CEO SUMMARY: Clinical labs are beginning to make the transition from a volume-based financial model to a model based on value-based payments. To survive this transition, labs must find ways to create value. The lab at Henry Ford Health System has identified 10 ways that it can contribute more value to physicians and its parent health system. One way is to help eliminate needless tests and processes. Other initiatives involve improving supplier processes, helping to reduce patient length of stay, creating a lab test formulary, and demonstrating the financial efficacy of all lab interventions.
First of Two parts
BY NOW, MOST PATHOLOGISTS AND CLINICAL LAB ADMINISTRATORS recognize that the era of fee-for-service reimbursement will soon end. To stay ahead of this critical financial trend, innovative clinical laboratories are taking steps to add value to lab testing services.
Such an effort is underway within the clinical laboratory and anatomic pathology departments at Henry Ford Health System in Detroit, Michigan. Early efforts are generating encouraging results and pathologist Gaurav Sharma, M.D., has identified 10 ways that labs can create value, along with the five most common barriers that laboratories face when implementing these value-creation steps.
Sharma is the Director of the Regional Medical Laboratory and Associate Medical Director of Core Laboratory, Quality Systems and Regulatory Affairs at HFHS. He explained how labs can demonstrate value at the Executive War College in New Orleans in May.
“The first step in the value-creation process is to recognize that this is a new model—a new paradigm—for lab testing services,” recommended Sharma. “All labs will need to leave behind the long-standing model of the laboratory as a stand-alone cost center in which in creased specimen volume generates more fee-for-service revenue. Today, increasingly, a lab will be reimbursed and judged on how it delivers value during the entire patient encounter, particularly in ways that lab test results contribute to improved patient outcomes.
“The great challenge now is to figure out how to transition to the future model, a model where labs may no longer be independent silos within hospital systems,” he said. “Instead, within our health system, our lab’s value will be judged on its overall clinical and financial outcomes.
“Today, clinical laboratories are a service specialty,” he explained. “Yet, under the Affordable Care Act, hospitals and health systems are charged with three basic tasks and none of them applies to ensuring the continuation of any service specialty. To survive in an ACA-driven environment, labs must be able to:
- “Improve patient care outcomes because quality metrics and new payment models are tied to those quality metrics;
- “Improve financial outcomes by cutting costs while continuing to deliver the same or higher levels of care; and,
- “Decrease waste.
“Among these three tasks, there is a concern about what will happen to the lab in its current role as a service specialty, given that there is also no way to increase payment for our lab testing services,” Sharma stated. “If a lab can’t increase or sustain revenue, the only option is to spend less.
“While there are very few ways for labs to spend less, one thing we can do is target things that don’t need to be done in the first place or have to be done more than once, such as speciman redraws, for example,” he added. “Also, we could work to eliminate anything in the lab that has to be done manually. Manual processes require staff time, and salaries are one of any lab’s highest costs. If better technology is available, and if automation can solve the problem, then our lab should get it.
Need To Find Cost Savings
“We can control what happens in the labs. That’s why we have Lean and process improvement tools,” he noted. “Because the need to find cost savings is so acute, we should look both within and outside the laboratory. “Unfortunately, when we look outside the lab, we find that’s where many of our costs and waste originate,” Sharma said. “What percentage of defects occur outside the lab? It’s more than 80%.
“That means, all but 20% of the defects your staff encounters and wastes time fixing are not caused by your staff!” he said. “This is why controlling the overall cost of lab testing is a challenge.
“Outside the lab we find collection and order defects, or we find something that went wrong with the specimen in transport,” stated Sharma. “So why do we typically fixate on continual analysis and tweaking of our in-lab processes when over 80% of the defects in lab testing are not in our direct control?”
Changes To Lab operations
“The answer is that we need to create value from those elements that our lab can control or influence,” he answered. “Our lab team at HFHS has identified 10 opportunities for labs to create value. As you understand each, you will see that most of the 10 opportunities involve making changes inside the lab and collaborating with partners outside the lab. They are as follows:
- Choose the right technology to reduce length of stay.
- Question the need for expensive tests.
- Create an institutional test formulary.
- Demonstrate the financial efficacy of the formulary’s interventions.
- Understand the downstream implications of lab decisions.
- Monitor and reduce defects.
- Improve supplier processes.
- Reduce unintended operating room testing.
- Reduce unintended inpatient testing.
- Reduce unintended testing in specialty clinics.
1. Choose the right technology to reduce length of stay
“The first strategy is to choose the right technology,” noted Sharma. “This requires evaluating how much use of a new technology can save in dollars versus current technology.
“One good example comes from using mass spectrometry, specifically mass spec with matrix-assisted laser desorption/ionization–time of flight (MALDI-TOF) in microbiology labs,” he advised. “This technology typically costs over $110,000. If you were in the finance department, you would ask the lab to justify that expense. Traditionally, this would be limited to savings in FTEs or a similar labbased metric.
