CEO SUMMARY: Throughout the 1990s, a growing number of hospital laboratory administrators learned the value of a professionally-managed lab outreach program. In a few markets, these savvy lab leaders moved to the next level: using regional laboratory networks to solidify their local market dominance while competing against the national labs for region-wide managed care contracts. Here’s an update on one such regional laboratory network in Florida.
NETWORK LEADERS of the Florida Reference Laboratory Network (FRLN) are preparing to turn up the heat on commercial lab competitors in the Sunshine State.
“All the pieces are falling into place,” stated Steve Wilson, Director of Business Development at Consolidated Laboratory Services (OLS) in Jacksonville, Florida. “After several years of tinkering and experimenting, our six hospital members are now united around a winning strategic plan.
“We want to take individual strengths we now have in separate local markets and meld them into a state-wide service infrastructure,” he added. “In achieving that, we expect to become as tough as any lab competitor in the state.”
FRLN Has A New Partner
FRLN is comprised of six hospital system members, along with a new partner. “After a selection process, we are pleased to announce that Specialty Laboratories is a full-fledged member of FRLN,” observed Gary Onofry, Financial Controller at OLS. “Specialty is contributing three things to FRLN. First, it will be our reference testing provider. Second, like all members, it will assume some risk for reference and esoteric testing covered under capitated contracts held by FRLN. Third, Specialty will bring us a common information systems platform to link our hospital labs and our outreach clients.”
Strategic Business Plan
FRLN’s strategic business plan emerged after a lot of trial and error, during the five years of its existence. “Like many regional lab networks, we spent a lot of months talking, building trust, and studying our business opportunities,” noted Wilson.
“However, unlike many networks, there was always a core group of hospital labs which were willing to operate as a de facto network while organizing meetings proceeded,” he continued. “This gave us practical experience and insights for developing our network’s business plan.”
Wilson says that, in the end, there was one common denominator to the labs which stayed with FRLN. “Each of our members operates a thriving and profitable outreach program. But more than that, in their local markets, they are a full competitor to national and independent commercial laboratories.”
“These are successful outreach pro- grams with professional sales and marketing,” added Onofry. “They perform in excess of one million tests per year. Because they make worthwhile profits, their hospital administrators want to protect this business and increase it.
Thriving Lab Outreach
“During our five years as a network, hospital labs without outreach programs came to meetings, but could not bring themselves to commit the necessary time and resources,” continued Onofry. “So it is not a coincidence that each of our six hospital members operates a thriving lab outreach program.”
On a go-forward basis, FRLN’s legal counsel is preparing to request an opinion letter from the Federal Trade Commission (FTC). “We are asking the FTC to rule, in advance, that our business plan meets antitrust laws governing healthcare networks,” stated Wilson.
“We anticipate that the FTC opinion letter will be issued in the summer,” he noted. “Once it is received, FRLN will formally incorporate a limited liability corporation (LLC). This will become the primary contracting and administrative vehicle for our network.”
Messenger Model Network
“FRLN operates on the messenger model. In our current ad hoc arrangement, an FRLN member laboratory directly contracts with a managed care plan,” explained Onofry. “That member then subcontracts with other members, but has full liability for the contract.
“Once the LLC is formed, managed care contracts will be held by the LLC. That limits the liability of our network members,” said Onofry. “The LLC also expands our business options.”
According to Wilson and Onofry, the stage one goal for FRLN is managed care contracts. “Our target is to have one million lives under contract,” explained Wilson. “The test volume generated by one million lives will help fill the existing unused capacity of our member laboratories.
“If we have the opportunity to bring more than one million lives under contract, that will require us to make some decisions,” he said. “For example, do we want to expand the capacity of our laboratories to handle this? Could we possibly be a broker for that testing? We certainly don’t want to limit our thinking, nor our ability to increase revenue and profits for the network and its members.
“FRLN is designed to make money as a network, while at the same time allowing its members to gain maximum internal advantage from a laboratory that operates at full capacity,” he continued. “We will use every tool available to keep our member labs as competitive and efficient as possible.”
All FRLN Members Operate Thriving Outreach Programs
Each member of the Florida Reference Laboratory Network (FRLN) operates a successful and professional laboratory outreach program.
- Baycare Healthcare Tampa
- Consolidated Lab Services Jacksonville
- Mercy Hospital Miami
- DSI Laboratories Fort Meyers
- Sacred Heart Hospital Pensacola
- Weusthoff Healthcare System Rockledge
Joining these six hospital lab organizations as a full partner in the FRLN network is Specialty Laboratories, Inc. of Santa Monica, California.
Simple Business Truth
“FRLN exists because our members understand a simple business truth: united we stand, divided we fall,” Wilson said. “In each of our regional markets, our member’s outreach program is either dominant or a major player.
