CEO SUMMARY: Among hospital administrators, the popular wisdom is that their clinical lab is a cost center. This thinking leads them to consider drastic cost-management strategies that include partnering with commercial labs to manage in-hospital lab testing and the outright sale of lab outreach programs. On the other side of this debate, innovative health system executives recognize clinical labs as strategic assets that can deliver substantial value in terms of patient outcomes and reductions to the overall cost of care. This latter approach is what evolved over 10 years at Northwell Health.
First in a Series
WHETHER CORRECT OR NOT, MANY HOSPITAL AND HEALTH SYSTEM EXECUTIVES tend to view clinical laboratories as cost centers. At the same time, clinical lab directors consider their operations to be strategic clinical and financial assets.
When the two sides diverge in this way, the narrow, expense-focused view of health system administrators may lead them to consider farming out clinical lab testing to commercial lab companies. After all, if the hospital laboratory is merely a cost center and lab testing itself is a commodity—identical in quality and service regardless of which lab performs the assay—then executives in financially-strapped hospitals will default to the lowest-cost method of operations. They may ask: Why not outsource the clinical lab, as is done with other services such as anesthesia, dialysis, imaging, hospitalists, and staffing for the emergency room?
When such thinking dominates the discussion, administrators often turn to the most expedient solution to the problem by asking an independent lab company to manage all operations and produce test results for the lowest possible cost. Viewing clinical lab testing in this fashion can thus become an existential threat to lab managers and pathologists.
The problem with this thinking is that those administrators who view the clinical lab in this way may miss the opportunity to leverage the value of their labs for improving patient care, increasing market share, as well as boosting profitability through reductions in the overall cost of care and improvements in their health system’s quality performance under value-based payment systems.
In recent years, progressive and innovative health systems that worked closely with their clinical lab leadership have shown how lab testing can help hospitals, physicians, and other providers to provide greater value to health insurers and to patients by improving both clinical and financial results.
The work that TriCore Reference Laboratories has done in Santa Fe, N.M., is an example of a clinical lab that works closely with physicians throughout the state to improve results for patients and health insurers. Although TriCore is not an internal lab in a health system, it nonetheless functions as one in many ways. (See “TriCore Forges Ahead to Help Payers Manage Population Health,” TDR, May 20, 2019.)
Now there is another success story from the laboratory organization of Northwell Health, in Lake Success, N.Y. In December, the leadership of Northwell Health Laboratories published the details of how over more than 10 years (2008 through 2019), the clinical lab added value to its parent health system. This report was published in December in the peer-reviewed medical journal, the Archives of Pathology and Laboratory Medicine (APLM).
Concept of Clinical Lab 2.0
Parts of this story have been published previously as the authors of the APLM report explained. “An overarching vision for valuation of in-system clinical laboratory services, termed Clinical Lab 2.0, was presented in 2017 by the Project Santa Fe group,” the authors wrote in an earlier report published in APLM. “This vision emphasizes the favorable impact that clinical laboratories embedded within health systems can achieve, both for population health outcomes and for the financial performance of the parent health systems.”
In this most recent APLM report, the authors described the strategies and implementation steps the Northwell lab team followed since 2008. For this reason, the article serves as a guide for senior lab administrators and laboratory directors to follow when developing similar strategies to boost the value of lab testing in their own health systems. Also, it is possible that CEOs and other hospital and health system administrators will want to emulate this lab-value success story.
The story of how Northwell Health retained the lab is particularly important today, given how payment for clinical and anatomic lab testing has declined in recent years, and how many health system administrators continue to view clinical laboratory services simply as a cost center.
10-Year Lab Strategy & Plan
In this multi-part series, THE DARK REPORT will describe the chronology of Northwell Health Laboratories from 2008 through last year, including steps Northwell corporate leadership took when they were considering a joint-venture partnership with a commercial lab company to run the Northwell labs.
This first installment in a series of articles THE DARK REPORT will publish describes how Northwell Health administrators considered the advantages and disadvantages of outsourcing their clinical laboratory in 2008, before deciding to accept lab leadership’s multi-year plan to retain the lab and enhance the value of lab testing for Northwell.