“Our microbiologists demonstrated that MALDI-TOF reduced our turnaround time for reporting a positive result for Candida from 4.5 to 2 days,” Sharma said. “That’s a reduction of 2.5 days for each patient with Candida sepsis, almost all of whom are in the intensive care unit. “Next, we determined the effect of this early reporting on the length of stay of each of these patients,” Sharma noted. “Before
MALKDI-TOF, it was over 14 days. After the introduction of MALDITOF, length of stay fell to under 10 days. That is a reduction in average length of stay of more than four days!
“One day of stay in the ICU costs $4,100,” he added. “That means the system would save $19,000 for each Candida patient who can go home 4.8 days sooner.
“Based on the number of patients we have with Candida, use of MALDI-TOF and our ability to render an earlier diagnosis from our microbiology lab saved $1.1 million the first year for Henry Ford Health System,” he said.
“Using the right technology basically means using the right tool for the job,” Sharma added. “As we did so, the technology paid for itself in the first month. We got this result despite the fact that working though those calculations took us a week or more of manual chart review.
“Now, here’s the best part: We use MALDI-TOF when diagnosing 100 other pathogens,” Sharma explained. “Without MALDI-TOF, we lacked the capability to quickly identify these organisms and enable a more focused treatment plan.
2. Question the need for expensive tests
“Strategy number two is to question the relevance of and need for expensive tests,” stated Sharma. “Most labs start with send-out tests and historically doing so has
been a success. In fact, our success in this domain has prompted us to use the same strategy to reduce spending on inappropriate inpatient testing.
How One Lab Contributed $50 Million of Annual Cost Avoidance with Companion Diagnostics
As the lab team at Henry Ford Health System in Detroit worked to demonstrate more value, one of the most effective approaches was to implement a lab test formulary, which is the third of 10 ways to deliver more value that are in use at HFHS. The fourth way to deliver more value is by demonstrating the downstream savings derived from physicians using in-house molecular test results for selection of appropriate pharmacological regimens for cancer patients. Presented about is a summary that the molecular lab developed in collaboration with the pharmacy department to show the cost avoidance associated with just five companion diagnostic tests.
“Controlling send-out tests can be challenging, not the least because reference labs send sales representatives to market their proprietary tests directly to HFHS physicians, usually neurologists or oncologists,” observed Sharma. “Based on the marketing material, physicians or patients may ask that these tests be sent out. Our challenge was that only a very small minority of these send-out tests would come to a pathologist’s desk for a formal review.
“Further, when we determined a test was irrelevant and contacted the provider, a disagreement often ensued about who should be making these decisions,” he continued. “That means a majority of esoteric and expensive send-out tests went to reference labs, and we lacked a mechanism to manage these orders.
“While figures may vary, large academic institutions like ours can easily spend about $3.5 million a year on send-out tests,” recalled Sharma. “In particular, the novel molecular and genetic tests are an area of challenge for laboratories and providers and so our team kept track of such requests.
“There was also a lack of standardization,” he said. “Some physicians wanted to send out additional tests for liver cancers. Some wanted to send out the same test only for head and neck cancers. We realized that we needed to reduce this variation and bring in standardization by our third value-creation strategy, which was drafting a framework for a multidisciplinary and institutionwide formulary for lab tests.
3. Create an institutional test formulary
“An institutional formulary solved this problem because it is based on one of the leading principles we found in creating value: Before you reduce waste in a particular area, it is best to first standardize lab processes,” he said.
“That’s what a formulary does: it standardizes your processes for test ordering,” explained Sharma. “For a lab test formulary to be successful, a committee is needed that represents all parties involved, such as clinical providers and financial representatives.
“Our committee included a chief medical officer, chief financial officers, the chief operating officer, all their designees, two pathologists, an oncologist, and two surgeons,” he noted. “The formulary committee meets every quarter and our lab has a departmental review committee that meets every month.
“Whenever the lab gets a request for a send-out test now, it is not automatically sent to the reference lab,” stated Sharma. “Rather, the order goes to a pathologist review or a department review, where a decision is rendered. If the clinician disagrees, we take it to the formulary committee, and the formulary committee decides whether to agree or disagree with the order.
“To date, of 38 decisions the committee has rendered, we had zero occasions when the formulary committee disagreed with the recommendation of the lab,” commented Sharma. “Following that decision, our laboratory can decide whether we should run the test internally or refer it out. We can set the utilization protocols for that test as well.
“When we studied the efficacy of using a formulary, we were surprised by the results, and this finding led us to our fourth value-creation strategy,” he stated.
