Regional Growth Strategy Guides Presbyterian Labs Services

Last of a special two-part series.

CEO SUMMARY: Here’s a consolidated laboratory organization serving six hospitals and an extensive outreach program. As described in the first installment of this two-p art series, Presbyterian Laboratory Services actively reshaped itself into a well-run asset for its parent healthcare system. Consistent growth and strong management execution gives Presbyterian Laboratory Services the potential to become the anchor for a potent regional laboratory system that could serve the Carolinas.

SUSTAINED SUCCESS at Presbyterian Laboratory Services in Charlotte, North Carolina is a direct result of careful strategic thinking, combined with effective implementation.

As documented in the first installment of this two-part series, Presbyterian Laboratory Services (PLS) decided as early as 1988 to simultaneously pursue consolidation of laboratory operations among existing sites and increased outreach testing.

In subsequent years, a total of six hospital laboratories were consolidated into the laboratory system. During the period 1988-1997, annual outreach revenues climbed from $1 million to $22 million!

Today, Presbyterian Laboratory Services is a diversified laboratory organization with 330 employees and a sizable market share of outreach testing in Charlotte. Testing from six hospitals and more than 300 physician office clients flows into a core laboratory at the Presbyterian campus. PLS manages 34 physician office labs in the Charlotte area.

Future Investment

Because it is profitable, PLS is capable of investing in the future to meet the challenges of managed care. But what has PLS done differently than other hospital laboratories to expand at a time when most laboratories are shrinking?

According to Bob Hamon,Administrative Director of PLS, part of the answer lies in its application of the Darwin Theory. “This means we evolve in response to changes in the healthcare world,” he said. “More specifically, ‘Darwin Theory’ management means that we roll with the punches. Instead of dogmatically adhering to a fixed business plan, whenever healthcare changes become apparent, we try to understand and adapt to those changes.”

Hamon is describing a management system rooted in two principles: 1) know your market and customers; and 2) respond to marketplace changes by quickly introducing solutions.

“We are best described as opportunists,” added Hamon. “We don’t try to second guess the market. Rather, we care- fully watch our customers, competitors and healthcare providers. We believe that changes to the existing healthcare arrangements in town create opportunity for us.

“Anytime payers and providers change historical relationships, they create the opening for us to introduce ourselves, bid for the testing and acquire new business,” noted Hamon. “We view changes to healthcare within our community as opportunities to expand our business relationships.

“Obviously, embracing change brings us new business,” he continued. “But there is another benefit. Our entire laboratory staff now realizes that changes to healthcare are not a threat to their job stability. Because of our opportunistic pursuit of new business, the laboratory staff now appreciates the connection between growth, employment stability and additional career opportunities within the laboratory.”

By encouraging the PLS laboratory staff to embrace change, Hamon unleashed a powerful asset commonly overlooked by hospital laboratory administrators: the human potential of a talented group of laboratorians willing to support change and innovation.

This is also consistent with how PLS maintains flexibility to redirect energy away from planned projects toward new market opportunities whenever justified by circumstances. “Although we are flexible and frequently deviate from our plan,” explained Hamon, “our actions are always consistent with the strategic vision for PLS. The strategy remains constant, even if we decide to change our planned tactics.”

Operational Design

Within the Presbyterian Healthcare System, PLS operates as a stand-alone division. The operational design of PLS gives it the flexibility to pursue opportunities which other hospital-based laboratories cannot. Despite the fact that PLS is not structured as an independent division, corporation, LLC or other business form, PLS operates “autonomously.”

Budgets and cost accounting arrangements treat PLS as a separate entity within the Presbyterian System. “It is important to understand that our cost accounting is rigorous,” Hamon noted. “It is handled as if we were a separate company. Each service that our parent system provides us is costed as if we were contracting with outside vendors. We believe this makes our financial numbers and productivity measurements much more accurate than those of other hospital laboratories.”

PLS also has its own human resource person. This arrangement permits the laboratory to quickly redesign job descriptions, fill open positions and deal with human issues resulting from ongoing restructuring and re-engineering of the various laboratory sites.

