Business Premises Underlying Lab Industry Dynamics

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This chapter addresses the characteristics of the laboratory industry which define the starting point for changes and ongoing evolution. The eight business premises listed in this White Paper describe unique situations which directly influence the ability of clinical laboratories to serve the medical community.

The relevance of these business premises becomes apparent whenever a laboratory undertakes the strategic planning process. Assuming that each of these eight premises accurately describes one element at play in the laboratory testing marketplace, then it’s necessary for a laboratory to develop a strategic plan which successfully addresses the challenges or opportunities represented by these eight business premises.

Premise #1

Inadequate Management Staffing at Most Laboratories

Most laboratory organizations are staffed with inadequate management resources.This makes it difficult to run the lab’s daily operations and simultaneously implement strategic management changes necessary to meet the needs of the changing healthcare marketplace.

This is a crucial point to understand. It is one characteristic of the laboratory industry which sets it apart from profitable industries outside healthcare. The form and manner of staffing middle and senior managers within Fortune 500 corporations allows these companies to competently handle daily work responsibilities and still initiate a variety of strategic business initiatives. Experience has taught these companies that it is essential to accomplish both objectives. If understaffing of management pre- vents that from occurring, the result is usually financial disaster.

In contrast, management staffing levels common to most Fortune 100 corporations are seldom found within clinical laboratory organizations. It is safe to say that the majority of laboratory organizations in the United States, whether hospital-based or independent commercial lab companies, do not have adequate middle and senior management resources.

This “understaffing” of management has an important consequence: managers are forced to spend all their time on daily work issues. They have relatively little time for either strategic planning or the implementation of changes necessary to keep their lab financially viable and competitive with other laboratory providers in their community.

Metaphorically, staffing a lab organization with insufficient management resources to deal with day-to-day operational matters and still have the capability to think and act strategically is like the farmer eating his seed corn. It buys time in the short term, but proves disastrous over the long haul.

Unfortunately, the continuing cost pressures on most laboratories will make it difficult for them to beef up their management teams. This will be particularly true in the hospital laboratory segment, since hospital administration must approve requests to add additional management positions and funds are tight throughout the hospital industry.

In all probability, hospital laboratories and most commercial independent laboratories will continue to be inadequately staffed with middle and senior management during the next few years. This situation increases the complexity of responding to changing circumstances in the healthcare community served by clinical laboratories.

Premise #2

Inadequate Capital Resources at Most Laboratories

Every laboratory organization needs adequate capital, just like it needs an adequate staff of middle and senior managers. Unfortunately, most hospital laboratories and commercial independent laboratories are starved for capital.

This leaves laboratories with insufficient money to explore new technologies, set up additional testing capability, enhance laboratory information systems, and expand facilities such as patient service centers and rapid response labs. There is also inadequate money to properly invest in developing and training people. This directly affects the lab’s ability to access outside management and clinical expertise through consulting arrangements, joint ventures, and collaborative efforts with potential lab testing partners.

There are many reasons why this is true, particularly within the hospital laboratory segment. However, this does not alter the fact that most laboratory organizations lack the capital they need to invest in physical assets, staff, and worthwhile new lab testing opportunities.

Within the anatomic pathology profession, insufficient capital is a widespread phenomenon. But it should be noted that, in this case, it is generally the pathologist-partners themselves who deny their group practice the capital (and management acumen) needed to respond effectively to changes in their local healthcare marketplace.

Unfortunately, many pathologists see the business of anatomic pathology as static, not dynamic. They operate their pathology group practices so as to protect existing sources of income. This mindset is one reason why they underinvest in their own business.

Sufficient capital is the lifeblood for any laboratory organization. Without adequate capital investment, laboratories and pathology group practices are limited in how they respond to new laboratory technologies and competitive changes in the healthcare marketplace.

Premise #3

Healthcare Remains A Local Service

This premise is simple: healthcare remains a service best delivered by local health providers. For clinical laboratories, this is an important business assumption.

During the decade of the 1990s, a number of national healthcare corporations emerged. Remember the business model of the “roll-up” company? This was a national corporation which purchased independent health providers in various cities and regions throughout the United States. The argument was that a unified, national corporation could gain competitive benefit because of superior management skills and economies of scale.

THE DARK REPORT chronicled the sad financial stories of many of these roll-up companies, such as PhyCor, MedPartners, and Columbia/HCA Healthcare. In such healthcare segments as physician practice manage- ment (PPM), for-profit hospitals, long term care, and home healthcare, national roll-up companies failed in spectacular fashion.