4. Demonstrate the financial efficacy of the formulary’s interventions
“To demonstrate the efficacy of our interventions at HFHS, we listed costly assays and then analyzed the clinical benefit of each one,” noted Sharma. “On receiving a request for a next-generation sequencing test, we consulted with an oncologist on the intended use of results.
“The oncologists responded that the test was new, and patients demanded it,” recalled Sharma. “The cost of the test was $5,800 for solid tissue tumors and $7,500 when used for hemato-lymphoid malignancies. We found that most payers did not cover this test.
“We found no FDA approval; there was no mention of this specific assay in the NCCN guidelines at that point in time; and the assay was not part of a clinical trial at HFHS.
“For all these reasons, our formulary made this test unavailable as a service accessed through the HFHS formulary mechanism. But it was still accessible through the off-formulary mechanism, which I’ll explain below,” he said.
“At HFHS, when we send out tests that are on our formulary, we support the cost,” he explained. “Also, we are Michigan’s largest cancer center. Therefore, a lack of standardization in how we managed send-out tests meant that this one test was being requested for a range of malignancies.
“For another assay, there was a claimed use in management of patients with ER+ node-negative breast cancer,” said Sharma. “At the time of our analysis, there was no FDA approval nor a specific mention of this test in NCCN guidelines,” he said.
“The economics were similar to that of the earlier assay,” Sharma added. “The cost was $3,500 and the reimbursement was $150, meaning a cost of $3,350. Based on the cohort of cases that would qualify for these assays, the cumulative costs could be millions of dollars for HFHS.
“Here is the crux of the issue: One of the complexities with cancer care is the fact that the laboratory must factor in and try to address the psychological burden of a terminal diagnosis,” he said. “Once diagnosed with cancer, the patient is worried and looking for all possible help,” he stated. “We feel the laboratory must play a positive and proactive role in assisting the patient.
“Every lab has the challenge of balancing the responsibility of the health system to do everything humanly possible to support these patients versus the stark reality of these costs,” noted Sharma. “Previously, because our lab had no system to resolve this issue, the lab was often seen as being an obstacle to care rather than facilitators of cancer care.
Protocol proves Its Value
“Now, the formulary and cost analysis tools are in place,” he explained. “Our lab has a policy, a procedure, and a protocol for each of these tests. Thus, if the lab formulary does not endorse a test and the patient still wants to go forward, we will assist by releasing the tissue to the patient or the patient’s provider.
“From that point on, that test is off-formulary,” emphasized Sharma. “This may sound unconventional, but this process is routine for pharmaceuticals, where hospital formularies have been in place for years. Many times an institutional pharmacy formulary will allow off-formulary use on humanitarian grounds or when the patient assumes financial responsibility.
“You might think clinicians don’t like this, but the reality is they endorse it because they are no longer in the uncomfortable position of having to justify pathology’s position to cancer patients,” he stated. “They give the patient all the documentation, which includes the lab formulary’s recommendation. This transparent system provides our patients with all the information they need to make iFnformed decisions.
5. Understand the downstream implications of lab decisions
“Value-creation strategy number five resulted directly from strategy number four,” Sharma continued. “As part of our investigation into the relevance of our inhouse molecular tests, such as EGFR, KRAS, and BRAF, we asked the pharmacy department about the cost of the drug targets associated with these tests.
“The pharmacy team worked with us over two months to determine the costs” he stated. “Once we had those numbers, we could determine the manner in which our results affected the costs to HFHS and to our patients’ health insurers.
“Based on the number of cases we for lung cancer, for example, we generated pharma cost savings of over $14 million in
2012 and a similar figure in 2013,” Sharma noted. “So, yes, all labs run these tests every day. But seldom did we leave the lab to ask the customer, ‘Did you like it? Does it make any difference to you and the way you manage the patient?’
“We found that the pharmacists and providers use this diagnostic information because it gives them actionable data for decision making when selecting the right drug for each patient,” he stated. “It results in substantial savings in therapeutic drug costs. Unfortunately, the lab normally doesn’t capture how much money it saved because of more appropriate test orders and chemotherapy.
“However, we did add up each cancer type and learned that there was over $50 million annually in cost avoidance!” stated Sharma. “This is a big contribution by the laboratory. We realize, however, that cost-avoidance is not cost-reduction that can come out of a specific financial silo. But still, cost avoidance results in great savings for the system overall.
“Think about the value of the lab’s work in better use of lab tests: Without the tests that we did, $50 million more per year would have been spent on drugs. And without the time and effort of analysis with the pharmacy department, our downstream value creation would not have been captured,” Sharma concluded. “Therefore, we feel that these numbers demonstrate the value of the work our lab contributes to our parent health system, our physicians, and our patients.”
Contact Gaurav Sharma, M.D., at 3Gsharma2@hfhs.org.
In the second part of this series, we will review the next five value-creation strategies, along with the barriers labs encounter when creating value.