Labs Entering New Cycle Of Evolution and Change

Our Pre-War College Industry Assessment

CEO SUMMARY: As some of the nation’s most astute and forward-looking lab executives prepare to gather in New Orleans for the fourth annual EXECUTIVE WAR COLLEGE, it is time to share our assessment of the laboratory and pathology industry. Recent events presage another profound shift in trends driving the evolution of laboratory services. This shift has positive ramifications for most laboratorians and pathologists.

Whenever the time for the Executive War College approaches, we like to take the opportunity to assess the laboratory and pathology industry.

Our role in gathering the manage- ment thought leaders of clinical laboratory and pathology for two days of debate, dialogue, and networking requires us to challenge conventional thinking. Those attending this year’s Executive War College on May 11-12 consciously seek effective solutions to practical problems.

This requires our pre-War College lab industry assessment to be a critical look at real-world influences on the laboratory organization of today. It is one of our most closely scrutinized and intensely debated features in THE DARK REPORT.

This year we hope to be just as controversial. Travels to laboratories throughout the nation provide us a unique perspective on what works—and what doesn’t. Regular conversations with diagnostics manufacturers, hospital administrators, and healthcare experts cue us about what’s happening now and what’s expected to happen in the next few years.

Of course, 100% of our predictions for the lab industry do not prove correct, but our consistent record for accuracy and timing is respected throughout the industry. THE DARK REPORT is now recognized as the leading source of accurate business intelligence for laboratory executives, pathologists, and even the financial community which funds laboratory organizations.

For 1999 and 2000, there is plenty of change ahead for the laboratory industry. But it will generally be positive change. This next market cycle is less about eliminating people and cutting costs and more about building the “right” kind of service menu.

To be more specific, since 1994, both the commercial laboratory segment and the hospital laboratory segment have undergone horrific restructuring. In many cases, rapidly-eroding finances forced lab organizations to take radical, wrenching steps to reduce costs and achieve stability of revenues and operating profits.

This was painful to all participants in laboratory medicine. Med techs and loyal employees bore the brunt of this, enduring waves of lay-offs, staffing cutbacks, and extra workloads. Surviving lab employees found themselves asked to do more work in exchange for less money.

But lab owners, pathologists, lab managers, and administrators suffered equally. The graveyard of defunct laboratories is littered with bodies: Damon, Allied, Nichols, MetPath/Corning Clinical Labs, National Health, Physicians Clinical Labs, Meris, and Universal Standard are among the best known. Each hit a financial brick wall that stopped them cold. Most morphed into a surviving organization which still operates today.

Hospital labs experienced their own brand of financial and consolidation mayhem. This activity predominated in 1995, 1996, 1997, and 1998.

In the commercial lab industry, the specific cycle of consolidation has passed. What is left can be described as a “mopping up” process. Quest Diagnostics Incorporated’s impending acquisition of SmithKline Beecham Clinical Laboratories only represents a business move that SmithKline Beecham, PLC should have done several years ago, as did Roche and Corning Corporation.

FIRSTS FROM WAR COLLEGE ’96

When the first EXECUTIVE WAR COLLEGE convened in Pittsburgh in 1996, it brought together laboratorians interested in what was then the hot trend of regional laboratory networking.

That meeting marked the first time leading regional lab network organizations made a public presentation to their management peers, with surprising results.

WAR COLLEGE ’96 was the first discovery that regional laboratory networks would be one of the most difficult management projects to organize and operate. In the years since 1996, the truth of that discovery has been validated by the actual experience of regional laboratory networks in every area of the country.

Consolidation Now Ebbing

Among hospital labs, the tidal wave of lab consolidation is now ebbing. There will continue to be a significant amount of ongoing hospital lab consolidation projects. But these are late-comers attempting to catch up to their peers. For the most part, future consolidation projects will involve existing hospital systems that acquire new hospitals. The new hospital’s laboratory will be consolidated and folded into the existing integrated system.

In both lab segments, these are clean-up events following the major trend. This is why we declare the end to laboratory consolidation as a major industry trend. Granting the truth of this pronouncement, what do we identify as the next major lab industry trend?

Regionalization Is Next Trend

We believe the next trend is “regionalization.” We define regionalization as the movement to create laboratory organizations which have extended service reach across a defined geographical area.

Unlike laboratory consolidation, which is an easy concept to define, laboratory regionalization will be an all-encompassing type of trend. It represents a variety of organizational models that can effectively and efficiently deliver laboratory testing services.

Despite this variety of organization models, each will have common characteristics that meet our definition of a regional laboratory system.

First, all participating laboratory sites are operated under a single administrative umbrella, regardless of who owns and operates the individual lab sites of the regional laboratory organization.

Second, the regional lab organization provides services to an easily- recognizable area of geography. In most cases, it will match the geography where the leading managed care plans have beneficiaries. This is consistent with healthcare’s evolution toward both integrated clinical systems and integrated operational systems.

Third, regional laboratory organizations will generally utilize existing laboratory resources already operating in that city, regardless of who owns those lab resources. With declining reimbursement and laboratory overcapacity in most markets, there will seldom be the need nor the motive to construct new laboratory facilities.

Fourth, the regional laboratory organization will have responsibility for at least three key functions: 1)negotiating and servicing managed care contracts; 2) developing and managing a unified sales and marketing program; and 3) handling billing, collections, and utilization reporting.