Of course, the commercial laboratory segment shared in this widespread financial misery. By the mid-1990s, all the publicly-traded lab companies were suffering deep losses. Many went into bankruptcy or merged. The lab companies which survived were forced to lay off sizable numbers of their employees and shrink the network of stat labs, patient service centers, and couriers that supported their lab testing operations.

The key lesson which emerged from this experience is that healthcare remains a service which is best delivered locally by people and companies who are close to the community and the people they serve. Decisions made by corporate leaders in a remote headquarters thousands of miles away are often at odds with the needs of individual communities.

This means that laboratories with direct involvement in the regional community they serve have a competitive advantage over laboratories based outside that community. This is the specific advantage the thriving hospital lab outreach programs use to their financial benefit.

Having made this premise about healthcare being local, it should also be said that there are national companies which understand how to give their local business units effective discretion to service their communities’ unique needs. This is the formula Sam Walton used to launch Walmart in small, rural towns across the country. His company rapidly grew into the nation’s biggest retailer. Walmart is not alone in this accomplishment.

But the lesson is consistent. Healthcare’s local needs are best-served by a provider located in that city. Success as a national healthcare company only comes because local business units operate not as clones from city to city, but as distinctive local providers closely aligned to the unique needs of their regional service area. In laboratory testing, being close to the customer is a distinct advantage, if not an essential element, of financial success.

Premise #4

Customer Returns as King; Consumer Choice Creeping Back into Healthcare

Healthcare in the United States is a uniquely contorted economic construction. The consumer has been placed at the the end of the line, with results that frequently disappoint everyone.

It is the employer which picks a limited menu of health plans for its employees and pays most of the premiums. It is the health plan which proscribes and limits how the consumer can choose his provider. The provider serves the consumer, but must look to the insurer for payment. In this arrangement the consumer has reduced power to select providers and to pay them according to the quality of service they deliver.

Sixty years ago, consumers were in total control over their healthcare options. It was the emergence of indemnity and managed care insurance plans during the past 60 years which fundamentally altered the traditional relationship between customer and physician.

Formerly the consumer chose a doctor and was responsible for payment. This created a simple accountability. If the doctor did a lousy job or was too expensive for the quality of care he provided, consumers would either refuse payment or choose other doctors.

But in the American health insurance system, a variety of parties began to interfere with this basic relationship. It caused many distortions in the economics of healthcare and the quality of services provided to consumers. Government health programs such as Medicare and Medicaid further exacerbated this problem, because bureaucrats take actions which constrain free market forces from correcting problems and encouraging experimentation and worthwhile innovation.

I believe this situation reached its worst point in the middle-1990s. At this time, a significant number of middle-class Americans found themselves in a closed panel HMO with a gatekeeper physician controlling their access to medical care and they did not like it!

Since those years, there has been a clear trend toward: 1) higher enrollment in PPOs and similar less-restrictive health plans; and 2) liberalization by HMOs themselves in how consumers can make decisions about their providers and their care.

It is now widely recognized that growing numbers of consumers are becoming highly sophisticated and knowledgeable about health issues. These consumers are asserting more control over all aspects of their healthcare. On the Internet, searches for health information and services now outrank all other categories.

This trend of increased consumer involvement will bring a radical change to clinical laboratory practices. As regulations and state laws are changed to allow consumers access to their laboratory testing data, it will become necessary for laboratories to deal with patients as decision-makers on a level that is almost comparable to how they currently deal with physicians.

Laboratory executives and pathologists will soon see Congress and the states pass legislation that expands patients’ control over their health care. Increasing numbers of patients will want to communicate directly with the laboratory doing their medical testing. These same patients will expect and demand that laboratories meet their needs and expectations. Laboratories which fail to respond to changing consumer expectations will find themselves at a competitive disadvantage in the marketplace.

Premise #5

Acceptance of Management Philosophies Emphasizing “Customer First,” and Workflow Process Design

Just as healthcare is evolving away from a cottage industry and toward modern forms of corporate organization (premise #3), so also is it adopting “new” management philosophies and methods.

I use the word “new” only because most laboratory executives and pathologists are unfamiliar with these various management philosophies and methods. Outside of healthcare, industries worldwide have embraced these management philosophies and made them essential for competitive success.

These management systems emerged during the 1970s and were based on the work of such management geniuses as W. Edwards Deming, Ph.D., and Joseph Juran, Ph.D. There are many flavors and lots of acronyms, such as TQM, CQI, ISO-9000, Six Sigma, Lean Thinking and the like. Whatever the name, these management philosophies have several essential characteristics in common.