When discussions began in 2008 about selling the health system’s lab assets, Northwell Health was a 15-hospital system based in Lake Success, N.Y., just outside New York City in the northwestern corner of Long Island. Today, the health system has 23 hospitals, and an extensive network of physician offices and other clinical assets that operate as one of the nation’s largest and most respected health systems.
In the next parts of the series, THE DARK REPORT will explain how Northwell’s lab leadership and staff achieved the goals laid out in 2008, and how the lab and health system are positioned for success in the future. This narrative can be instructional for pathologists and clinical lab directors in other hospitals and health systems.
Northwell’s Lab in 2008
Over the past 25 years, commercial lab companies have offered to hospital and health system CEOs the opportunity to lower lab test costs, increase efficiency, and grow outreach lab services by acquiring the clinical lab assets or forming joint-venture partnerships to operate the lab. When they announce these joint venture deals, the details often are reported widely.
Conversely, the details of negotiations between health systems and commercial lab companies that did not result in a sale or some form of lab collaboration agreement are rarely made public. For that reason, it’s extraordinary that the details on the story of how one of the nation’s largest urban health systems considered forming a joint venture with a commercial laboratory to run all its lab operations—yet did not execute the deal—has now come to light.
In APLM’s December report, “Northwell Health Laboratories: The 10-Year Outcomes After Deciding to Keep the Lab,” Crawford and colleagues explained that the story began in 2008. The senior and corresponding author was James M. Crawford, MD, PhD, the Senior Vice President for Laboratory Services, NorthwellHealth.
Sale of System’s Lab Assets
At the time, health system executives considered monetizing the clinical lab by entering into a joint venture as a minority partner with one of two commercial laboratories. The offer under consideration involved accepting a multi-million-dollar payment for the health system’s lab assets.
If accepted, this offer would have meant that Northwell would then hold a minority stake in a lab joint venture with the commercial lab company that would purchase those lab assets. Under this arrangement, the commercial lab company would operate the health system’s inpatient, outpatient, and outreach lab services. Neither of the commercial laboratory companies that expressed interest in the JV opportunity in 2008 was named in the published story.
Following much discussion, the leadership of Northwell Health Laboratories persuaded the health system’s administrators that retaining the lab as a significant clinical and financial asset was the best strategy. Their arguments were based on a vision for Northwell being able to leverage the lab to expand its service offerings in the New York Metro, one of the largest healthcare markets in the nation.
One of the most persuasive parts of the argument was the lab’s six-part, five-year strategic plan for lab growth for 2009 through 2014.
In the 10 years since (2009-2018), test volume in the core laboratory grew by 4.5% per year and revenue from testing rose by 16.0% each year, the authors wrote. Also during this time, hospital-based lab testing costs remained constant or grew in accordance with the development of strategic clinical programs. During this time, the lab developed innovative system-oriented clinical and value-based payment programs.
In addition, Northwell Health Laboratories developed a joint venture in 2014 with New York City Health and Hospitals. Under this arrangement, Northwell Health’s lab organization worked with New York City Health and Hospitals to achieve substantial cost savings for laboratory services in both organizations.
Also, in 2011 and in 2016, the Northwell Health labs were called on to support two distressed hospital labs in the nearby borough of Brooklyn, New York.
Validating Northwell Health’s decision to retain the laboratories as a wholly-owned system asset, the 10-year outcomes have exceeded projections, theAPLM report authors added. “Northwell’s clinical lab is now well positioned for leading innovation in patient care and for helping to drive a favorable posture for the health system under new payment models for healthcare,” they wrote.
How Health System Administrators Developed Criteria in 2008 for a Laboratory Joint Venture
WHEN THE CLINICAL LABORATORY TEAM AT NORTHWELL HEALTH published its peer-reviewed study of their lab’s experience during the years 2008 to 2018, it listed the factors that the Northwell administration considered when it issued a request for proposal (RFP) in June 2008 for a laboratory joint venture with a potential commercial laboratory partner.
This list is presented below. It provides hospital lab administrators and pathologists with insights on the issues they must address when educating their administrators about why their lab is simply not a cost center that can be outsourced to the cheapest provider of lab tests to their hospital or health system, but is a strategic asset that can create value.