Another fascinating aspect to PLS is the way it is reimbursed by the hospitals for the in-and-outpatient testing it provides. “As new hospitals were acquired, we wanted to consolidate their laboratories,” recalled Hamon. “Most frequently this met with resistance from the new hospital CEO and staff. After all, it requires trust and confidence to give up in-house testing to an off-site core laboratory.

“In order to put the relationship on a win-win basis, we agreed to accept reimbursement from the hospitals on a per-test basis. This accomplished two things. First, it took the expense of the laboratory off the hospital CEO’s monthly budget. Second, it converted laboratory services from a fixed cost to a variable cost.

“Now his laboratory expense varies in direct proportion with his occupancy,” continued Hamon. “The hospital only pays for laboratory services as incurred by the patient. Hospital CEOs like this, because it permits laboratory costs to rise and fall proportionally with occupancy levels.”

The obvious question is: What happens to the laboratory when hospital occupancy rates are down, and the laboratory is receiving proportionately less money? How does the laboratory pay its bills?

“It is our large volume of outreach testing which makes this arrangement work for the hospital and the laboratory,” answered Hamon. “We have a diversified source of revenue outside the hospitals. Thus, declines in hospital bed occupancy and the resulting decline in lab testing reimbursement is offset by the steady flow of outreach testing and revenues.”

PLS also knows what business it is in. “We are organized to provide five distinct product lines: 1) hospital contracts, which cover in- and outpatient testing; 2) physician office laboratories managed under contract; 3) skilled nursing facilities; 4) traditional reference and physician outreach accounts; and 5) patient service centers,” he noted.

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Strategic Plan

“This feeds our strategic plan,” Hamon said. “We’ve identified six core competencies at PLS. We are lumpers, not splitters. Thus we tend to lump things into categories. We determined that our business involves six core competencies.

“Because we want to encourage people to think outside of their traditional boxes, we created six core competency teams. These are headed by either a director or a manager. Each team is structured to include the following: a facilitator, a pathologist, an executive owner, a working owner and six staff employees.”

Problems and management issues are fed into these cross-disciplinary teams. “Each team is responsible for its area of lab operations across the entire system,” explained Hamon. “This cross-discipline approach requires people to think outside the box on a regular basis.

“Also, every month we meet off-site as a team for one full day,” he said. “We work on strategic planning and address operational issues. This allows us to regularly update our strategic plan. Our teamwork consultant emphasized to us that we cannot be a team if we do not practice. So we use this one day per month as our practice day.”

Constant Site Visits

Hamon addressed another strategic factor in PLS’s success. “We constantly do site visits of laboratories and business operations throughout the United States which we perceive as being ahead of us. We want to borrow the things they have done well and bring them back to implement them in Charlotte.”

This creative borrowing inspires the management team at PLS. For example, to solve logistics and courier problems, Hamon spent the day riding in a Roadways diesel truck looking at how they picked up and delivered packages. He visited Federal Express in Memphis.

When PLS looked at ways to improve courier service, they invested in a handheld package registration system. “This technology is similar to that used by Federal Express and UPS,” said Hamon. “In each doctor’s office, our courier wands the specimen with a bar code reader. This information goes into the handheld unit. When the courier returns to the lab, he downloads this information into the computer. We now have accession number, patient, office pick-up time and laboratory arrival time in our computer database.”

Clients of the laboratory love this feature, since PLS now can account for the specimen at pick-up, and every step which follows. Plus, there has been a direct improvement in service. “Once these tracking units were in place, we saw mistakes and errors involved in specimen pick-up and delivery fall by as much as 75%,” said Guanah Davis, logistics manager at PLS. “We got a double benefit. Our customers noticed the new technology and improved service. Meanwhile, we saw a direct reduction in errors with a corresponding reduction in costs.”

One obvious secret to PLS’s sustained success is its recognition that costs in the laboratory could only be controlled by increasing specimen volume. Two strategies bring additional specimens into a laboratory. One is consolidation, the other is increasing outreach.

“Frankly, a turning point was when we looked at our cost performance in 1993,” observed Hamon. “As we defined our average cost per test, it had increased from $10.60 in 1988 to $16.50 in 1993. We understood that, if we did- n’t do things differently, our average cost per test would probably top $21.00 in five more years.