First, they require business organizations to establish a goal of providing products and services which are engineered to meet and exceed the expectations of their customers. To accomplish this, business organizations are required to interview their customers; learn about these needs; design and deliver products to meet these needs; then regularly measure consumer satisfaction and use this information to improve the products further! (I add the italics because most laboratories and pathology group practices devote few resources toward measuring their patient’s satisfaction and responding with programs to improve patient-focused services.)

Second, business organizations are to organize themselves so that their system of producing products and services is designed to do the job right the first time. Individual work processes are established and continuously evaluated to insure that only products and services which meet specifications are produced. It is common to measure success and failures in parts per thousand (three sigma) or parts per million (six sigma).

Third, senior management must empower those closest to the work to take responsibility for designing, monitoring, and implementing individual work processes. Under this management philosophy of “customer first” and process-driven systems, the emphasis of senior management shifts away from micro-managing day-to-day operations. Instead, it shifts toward providing workers with the leadership, vision, education, and the business tools needed for them to accomplish their responsibilities.

Needless to say, this is a change in the management style of most healthcare organizations. Whether hospital, laboratory, or physician group practice, the old “top-down” hierarchical management style (think “military” or “Catholic church”) is still widespread.

I believe that laboratories which are first to effectively embrace and implement these management philosophies will achieve competitive advantage over those which maintain traditional management systems. The evidence of this outcome is becoming visible in the laboratory industry.

Quest Diagnostics Incorporated is moving swiftly to infuse ISO-9000 methods and Six Sigma management techniques throughout its organization. Several regional laboratory divisions at Kaiser Permanente have achieved, or are working toward, ISO-9000 certification. Laboratory accrediting standards are evolving to include these new management philosophies.

Expect the publication of papers documenting significant gains in lab test quality, increased productivity, and ever-falling costs at these early- adopter labs to give encouragement for other lab organizations to follow the same management path. Within the hospital industry, a parallel process is occurring. As it does, this will be a positive stimulus for laboratories to adopt this new form of management thinking.

Premise #6

Miniaturization Now Changing How and Where Laboratories Perform Diagnostic Testing

New technologies in a wide range of scientific disciplines are finding application in diagnostic instrument systems and test kits. The impact of these new technologies is simple. They are shrinking the size of diagnostics instruments (and the amount of specimen and reagent needed to perform the test). They are also reducing the complexity of diagnostic instrument systems and test kits while improving the accuracy of the test results.

This process of miniaturization is easy to see and understand. Go back to 1970 and look at the size and capability of three products: computers, mobile (radio) telephones, and chemistry testing instrument systems. In just 30 years, computers shrank into laptops, notebooks, and palm pilots. The mobile telephone evolved into a digital cellular device as small as a deck of cards that is capable of accessing real time information about weather, stock prices, and current news stories.

Chemistry instruments are now sophisticated systems. They offer random access—multiple specimen—multiple channel capability with onboard internal diagnostics. Even the largest automated chemistry systems are becoming smaller and taking less floor and counter space. They also use smaller volumes of specimens and reagents.

The examples of computers, mobile telephones, and chemistry instruments make a compelling argument that miniaturization is about to take the science of diagnostic testing into a new dimension. Technologies like the Luminex LabMap¤ system are engineered to do 100 bioassays on a specimen as small as 50 microliters. Affymetrix and several of its competitors are investing tens of millions of dollars to develop “lab on a chip” capability. A California company is even working to put diagnostic tests on a compact disk, enabling physicians to perform lab tests in their offices, using the CD-ROM player in a desktop computer!

The increasing variety, and capabilities, of point-of-care (POC) testing devices demonstrate that miniaturization is rapidly changing the location where lab testing is done, as well as how those tests are actually performed.

This situation puts laboratories into a here-and-now dilemma. In certain areas of diagnostic testing, existing POC testing technology is moving lab tests out of the core laboratory and closer to the patient, whether in hospital units, emergency departments, or physicians offices. During the past 24 months, the FDA approved several POC instruments which offer new options for moving even routine chemistry, hematology, and immunoassay tests out of the core laboratory and into near patient and POC settings.

Lab executives and pathologists should be ready to deal with this trend. It means that laboratories must begin to organize themselves in different ways. The concept and validity of the core lab will not disappear, but the test mix done in the core lab will begin to shift. Miniaturization will allow smaller labs to do a wider range of reference and esoteric testing in-house. Meanwhile, many routine tests will migrate out of the core lab because of economics, turnaround time requirements, and better access to the patient at the time of service.

As this migration of testing out of the core lab occurs, laboratory managers will find an interesting benefit. Even as POC instruments are “dumbed down” so that non-laboratory personnel can use them to produce accu- rate and high quality test results, the need for experts in lab medicine medical technologists, Ph.D.s, and pathologists will increase.

