CEO SUMMARY: Swift transformation of the American healthcare system is causing financial challenges for those clinical labs and pathology groups that have been slow to react to these developments. At NorDx Laboratories in Scarborough, Maine, the team is following the classic five rules for laboratory success. However, as NorDx CEO Stan Schofield said in his presentation at the Executive War College in April, in today’s more competitive marketplace, it is essential to drop the “old school” execution of these essential rules and adopt “new school” approaches to be successful.
PART ONE OF TWO PARTS
WHAT ARE THE RULES FOR SUCCESS in today’s changing and challenging financial environment for clinical laboratories? One lab executive says that the five classic rules for clinical and financial success still work—but labs must address these rules in new ways.
“Think of it as old school versus new school,” explained Stan Schofield during his presentation at the Executive War College in New Orleans in April. “Traditional ways of managing a lab and developing the business are less effective in today’s rapidly changing healthcare system. That is why the new school approach is necessary to be successful.”
Schofield is President of NorDx Laboratories in Scarborough, Maine; Senior Vice President of MaineHealth; and Co-Founder and Managing Principal of The Compass Group.
NorDx is a comprehensive clinical laboratory providing clinical diagnostics services to hospitals, physicians, other laboratories, and managed care providers throughout New England. MaineHealth is the largest health system in the state. The Compass Group is an organization of not-for-profit IDN System Laboratory leaders from 23 of the largest integrated delivery systems in the United States.
“One secret of successful management is to keep things simple,” observed Schofield. “That is true of these five rules. Pathologists and lab directors will recognize them as the same time-honored rules that labs have followed for many years. What is different today, however, is the need to be innovative in order to use these rules successfully.”
In part one of this two-part series, THE DARK REPORT will present Schofield’s observations about the first three rules. Part two will address the remaining two rules.
Schofield’s five rules for successful laboratories are:
1. Add clients
2. Keep clients
3. Create revenue opportunities
4. Get paid
5. Reduce expenses
RULE 1 | Add Clients
“The old school method of adding clients was to do the classic steps of lab outreach,” noted Schofield. “Labs would build their clients by concentrating on adding physicians, hospitals, and other laboratories; and serving nursing homes.
“We’ve all done this work because every lab—just like any business—needs to increase the number of customers,” he said. “The old school approach was to do out-reach in the traditional manner.
“Your lab team worked with the providers you knew,” continued Schofield. “You had couriers serve a few doctors in the neighborhood and the two or three nursing homes in your vicinity. We do that today at NorDx by supporting 110 nursing homes for lab services even though it’s difficult and expensive.
“But the new school way of operating, at least for us at MaineHealth, is to do hospital integrations as well,” he stated. “NorDx currently manages 10 hospital laboratories.
Integration of Hospital Labs
“Our model is to do outreach to those hospitals, but also to integrate those hospital laboratories into our lab process and standardized workflow,” commented Schofield. “Through these hospital integrations, we’ve become a lead organization for the health system. That’s because our laboratory is first to do clinical integrations in these hospitals.
“This is the new school approach to adding clients,” he noted. “Today, more hospitals are becoming integrated and affiliating with larger hospital and health systems as a way to get contracts from payers.
“In turn, payers want those health systems to prove that they’re clinically integrated and that, by being integrated, they can cut costs and improve quality,” observed Schofield. “In the lab, we are the trailblazers for that clinical integration on behalf of MaineHealth, our parent system.
“As part of its integration with our health system, the hospital outsources its lab staff, equipment, and services to NorDx,” he added. “By doing that, we often generate substantial savings to the hospital.
“Let me emphasize that we are not simply chasing test volume,” continued Schofield. “We’re providing a high-quality lab testing service at the lowest possible cost point and we’re doing that for a smaller and perhaps rural hospital that could never achieve that level of quality or such low prices on its own.
“During the integration process, there is often a long, drawn-out discussion about control of the processes and fear that some people might lose their jobs,” he said. “The problem is that the money is going away. Reimbursement for services in small hospitals and long-term care facilities is declining and what we see today is only the first wave.
High-Quality Lab Testing
“When I started working in Maine almost 20 years ago, we would talk with small hospitals about the advantages of clinical laboratory integration and they all said, ‘We don’t need do that,’” he stated. “By contrast, today, hospitals are contacting NorDx to explore cost savings and to enhance lab test services to help them improve patient care while better meeting today’s financial challenges.
“To make this integration work, we contract with these hospitals to do all their lab testing,” noted Schofield. “We cut the expenses, standardize the equipment, and tune up the staff. The hospital pays us and it does all the billing for inpatient and outpatient and retains that revenue.”
RULE 2 | Keep Clients
“For MaineHealth, this method of clinical integration with hospitals and other providers allows us to keep our clients,” observed Schofield. “This is the goal today because you do not want to lose any client ever! And, yet, clients are leaving for many reasons that you cannot control.
“We all remember how, in the past, retaining clients was easy,” he continued. “The old school approach was to have an account rep buy the client lunch, and do an annual business review of volume and costs. Then you added information system connectivity. If the office staff was happy, it was an account in good standing. All these are standard patient-retention strategies.