Using this checklist of four characteristics, there are a number of regional organizations operating today which already meet this criteria. Many have been profiled in THE DARK REPORT. Others appeared in recent years at the War College podium to profile their business strategy and experience in the marketplace.

One obvious category of regional laboratory organization is the network model. Early pioneers were Reference Laboratory Alliance in Pittsburgh and Bay Area Hospital Laboratory Network in San Francisco. Launched in 1995, they found limited success and eventually collapsed into other forms of regional services.

A sampling of networks operating today are Joint Venture Hospital Laboratories in Detroit, PacLab Laboratories in Washington State, Regional Laboratory Alliance in Kansas City, and LabNet of Middle Tennessee of Nashville (a War College ’99 case study). There is also a pathology network, Pathology Service Associates, headquartered in Florence, South Carolina (a War College ’99 case study).

Of course, the national commercial laboratories operate regional laboratory organizations. Each of their regional mother ships in cities like Philadelphia and St. Louis acts as a core lab and anchors a network of stat labs, drawing sites and courier routes serving that particular metropolitan area.

Integrated healthcare systems operate regional laboratory organizations. Penn State-Geisinger Health System operates an integrated laboratory system which serves the system’s hospitals, outreach clinics, and outpatient centers in a 30-county area of middle Pennsylvania.

Aurora Health Systems, based in Milwaukee, has a similar regional lab system which serves 17 hospitals located within a several hour drive of the metro area. Examples like Presbyterian Laboratory Services in Charlotte, North Carolina or Health Midwest in Kansas City illustrate that this model is already common.

FIRSTS FROM WAR COLLEGE ’97

New Orleans was the site of WAR COLLEGE ’97. The hot topic this year was hospital consolidation and a record crowd was on hand to learn from THE DARK REPORT’S pick of the leading hospital laboratory consolidation projects.

WAR COLLEGE ’97’S “first” was the discovery that hospital laboratory consolidation was under way in virtually every major city in the United States. It was validation of the fact that a new model for laboratory organization was gaining dominance in the United States and Canada

Joint Venture Model

The other model of regional laboratory organizations is that of the commercial lab/hospital system joint venture. Newest of these is the joint venture with MDS and Columbia/HCA in Georgia. A new core lab was constructed in Atlanta. It does reference testing for Columbia’s 18 hospitals in Georgia and solicits office-based testing from physicians in the Atlanta area.

Another similar model is Dynacare-Hermann Hospital. This is a joint venture between a commercial lab and a hospital lab that has been successful around its immediate hospital campus and is expanding its service area on a regular basis.

These examples are provided to make a point. Regionalization of laboratory services has been under way for several years already. As an industry trend, its roots are already set deep. These earliest operational models of a regional laboratory organization will be copied by those to follow.

FIRSTS FROM WAR COLLEGE ’98

Case studies presented at WAR COLLEGE ’98 revealed a fascinating surprise to both attendees and THE DARK REPORT alike.

It turned out that every laboratory case study at War College ’98 shared something in common which no one had spotted. Each was a combination, in some manner, of a hospital lab venturing with a commercial lab. This was the first discovery that such joint ventures were increasing in number and influence.

More importantly, it was the first confirmation that financial pressures were causing hospital labs to reassess their traditional animosity to partnering with commercial labs. In today’s managed healthcare world, financial benefits from specific partnership arrangements are too compelling for hospital labs to ignore.

Dominant Influences

As in past years, this assessment offers our thinking and analysis about the dominant influences shaping laboratories and management decisions. We provide our reasons for developing these conclusions and invite comments and critiques from our clients and readers.

This annual assessment of the lab industry is an important statement. It is designed to provoke thoughtful conversation and debate at the upcoming Executive War College in New Orleans in just a few weeks.

Further, it is intended to help laboratory executives validate their own observations about marketplace developments in the lab industry. Good strategic planning requires an accurate, real-world assessment of events shaping our healthcare community.

A special word to pathologists. THE DARK REPORT is strongly convinced that pathology practice consolidation will be a trend that parallels, and follows behind, that of clinical laboratory consolidation.

The fortunes of both groups are closely linked. There is every sign in the marketplace that the number of pathology consolidation projects will increase during the next two years.

As these pathology practice consolidations occur, their natural evolution will lead to pathology regionalization. This will happen because of the same market forces which are now shaping the regionalization of clinical laboratory services.

Thus, pathologists have a demonstrated template to guide the strategic planning for their group practice. These trends are unstoppable. Attempts to deny change and maintain the status quo will have one result.

Those pathology practices which chose to “sit tight” and wait to see what happens next will discover an unpleasant fact. They will have ceded control over their destiny, their ability to diversify income, and their ability to chose the clinical methods and technologies they want to use in their practice of medicine.

Laboratory executives and pathologists should realize that this regionalization trend will probably result in even greater change than that of laboratory consolidation.

PREDICTIONS ABOUT WAR COLLEGE ’99

WAR COLLEGE ’99 will convene at the New Orleans Sheraton Hotel on May 11-12. Several “firsts” will take place at this year’s event.

With case studies from Canada and New Zealand to American case studies at the podium, it will be the first international laboratory management program ever presented.

The laboratory and pathology sales and marketing edu-track at WAR COLLEGE ’99 is the first-ever national gathering of lab sales managers and marketing directors.

A special one-day laboratory CEO SUMMIT is scheduled for Thursday, May 13. This will be the first national meeting exclusively for lab CEOs and senior hospital lab administrators. It’s designed to be a strategic think tank for the lab industry’s leading executives.

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