Goals for a Potential Laboratory Joint Venture
(JV to involve a commercial lab company with health system as a minority partner)
- Synergistic partnering/collaboration to establish a new entity as a national and international leader
- Equity opportunity (monetization of a system asset)
- Continued growth in laboratory services
- Increase margin from laboratory services
- Maintain and enhance service to the existing client base
- Further develop anatomic pathology service
- Further develop molecular and specialized testing
- Enhance academic mission
Arguments for Monetizing the Laboratory
(by sale to a JV)
- Immediate short-term cash influx
- Relief from costs of salaries, benefits, employee management
- Access to larger geographic area through joint venture partner
Arguments for not monetizing the Laboratory
- Retaining complete control of a major clinical asset
- Maintaining one of the larger growth-oriented financial assets in the system
- Opportunity to grow into different revenue streams
- Access to laboratory data as a longitudinal resource for patient management
Source: “10-Year Outcomes After Deciding to Keep the Lab”—Jensen et al, Arch Pathol Lab Med. 2019 Dec;143(12):1517-153.
A Timely, Important Story
“This report comes at an auspicious time, since the not-for-profit sector of the laboratory industry faces challenges that threaten its status as in-system assets,” the authors explained. “Inpatient laboratory services are a cost center for hospitals; key performance metrics are cost-per-test and total laboratory costs for the hospital.”
Hospital and health system executives view cost efficiencies and laboratory test utilization management as significant indicators of performance and any perceived failure to achieve satisfactory clinical or financial results leads these executives to consider alternative management arrangements, the authors added.
When health systems consider such alternatives, the largest commercial laboratory companies, including Laboratory Corporation of America and Quest Diagnostics, have three factors in their favor:
- They offer competitive lab test pricing wherever they have operations;
- They are in-network through the national contracts they have with many national and regional health insurers; and
- They have the size to withstand much of the reductions that health insurers and government payers have made in what they pay for laboratory tests.
Northwell Lab Had a Vision
As a result of the challenges that executives of not-for-profit health systems face, they are open to overtures from commercial laboratories for divestment (and one-time monetization) of their ambulatory laboratory assets, or entry into minority positions in joint ventures, while arranging for external managed services of their inpatient clinical laboratories, the authors explained. The decision Northwell Health made in 2008 to keep the lab gave Crawford and colleagues an opportunity to realize the vision they had put forth for achieving the value of in-system lab.
Their vision had included achieving in-system cost efficiencies for all clinical lab practice sites and unification of health information on patients from both the ambulatory and in-patient sectors of healthcare. For health insurers, such information has high value.
The lab staff’s vision also included growth of outreach lab services to health-system affiliated physician practices and the establishment of pathology informatics to leverage the latent information present in the massive data streams the clinical laboratory generated.
In 2008, Northwell’s lab had 50 pathologists on staff in various subspecialties. It also had professional PhD expertise in microbiology, virology, molecular pathology, and cytogenetics.
Because the lab was founded in 1997, its lab management team was experienced and highly qualified, given that they already had more than 10 years of experience running the Northwell Health Laboratories network successfully.
Also in 2008, the core laboratory occupied 60,000 square feet in a building in Lake Success and ran 5.90 million (or 98%) of the 6.02 million tests the health system generated each year from its hospitals, affiliated physician practices, nursing homes, in-system reference testing, and from clinical trials.
From the hospitals alone, testing generated $27.7 million in revenue from 2.12 million tests annually, representing 36% of the core lab’s revenue.
The lab also ran 3.74 million tests that came from outreach testing, including physician practices, nursing homes, and reference testing. This volume generated $43.2 million in revenue and represented 59% of total net revenue.
Lab Team Given Six Ambitious Goals in 2008
TO SHOW THAT IT COULD DELIVER VALUE TO THE PARENT HEALTH SYSTEM, the laboratory team at Northwell Health put forth six key goals for growth in 2008. This was at the same time that administration was considering selling the clinical lab and taking a minority share in the resulting clinical laboratory joint venture.
This was to be the laboratory’s 6-part, 5-year strategic plan over the next five years, meaning 2009 through 2014. The goals were listed as follows:
- Continue to support the health system’s hospital-based clinical laboratory needs.
- Generate incremental physician outreach revenue and increase regional market share.
- Become recognized as a national reference laboratory through further development of test protocols and growth in areas of molecular diagnostics, anatomic pathology, and specialized testing.
- Continue to grow clinical trials business focusing on high margin and high complexity testing.