“The network is our way of banding together so that we can continue to serve the needs of our hospitals and our local physicians,” he continued. “The successes of our individual lab outreach programs concern commercial laboratory competitors, because they’ve lost market share.”
“In fact, we’ve noticed a change in attitude in recent years,” offered Onofry. “It used to be intensely competitive. National labs paid little attention to us. Now they are very interested. We hear from them regularly and they talk to us about joint ventures, partnerships, and the like.”
“Maybe we have their attention now because each FRLN member lab is very strong in its particular market,” responded Wilson. “FRLN allows us to combine these regional strengths into a statewide service organization that will be very competitive.
“After all, look at what we started with. FRLN labs have strong relationships with the local physicians,” he said, “and these doctors are already hooked up to our hospitals. As FRLN becomes a statewide competitor, it gives us the opportunity to expand our share of the market.”
In evaluating the business strategies of Florida Regional Laboratory Network, several themes emerge.
First, during the past five years, efforts to develop shared testing among interested hospitals proved fruitless. Lack of motivation and trust among many of the hospital labs which attended organizational meetings was responsible.
Florida Payers Increasingly Request Sophisticated Lab Data and Reports
“AT MANAGED CARE TIME, we hear a different story from HMOs now,” commented Steve Wilson, Director of Business Development at Consolidated Laboratory Services (CLO).“It’s less about the cost per test and more about the type of useful information our laboratory network can provide to them.
“Three years ago, managed care plans talked to us primarily about service—draw sites, stat labs—and price,” he explained. “Now that’s all on the back burner. Payers talk to us first about data and information capabilities, second about service and coverage.
“As a regional lab network, we got the message,” Wilson said. “We needed an effective way to link the information systems of our six laboratories and create useful data sets from the laboratory testing we do. Without this, managed care contracts would be tough for us to win.”
“This is one reason why FRLN selected Specialty Laboratories to be our reference lab and a full partner in our network,” stated Gary Onofry, Financial Controller at CLO. “First, our labs and clients will connect to each other through Specialty’s information system platform. Second, Specialty will collect all our test data in their repository. With their help, we will generate a variety of reports to meet the needs of our managed care plans. We’ve already learned that payers respond to these services by increasing capitation rates to acceptable levels.
“We also believe that the central data repository is important to our network in another way,” noted Onofry. “This data repository gives us a way generate laboratory information that we might sell to pharmaceutical companies, clinical trials companies, and other healthcare entities.”
Six Willing Partners
Second, the network established common ground among six willing partners. The glue which binds this group together is their common interest to protect their existing outreach business. It is the profit motive, supported by hospital administrators who want to protect and increase profits coming from their outreach programs.
Third, because FRLN’s labs compete head-to-head with the national labs, they understand the need for raising the service bar to remain competitive. That is why they are willing to cede some independence and fund the next level of information-based lab services. They see the competitive threat to their existing business and they are taking active steps to protect it.
Organized Like A Business
Fourth, this network is organized like a business. It is designed to generate cash flow that covers network expenses and generates a surplus to its partners. This makes it easier for hospital CEOs to commit up-front capital and support the network’s goals.
THE DARK REPORT believes that FRLN is an example of the upcoming new generation of regional laboratory networks. These networks are built around hospital labs which operate lab outreach programs.
Their lab administrators are much more in tune with marketplace issues, profit management, and service innovation than hospital labs which only perform in/outpatient testing.
Examples of this new generation of lab networks are Midwest Provider
Laboratory Network (MPLN) in Indiana (organized primarily by four labs with significant outreach business), and Joint Venture Hospital Laboratory Network (JVHLN) in Detroit (which involves labs from eight of the city’s nine health systems).
FRLN Pathology May Evolve Into a Comparable Network
BY DESIGN, ANATOMIC PATHOLOGY is not part of the Florida Reference Laboratory Network. For the foreseeable future, FRLN has chosen to let individual members deal with pathology at the local level.
“FRLN’s members see a three-prong strategy for controlling costs,” said Steve Wilson, Director of Business Development at Consolidated Laboratory Services (CLO). “First, control over the cost of routine testing, accomplished by increasing specimen volume into each lab.
“Second, by controlling reference and esoteric test costs through our partnership, where the reference lab member is willing accept risk,” he continued. “Third, pathology can contribute to improved cost performance. After the LLC forms, we hope to encourage and help the pathologists to form a parallel pathology organization. Given the historic independence of pathology groups, this will obviously need to be championed by the pathologists themselves.”
Think, Act, And Manage
What is common to this emerging class of regional laboratory networks is that their hospital lab administrators think, act, and manage like commercial lab managers. They are market sensitive, open to innovation, and concerned about generating profit.