Spectrum Owns MEDex, Comments on Trends

North Carolina’s lab outreach giant gains access to managed care contracts

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CEO SUMMARY: Spectrum Laboratory Network recently completed its acquisition of MEDex Laboratories, Inc. of Kingsport, Tennessee. It is becoming a regional laboratory powerhouse, challenging Laboratory Corporation of America in North Carolina and establishing a sales base in Atlanta, long-dominated by Quest Diagnostics Incorporated. It is also adding managed care contracts.

HAVING COMPLETED ITS ACQUISITION of MEDex Laboratories, Inc. on December 12, 2004, Spectrum Laboratory Network has a claim to be the largest hospital laboratory outreach program in the United States.

Net collected revenues from Spectrum’s outreach clients are projected to be as much as $90 million during 2005. THE DARK REPORT is not aware of any hospital laboratory outreach program in the United States which equals or exceeds that total.

Largest Lab Firms In USA

Further, Spectrum Laboratory Network is probably the second largest, non-public laboratory company in the United States that primarily serves office-based physicians with routine and other testing services. Clinical Pathology Laboratories, Inc. (CPL) of Austin, Texas remains the largest private laboratory company, with estimated annual revenues in the range of $140 million.

Spectrum, based in Greensboro, North Carolina, paid $10.8 million to acquire MEDex, which had filed for Chapter 11 bankruptcy action in 2003 after it was discovered that its then-CEO, Michael Ladd, had conned both the lab company directors and its bankers to the tune of about $8.5 million. Ladd was convicted of criminal charges and currently is serving a 41-month sentence in a federal prison. (See TDR, May 27, 2003.)

“Based on financial documentation provided by the bankruptcy court during the time of the sale, MEDex had between $10 million to $12 million in laboratory business,” stated Nate Headley, CEO of Spectrum. “Since acquiring MEDex in December, however, we believe MEDex clients will generate between $16 million to $17 million in net revenues for us this year.

“That’s because of two factors. First, our billing and collections department is more sophisticated than the one at MEDex,” explained Headley. “It allows us to more accurately bill and collect a higher percentage of gross billings than was true of MEDex.

“Second, our laboratory offers a fuller menu of laboratory testing services to MEDex’s clients. So we are seeing higher volumes of specimen referrals from selected MEDex clients,” he commented.

Spectrum Laboratory Network is owned by Moses Cone Health System and High Point Regional Health System. In recent years, it has posted dramatic growth in its laboratory outreach program. Several operational strategies underpin this sustained growth in outreach revenues.

As the new owner of MEDex Laboratories, Spectrum Laboratory Network now serves fives states. They are: North Carolina, South Carolina, Virginia, Tennessee, and Georgia. “As we’ve grown, Spectrum has developed name recognition and credibility in our service markets,” stated Headley. “This now helps our sales program. Physicians know us and it helps shorten the sales process needed to bring on new client accounts.”

Access to MC Contracts

Spectrum’s size and reputation is helping it acquire something else which often eludes hospital lab testing outreach programs: managed care contracts. Headley observes that there is a new trend appearing in the marketplace.

“As a regional laboratory, we are now getting attention from national health insurance companies,” he explained. “We recently signed a contract with Cigna Healthcare that covers all their health plans across our five-state service area.

“I believe our success in obtaining this contract reflects a new interest in regional laboratories by the national health insurers,” he continued. “Cigna has also inked a regional contract with Clinical Pathology Laboratories.”

Headley’s observation is consistent with developments covered by THE DARK REPORT. Last year, UnitedHealth Groupadded Esoterix, Inc. to its national contract as a reference and esoteric test provider to its specialist physicians. (See TDR, June 28, 2004.)

Laboratory Provider Panel

In the case of the UnitedHealth contract with Esoterix, the insurer was motivated for three reasons. One, UnitedHealth wanted leverage when negotiating with its existing two contract lab providers, the two blood brothers. Two, with physicians objecting about service issues involving contract lab providers, UnitedHealth wanted to expand the lab provider panel to grant physicians more choices.

Third, leakage from its national lab contracts continued to be a problem. Adding Esoterix to the national contract was seen by UnitedHealth as a way to increase the overall volume of lab testing reimbursed at national contract pricing.