- Sustain the existing 18 nursing home clients while continuing to assess the effect of supporting nursing homes and the health system’s efforts to provide care.
- Enhance and drive the health system’s brand.
Source: “10-Year Outcomes After Deciding to Keep the Lab”—Jensen et al, Arch Pathol Lab Med. 2019 Dec;143(12):1517-153.
Clinical Trial Revenue
At the same time, clinical trials ran 260,000 tests each year, generating $3.4 million in revenue, or 5% of the total net revenue, the authors explained.
For blood draws, the laboratory had 11 patient service centers, eight of which were in the surrounding communities and three of which were based in Northwell Health’s physicians’ offices. Each day, all lines of the labs’ business generated about 5,000 requisitions and there were 30,000 laboratory test pick-ups per month. Primarily, the test pickups came from the Borough of Queens in New York and the two counties on Long Island, Nassau on the west end, and Suffolk on the east end.
In October 2008, lab executives projected revenue for the year would total $69.2 million, based on 5.9 million tests. It’s important to note, however, that the projections fell slightly short of the actual total, which were $72.8 million in revenue for 6.0 million tests.
These numbers represented significant increases from the revenue numbers reported in the previous two years ($47.4 million in 2006 and $59.9 million in 2007). Over those three years, outreach revenue grew by 64% from $26.2 million in 2006 to $43.2 million in 2008, the authors reported.
In June 2008, health system administrators issued a request for proposals to commercial laboratories seeking a potential partner for the Northwell Health Laboratories. Two months later, a commercial lab company responded offering to form a joint venture to operate Northwell labs.
Under the proposal, Northwell Health would retain a minority interest and the commercial lab company would control the operation. Discussions ensued with this commercial lab from September through November 2008. Later in November, another potential commercial laboratory partner expressed interest in working with Northwell Health, although the authors provided no details about this second offer.
To evaluate the proposals, Northwell Health’s administrators appointed members of the board of trustees to a subcommittee to assess how well the proposals met the goals outlined in the RFP for the joint venture. The subcommittee also considered the arguments for and against monetizing laboratory services.
Assessing the Options
Lab leaders presented arguments to the subcommittee about the importance of retaining lab operations in full.
The discussion in October 2008 included the core lab’s net revenue for 2006 and 2007 and the projected revenue for 2008 and 2009, along with actual test volume from 2007 and projected test volume for 2008 by source categories. Based on projected 2008 revenue of $69.2 million (representing a growth rate of 20%), lab leaders projected that revenue in 2009 would grow by 13% to $81.5 million.
Test volume from Northwell’s hospitals was projected to be mostly steady (0.3% growth) at about 2.1 million tests. Growth in testing from nursing homes was expected to rise from 331,588 in 2007 to 359,312 in 2008 (growth of 8.4%), and from clinical trials, test volume would rise from 217,636 in 2007 to 237,223 in 2008 (9.0% growth).
Reference testing was expected to grow at a substantial rate from 24,430 tests in 2007 to 93,158 tests in 2008 (an increase of 281.3%). Outreach volume also was expected to rise significantly from 2.4 million tests in 2007 to 3.2 million in 2008 (growth of 31.2%), the authors wrote.
2009 Leadership, Structure
The combination of the 2008 positive numbers showing strong projected growth in test volume and revenue, and the projected growth for 2009 through 2014, helped to persuade the health system’s administrators to retain the laboratory as a fully-owned system asset. The result was the administrators endorsed both the vision the lab’s executives and staff offered and the necessary organizational structure to achieve that vision.
Specifically, in order to have Northwell Health Laboratories become a fully-integrated health system laboratory network, at the start of 2009 the health system’s administrators approved the formation of a laboratory service line and appointed Crawford as both Chair of the Department of Pathology and Laboratory Medicine (DPLM) and as Senior Vice President for laboratory services.
New Clinical Programs
Reporting to both the Chief Medical Officer and Chief Operating Officer respectively, Crawford was asked to identify and develop new clinical programs consistent with market opportunities, patients’ needs, and financial feasibility.
In the next installment of this series, THE DARK REPORT will describe the steps Northwell’s clinical laboratory team took to achieve the objectives the administration approved.
Contact James Crawford, MD, PhD, at 516-719-1060 or JCrawford1@northwell.edu.