CEO SUMMARY: By signing this deal with Tenet, SmithKline Beecham Clinical Laboratories captured one of the largest hospital laboratory management contracts ever offered. The project’s size, scale and far-flung geography make this a daunting challenge, particularly given California’s competitive managed care marketplace.
FOLLOWING MONTHS OF STUDY and negotiations, SmithKline Beecham Clinical Laboratories (SBCL) and Tenet Healthcare announced on January 7 that SBCL would manage Tenet’s 30 hospital laboratories in Southern California.
This agreement represents the largest laboratory management contract ever negotiated for a defined geographical area. Tenet operates 30 hospitals in Los Angeles, Orange and San Diego Counties. SmithKline assumes responsibility for managing laboratory operations at these facilities.
The scope of the project is staggering. Tenet’s 30 hospital labs perform almost seven million tests per year. Assuming an average cost per test of $12.00, combined annual expenses of these laboratories could easily represent in excess of $84 million.
Another challenging factor is the geography. Tenet’s southernmost hospital in San Diego is 150 miles away from its San Fernando Valley hospitals. Transportation of specimens between all the hospital labs must rely upon California’s car-clogged freeway system.
Size and distance are two aspects which make the agreement significant. Another is its emphasis on service. “This is not a traditional arrangement between a hospital and commercial laboratory,” stat- ed Don Wheeler, Director of Operations Improvement at Tenet. “Typically that involves sending out as many lab tests as possible. Our goal is different. SmithKline will help us restructure laboratory operations at the 30 hospitals so as to improve service while maximizing the number of tests performed within Tenet facilities.”
From Tenet’s perspective, their agreement with SmithKline involves contract management of the hospital laboratories, not outsourcing inpatient tests to SmithKline’s Van Nuys laboratory. As Wheeler states, Tenet’s primary motive is to improve service while lowering costs.
Smaller Hospital Lab Facilities
“Because many of our laboratories are in smaller hospital facilities,” said Wheeler, “they are not capable of meeting the changing needs of each hospital. California’s competitive healthcare environment is always raising the service bar. Tenet needs to respond to those service needs, both today and in the future.
“That is why our primary goal in this contract management project is to improve service levels while consolidating the laboratory operations in sensible ways,” he continued. “We are establishing flexibility to improve our laboratory capabilities as the healthcare market evolves.”
Early details of how SmithKline and Tenet will revamp existing laboratory arrangements are sketchy. The basic plan calls for the creation of two core laboratories at Tenet’s USC University Hospital in Los Angeles (Los Angeles County) and Western Medical Center in Santa Ana (Orange County).
Rapid Response Labs
The remaining hospital laboratories will be converted into rapid response laboratories. “Because we want to improve service,” noted Wheeler, “we will determine the specific tests to be performed at each rapid response laboratory based upon turnaround time requirements, distance to the core laboratory and similar criteria. There is no ‘cookie cutter’ solution which can be applied to each hospital site.”
Tenet’s existing 30 hospital laboratory administrators will apply for 12 available laboratory directorships. Depending on the size of the individual rapid response labs, each new director will have responsibility for one to four sites. The laboratory directors will become employees of SBCL. As the new laboratory administrator positions are filled, it is these individuals who will help develop the specific reengineering plan for the rapid response lab sites under their purview.
Existing Tenet med techs at the various sites will apply for positions as specific staffing requirements are identified. They will remain employees of Tenet. “The announcement has been made that there will be no mass lay-offs,” explained Wheeler. “It will take some time to organize individual laboratories into the appropriate rapid response lab structure. As this occurs, we want to retain and support our most effective employees while using normal attribution as one way to reduce over-all staffing levels.”
“For us to make significant breakthroughs in lowering costs would require us to adopt new, possibly even radical, philosophies and techniques. We had to go outside Tenet for such resources.”
“This project evolved over two years,” Wheeler noted. “We studied a variety of approaches. On the cost-reduction side, we realized that our hospital laboratory administrators had done a good job of squeezing costs through conventional methods. For us to make significant breakthroughs in lowering costs would require us to adopt new, possibly even radical, philosophies and techniques. We had to go outside Tenet for such resources.
“On the service side, we understood that we had to continually improve what our laboratories do for clinicians. That also requires radical thinking from most laboratory administrators, because they must call upon a different range of experience and management models to achieve this.”
In searching for the outside management expertise, experience, and philosophy needed to create radical change, Tenet focused on the national commercial laboratories. “From our perspective, they bring objectivity to the process of restructuring and changing the organization,” noted Wheeler. “They also possess practical skills in taking costs out of regional laboratory systems.”
Tenet deliberately chose to partner with a commercial laboratory and not a laboratory consulting firm. “Commercial laboratories have hands-on experience at moving laboratory specimens from point to point. They have information systems capable of linking far-flung laboratory locations,” explained Wheeler. “Also, with risk- sharing involved in this contract, the financial strength of commercial labs complement their practical experience and resource base.
“Since finalizing our arrangement with SmithKline,” he went on, “they have moved quickly. We are impressed with extensive resources rapidly committed to this project. They assembled a sizable implementation team which is already working with our laboratory administrators to fast-track the planning process and its subsequent implementation.”
Neither party to the agreement would discuss the financial arrangements. It can only be speculated that there is some formula which reimburses SBCL for its management time. The amount of reimbursement is probably weighted by actual performance in cost reduction, service enhancements and performance against defined deadlines.
THE DARK REPORT believes that this Tenet-SBCL contract represents a watershed change in the marketplace. Tenet has credibility among hospital CEOs. The fact that Tenet is willing to rely on a commercial laboratory partner to restructure and manage 30 hospital laboratories will not go unnoticed. The Tenet-SBCL agreement will encourage other hospital systems to entertain similar proposals from national laboratories and their regional commercial lab competitors.
Judging Contract Success
It will take several years before the success of this Tenet-SBCL contract can be determined. Success must be judged against three criteria. One, did the contract management arrangement lower laboratory system costs by the expected amount? Two, did the reorganization of laboratory services create the capability to evolve value-added laboratory services in response to market changes? Three, did both Tenet and SBCL make money from this contract?
The last item is the one which laboratory executives should carefully watch. Will SBCL recover its costs and earn a satisfactory profit margin for the services it provides Tenet? Although the three blood brothers want to expand their activities in hospital laboratory management, it is crucial that such arrangements be as profitable to them as with their hospital partner. Earning revenue from con- tract laboratory management is a diversification strategy that only works if the commercial laboratory can make a satisfactory profit margin.
Because of the magnitude of this Tenet-SBCL project, both companies will be challenged to maintain deadlines while minimizing disruptions and problems. Wheeler acknowledged that fact. “I am relatively confident that there will be pain. But the benefits to a comprehensive realignment of our laboratory services will far outweigh any short-term discomfort. Most importantly, we are focused on the needs of our customers and we know these changes will enhance the laboratory services that they receive from Tenet’s hospitals.”