The reason is simple. We are entering an era where someone needs to make decisions for the integrated healthcare environment. What diagnostics tests should be done in-house versus referred out? What methodologies are appropriate? Which vendors have the best solutions for the chosen methodologies? Where should the test be performed? Who does the test? Who reviews the results? Who provides the referring clinician with expert advice and counsel on how to interpret results and do follow-on tests as appropriate? It will be pathologists, Ph.D.s and medical technologists who are responsible for these functions.

The world of laboratory medicine will become more complex to manage even as new technologies make it easier to build “fool proof” diagnostic instruments that can be used successfully by non-laboratorians, including patients themselves. More than ever, the integrated healthcare environment will require trained laboratory professionals to design, manage, and trouble shoot diagnostic testing wherever it is performed “from core laboratories to physicians” offices to patient self-testing.

Premise #7
Healthcare is a Cottage Industry Converting to Modern Corporate Management Forms

Back in 1996, THE DARK REPORT quoted a Wall Street venture capitalist who said “Healthcare is a billion-dollar cottage industry now transforming into modern corporate management models.”

Simply put, this observer was noting that the day of the solo physician practitioner, the small clinical laboratory, and the stand-alone hospital were ending. It was ending for a simple reason: healthcare increasingly requires a more sophisticated business organization to deliver high-quality, low-cost health services.

Cost management and economics of scale are best achieved through increasing volume, whether it be lab testing, patients, or any other health service. Volume can be increased by sales, by acquisition, or by consolidation. To properly consolidate and manage higher volumes requires laboratories and other healthcare providers to also develop specialized management services. Experts in coding, billing, collections, information services, law and contracting, office administration, sales, marketing, and accounting become essential if a regional healthcare provider is to offer quality healthcare services at a competitive cost.

It is no accident that hospitals moved to become part of integrated healthcare networks (IHN), and doctors formed independent physician associations (IPA) and regional supergroups. These providers needed volume to support more professional, sophisticated management expertise.

The impact of this premise will continue into the 2000s. In the lab industry, it will play out in two ways. First, smaller labs, including hospital labs, will have an economic incentive to collaborate with other laboratories in the local area. Regional laboratory networks, joint ventures, and shared lab organizations will be some of the business models used to allow small labs to access the more sophisticated management resources necessary for them to remain competitive.

Within the anatomic pathology (AP) profession, it will become increasingly tougher for small pathology groups to maintain their independence. The market will be seeking enhanced AP services and declining costs. Small pathology groups will be unable to meet either requirement because they lack the volume necessary to finance such capabilities.

Premise #8
Information Technology Revolution Transforms Laboratory Medicine

Here’s the true wild card in the deck. Technology that supports the collection, assessment, and distribution of information is improving at the speed of light. Because information is the end product of clinical laboratories, these new technologies will revolutionize all aspects of laboratory medicine.

It is undeniable that the technologies of computer hardware, computer software, fiber optics, digital, wireless, and the Internet are already bringing radical changes to business and society. There is now widespread recognition and consensus that the collective world economy is moving from the “industrial age” into the “information age.”

This has profound ramifications for the laboratory industry. The digital Internet is supplanting analog telecommunications. The price of long distance telephone service is falling rapidly and it will not be long before customers cease to pay for long distance calls by the minute. Instead, they will pay a flat monthly fee, similar to how Internet service providers (ISP) currently charge their customers (AOL’s unlimited access for $21.95 per month).

These swift and ongoing changes in information management create new opportunities for clinical laboratories to add value while lowering costs. For example, vendors are just now coming to market with ASP-based software products (application service provider) for certain laboratory functions. The ASP business model means that the vendor maintains the software application in a remote host. To use the application, the client dials up the remote host using the Internet and a Web browser. The earliest installations of ASP technology in the clinical laboratory industry involve lab test ordering and results reporting between physicians’ offices and the laboratory.

But laboratory executives and pathologists will see enhanced information management products transform the full range of laboratory operations and laboratory services. Using the Internet, labs will have the real time capability to report test results to physician clients and their patients even as they transmit reimbursement claims to payers. One of the most intriguing uses of new communications technology will be the ability to sort through vast databases of laboratory test data. The goal will be to identify disease indicators derived from test result patterns across a number of different types of diagnostic assays.

Because information is the laboratory’s true product, this revolution in information management technologies and tools will probably have more influence on changing the organization and operation of clinical laboratories than any other single factor. As individual laboratories do their strategic planning, the “information age” and its impact on laboratory testing should receive the highest priority.


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