“In Spectrum’s negotiations with large health insurers, we see these same motives,” commented Headley. “It is strong evidence that health insurers, having worked almost exclusively with national laboratories for nearly ten years, now have a growing interest in adding regional laboratories to their provider panel. But that is only true if the region- al laboratory has a good network of patient service centers, rapid response laboratories, logistics, and a robust laboratory information capability.”

Payers’ Interest Is Shifting

“The interest of major health insurers in expanding their lab provider panel to include select regional laboratories is a significant change over past years,” added Headley. “It shows how the competitive landscape for the two national lab companies is changing.

“At the same time, it is our view that both national lab companies are maintaining a consistent discipline in pricing,” he said. “Maybe that is a sign of lessons learned from the 1990s, when deeply-discounted capitated contract pricing hurt the entire laboratory industry.”

Competition in Spectrum’s market area remains intense, particularly with Laboratory Corporation of America. “For example, LabCorp is making significant efforts to introduce browser-based lab ordering and resulting systems to their client-physicians,” stated Headley. “We encounter these arrangements a significant amount of time.

“To counter this, we have made regular investments to our information technology capabilities over the past three years,” said Headley. “Currently, 75% of our daily lab test orders are received via the Internet. These requisitions come from clients using our Web browser-based system to fill out test requisitions and transmit that information to us.”

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Browser-Based Lab Orders

Spectrum uses Atlas Development Corp.’s “LabWorks” as its Web browser-based lab test ordering/resulting system. It maintains a staff of customer service reps and “Atlas installers” in the field. The objective is to help new clients quickly install and train on Spectrum’s browser-based lab ordering/resulting system.

“We support the cost of this field staff because it saves us money throughout our work processes,” said Headley. “For example, Spectrum’s days sales outstanding (DSO) is currently at 47. Because a high number of our requisitions are received electronically over the Internet, they are legible and contain more comprehensive information. This helps us prepare and submit more accurate claims and bills on the first pass.

“As another example, our daily flow of requisitions exceeds 10,000,” he noted. “Yet we operate with only eight people entering orders.”

“As another example, our daily flow of requisitions exceeds 10,000,” he noted. “Yet we operate with only eight people entering orders. This reflects the progress we’ve made developing a system where a high percentage of our orders are received electronically and contain greater amounts of accurate and complete information.

Daily Shift In Paradigms

“In fact, our laboratory is seeing a daily shift in many of the paradigms which traditionally dominated laboratory operations,” offered Headley. “Internet-based information services is only one example. It is a radically different way for a physician’s office to order laboratory tests and receive the results. But at the same time, this Web-based electronic ordering/resulting capability creates new opportunities for our laboratory.

“It gives us an opportunity to offer new features to physicians and their staffs. We can also provide useful services to patients in a cost-effective manner. And, even as we are doing this for our customers, our laboratory has the opportunity to cut costs and improve its performance throughout our operation,” declared Headley.

Whether or not Spectrum Laboratory Network is the nation’s largest hospital lab outreach program, its swift growth must be recognized as a major management accomplishment. It was just 1997 when three health systems in North Carolina invested $6 million to build the off-site laboratory facility and launch its laboratory out- reach sales program.

Financial Struggles

Most laboratory administrators and pathologists know that, in its early years, Spectrum struggled to reach financial break-even. The turnaround started with the arrival of a veteran commercial laboratory industry executive. Working in tandem with his management team, most with hospital laboratory experience, the combination of skills has created a successful laboratory organization.

Many aspects of the Spectrum story should encourage leaders of hospital laboratory outreach programs throughout the United States. Further, Headley’s comments about changes in the lab testing marketplace confirm several trends identified by THE DARK REPORT.

Several Evolving Trends

First, physician acceptance of Web browser-based lab test ordering and resulting systems is increasing. One reason is that the national laboratories are devoting resources to convert their client base to this mode of ordering. In so doing, the competitive bar is raised for hospital laboratory outreach programs.

Second, it is noteworthy that Headley believes managed care companies have a genuine interest in using regional labs to expand their provider panels. This would be a most positive development for hospital lab outreach programs that have strong market share and the infrastructure necessary to meet the needs of payers.

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