“This was the point in time when we appreciated how important increased outreach testing would be if we were to provide our parent healthcare system lower average testing costs over a multi-year period,” continued Hamon.

“We manage our laboratory as a business, not as the old paradigm of a clinical provider. Thus, our emphasis is on meeting and exceeding the expectations of our customers. Since our clients expect clinical accuracy and quality, our business strategy delivers that. But, unlike laboratories still caught in the old paradigm, we are prepared to respond to their other needs and expectations for service, cost and testing. Those other features become our competitive advantage in the marketplace.”

PLS, Hamon Honored As Lab Innovators

Sustained excellence at Presbyterian Laboratory Services (PLS) has not escaped the notice of others. In recent years both PLS and Bob Hamon earned recognition as innovators within the laboratory industry.

In 1995, SunHealth Alliance, Inc. gave PLS its 1995 Laboratory Innovator Award. PLS was selected through a peer review process comprised, in part, of members from the 300 hospital buying alliance.

In 1997, Bob Hamon, Administrative Director at PLS, was picked by THE DARK REPORT as one of only eight Laboratory Innovators To Watch In 1997.

In both cases, outside experts recognized that the multi-year performance of Presbyterian Laboratory Services was exceptional, particularly during a period when the clinical laboratory industry is under financial pressure from managed care.

Business Differentiation

“We accomplish this by a strategy of business differentiation,” explained Hamon. “We differentiate ourselves on three points: quality, cost effectiveness, and customer satisfaction. We benchmark our effectiveness by watching client turnover, which is negligible from year to year.”

Apparently the marketplace recognizes PLS’s success in differentiating itself in these three business areas. The outreach geography served by PLS has increased in four steps. Beginning in 1988, PLS defined its service area as a one mile radius around the hospital laboratory. By 1992, this had expanded to a ten mile radius.

In 1994, PLS opened the radius to 60 miles around the core lab and began to approach other hospitals to see if they were interested in joining the consolidated laboratory organization.

As outreach specimen volume increased, PLS found it necessary to build a bigger core laboratory. Currently, up-fitting of a new 54,000 square foot facility is under way. As part of this strategic expansion, PLS expanded its service area to a 90-mile radius.

“We believe that the next step in the revolution of healthcare in Charlotte is regionalization,” explained Hamon. “Our healthcare system is merging with another and we must be prepared to serve a much larger geography than before. Although we are excited about building a new core laboratory, we are also wary about making such a major commitment at a time when managed care is threatening the financial structure of clinical laboratories.”

Despite Hamon’s concerns, his group is on target with its assessment that the marketplace is undergoing regionalization. Assuming the PLS continues its tradition of strong service and, competitive pricing, it has as good a chance as any of the national laboratories to become the dominant regional laboratory provider in that area.

During The DARK REPORT’s recent site visit to Presbyterian Laboratory Services, many of the management strategies described by Hamon can be seen in action. There are five key drivers which are applicable to any hospital-based laboratory seeking to increase revenues and expand services.

First, PLS is based upon proactive management. Instead of waiting for fundamental market changes to become obvious, it constantly tinkers on the margin in response to perceived changes. For relatively small investments in time and money, it develops products and services wanted by the market. This is a competitive edge.

Second, administration of both the parent healthcare system and the laboratory fully agree upon the importance of expanding specimen volume through internal consolidation and external marketing. The resulting predictable increase in specimen volume provides PLS management with an entirely different set of strategic options than if the laboratory was static or shrinking.

Third, innovation and experimentation with new lab services permits PLS to offer clients and prospects a menu of laboratory services unlike its competitors. This makes PLS the laboratory partner of choice with physicians and managed care plans in the Charlotte market.

Fourth, concentrating on a limited service area is a simple and obvious strategy. Because PLS was careful and disciplined in executing that strategy, its service infrastructure is closely-tailored to customers’ needs and the territorial concentration permits management to make a difference when acquiring and servicing new clients.

Fifth, leadership does make a difference. At PLS, there are three levels of enlightened leadership supporting the laboratory’s success: hospital/system administrators, pathologists/medical directors, and laboratory administration. These three groups understand the laboratory’s mission and have made it possible to develop, then execute, a successful strategic business plan.

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