attendees how PML used a laboratory partnership with Scripps Healthcare System to create a high-volume core laboratory near the Scripps medical campus. This original partnering arrangement has led to laboratory management arrangements with six other hospitals.

Prosek demonstrated how PML’s partnering approach improves the economics and service levels for participating hospital partners. He believes that PML’s future partnering opportunities with additional hospitals will allow it to develop into a $100 million laboratory in three to five years, doubling from its current size of more than $50 million.

PacLab NetworkLaboratories of Seattle, Washington was another case study built around a partnering model. This is a regional laboratory network where eight hospitals and one independent regional laboratory got serious about creating a business-based service network.

Thomas Tiffany, Ph.D. is CEO of Pathology Associates Medical Laboratories of Spokane, Washington. Dr. Tiffany explained how marketplace dynamics in Washington caused the network participants to combine forces. To emphasize the management effort invested in PacLab, he introduced Noel Maring and Lawrence Killingsworth, Ph.D. They are responsible for sales/marketing and operations, respectively.

Maring outlined the sales successes enjoyed by the network while Dr. Killingsworth impressed the War College attendees with a description of the rigorous operational standardization program enthusiastically implemented by PacLab’s member laboratories.

Partnering Arrangements

Case studies during day two of the War College reinforced the common theme of partnering arrangements. Dynacare-Hermann Hospital Laboratories (DHHL) of Houston, Texas is a 50-50 partnership between the two companies. Each partner sent a representative to the War College to share their organization’s perspective.

Bill Pesci, COO of DHHL and Sylvia Skotak, Clinical Administrator of Hermann Hospital, described the reasons why Hermann Hospital decided to partner with Dynacare in 1995. Both individuals then detailed the operational progress of the partnership, including serious market setbacks which jolted the joint effort in its first years.

The net conclusion to this joint venture is that both partners have harvested substantial economic benefits. In the four years of the partnership, joint revenues have increased from $16 million to a projected $36 million for 1998. More importantly, the integrated healthcare system to which Hermann Hospital belongs is seriously considering rolling out this partnership arrangement to all the hospitals in its system.

Traditional Backwater

Traditionally, the Veterans Administration has been considered a backwater for innovations in laboratory management. That is no longer true. Bruce Dunn, M.D., Chief of Pathology and Laboratory Medicine at Milwaukee’s VA Medical Center, discussed how his laboratory division (VISN 12), which covers Wisconsin, northwest Illinois and the Michigan peninsula, consolidated laboratory testing from eight hospitals and a number of VA clinics into two core laboratories. The core laboratories are located in Milwaukee and Chicago.

One essential element in the operations plan for this region-wide consolidation was the contribution of Quest Diagnostics Incorporated as a partner with VA VISN 12. Quest provides logistics and courier services, reference laboratory testing, and LIS linkages between the VA sites where laboratory specimens originate.

An additional case study reinforced the theme of hospital lab-commercial lab
partnering. Shared Laboratory Services (SLS) of Fairfax, Virginia was formed when four non-affiliated hospitals decided they wanted to build a core laboratory and pursue outreach business.

According to Raleigh Hamilton, CEO of SLS, the planning process quickly revealed that the consortium needed capital, management expertise, and sales/marketing experience. SLS determined that recruiting a commercial laboratory partner would be a cost effective way to resolve these needs.

Using an RFP process, SLS selected American Medical Laboratories of Chantilly, Virginia to be an equity participant in the combined laboratory venture. Hamilton acknowledged that AML’s experience and, knowledge helped SLS design their core lab, initiate operations, and manage the business more effectively than they could have using their experience as hospital-based laboratorians.

Market Message

Administrators of hospital-based laboratories should recognize the market message represented by these case studies. Whether or not they are personally comfortable with the concept of partnering with commercial laboratories, hospitals around the country are evaluating the benefits and moving forward. It is no coincidence that individual hospitals in each of these six geographically-dispersed organizations made independent determinations that the benefits of partnering with a commercial laboratory were substantial.

At THE DARK REPORT, we believe these six case studies represent an unmistakable shift within the entire clinical laboratory industry. They demonstrate that financial pressure upon hospitals is finally forcing them to objectively analyze the economics of partnering with commercial laboratories.

Sizeable Revenue Gains

If done objectively, these analyses reveal that sizeable revenue gains and service enhancements are undeniable, assuming they associate with the right commercial laboratory partner. This is a change from past years, when traditional animosities harbored by hospital lab administrators toward commercial laboratories in their area subjectively clouded any type of serious partnering negotiations.

Another market trend revealed by these War College case studies is that viable partnering opportunities exist with regional laboratories, not just the three blood brothers. The case studies involving Pathology Medical Laboratories of San Diego, Pathology Associates Medical Laboratories of Spokane, and American Medical Laboratories of Chantilly demonstrate that independent commercial laboratories are good partnering candidates.

The reasons are obvious. Independent commercial laboratories generally have four things going for them. First, they are owned and operated by local pathologists, who are personally acquainted with clinicians in the area. Second, they have excellent reputations within the clinical community they serve. Third, they have never compromised service to their physician clients the way the national laboratories have. Fourth, and most importantly, they have no national corporate standardization programs to distract them. Management spends 100% of its time and focus on competing locally.

Anchored In The Market

This summary review of six case studies does not do them proper justice. But it permits clients of THE DARK REPORT to understand that the partnering trend is already anchored in the market.

Partnering will be a necessary component for successful laboratory regionalization. THE DARK REPORT will be reporting on additional partnering models as they emerge in the marketplace.

In the meantime, hospital laboratory administrators are well-advised to carefully research the partnering proposals they may entertain from commercial laboratories. Skilled sales people can sometimes oversell the capabilities of their company. It is essential that a hospital laboratory find the right partner before signing on the dotted line.

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