“It used to be that good labs produced timely and accurate lab results,” added Schofield. “That doesn’t cut it any longer. Today, as a new school lab, we have a tailored metrics program for clients because hospitals want data from labs.
“The new school approach is for our lab to transform and take on a new role,” he said. “NorDx must step up and meet the needs of today and tomorrow. We can do that by becoming lab data management experts.
“Our new school strategy for Rule 2 is to offer a tailored metrics program for each hospital,” said Schofield. “All the doctors have report cards now and hospitals and health systems have report cards as well.
“Labs benefit from report cards too because lab managers need these metrics,” he noted. “More specifically, lab managers need to perform in the areas of clinical quality, service, and finance as documented by objective, measurable data. If your lab doesn’t, you’ll be handicapped in the marketplace because your competition is already doing that.
“Patient satisfaction or patient experience reports are just one example,” noted Schofield. “You have to measure how each patient feels about his or her experience.
“Hospitals live and die on HCAHPS scores,” he added. “The HCAHPS (Hospital Consumer Assessment of Healthcare Providers and Systems) survey is a national, standardized, publicly available assessment of patients’ perspectives on care. They are used by hospitals throughout the nation, just as the Picker survey from the National Research Corporation is used.
“In this new school approach for keeping clients, we track the patients’ experience with the lab,” stated Schofield. “We’ve designed versions of Picker surveys that complement those report formats.
“That way, when a hospital reports to a federal or state payer, to accountable care organizations, or to health plans, these entities understand how well the lab is doing in terms of patient experience. Our reports have a lot more detail than most labs deliver because they are customized for the lab experience.
“As an example, we had to custom-build our surveys so that they are specific for phlebotomy,” he added. “That’s because hospitals were using the HCAHPS or Picker outpatient surveys and applying them to the lab. Well, of course, the lab scores were abysmal because these surveys were not asking questions specific to the lab.
“Now we can show, for example, how patients feel about their phlebotomy experience in our 22 patient service centers and 10 hospitals,” observed Schofield. “The survey asks about cleanliness, quietness, over- all rating, facilities, and pain management. “Our lab team spent a year developing this survey product,” added Schofield. “Now Picker has that lab module and makes it available to labs.”
RULE 3 | Create Revenue Opportunities
A number of old school strategies are available to comply with the third rule: create revenue opportunities. “Your lab can add new tests or you can bring back tests you once sent out,” advised Schofield. “Along with adding new clients to boost revenue, if your lab is creative and cutting edge with its test menu and technologies, you might add clinical trials or a drug study with local doctors. Those are tried and true and may still work but your lab will probably need others.
“At MaineHealth, our new school approach to creating revenue opportunities is to do more management arrangements,” noted Schofield. “For example, hospital management agreements are now 70% of our business.
“This strategy is a lot more lucrative than chasing doctors for a few test referrals,” he said. “Even better, if you manage the hospital’s lab testing needs well and that hospital is a strategic asset to your health system, you enhance your value as the lab operator.
“In today’s new school environment, it is essential that your lab participate in all your hospital or health system’s payer agreements,” recommended Schofield. “If you don’t participate, you will be excluded by payers and then your lab probably won’t get back into the network. Yes, it may be painful when rates from some health plans are Medicare, minus 20% or minus 15%, but it’s necessary.
“Certainly geography can help a hospital if it is the only such facility within 50 miles of its community,” he continued. “But we saw the example of a hospital where the administrators, thinking their geography was an asset, refused to accept deep discounts for lab work. That was enough to get the hospital excluded from several payer networks.
Substantial Loss of Revenue
“Three years later, the facility had lost substantial revenue,” recalled Schofield. “Currently, this hospital can’t get back into these important payer networks.
“Here’s a related strategy for creating revenue opportunities to the new school way: Contract with point-of-service insurance programs,” he said. “Patients who have a point-of-service (POS) plan can choose a provider in the narrow network. Your lab must pursue that POS business, because—as painful as the pricing may be— insurers will cut you out due to national contracting if you don’t participate.
“The question is: How do you participate?” noted Schofield. “To answer that question, you need data on your lab’s performance that will allow you to sit at the table with the big labs. Then you can show that you are just as good as they are, that you have the quality, and significantly, that you are local.
“This is one of the single most important new school strategies for success today,” he emphasized. “If your lab has enough of the right kind of performance data, you will be better able to succeed. Of equal importance, you will be preparing your lab for what’s to happen in the next two to four years.”
Benefits of High-Value Tests
Next, Schofield addressed the benefits of adding high-value tests. “Your lab can generate revenue by offering highly complex tests such as KRAS and BRAF,” he said. “Doing these tests demonstrates the value of your lab. If oncologists see you delivering results within a day, they will appreciate that turnaround time.
“With cancer testing, time is of the essence,” noted Schofield. “Thus, with your lab right there in the community, it means the patient and the physician won’t have to wait a week for these results.
“However, this work is a double-edged sword,” he said. “Your lab must do this work well and you must be cost-effective. Otherwise, this expensive testing will eat into your lab’s financial performance.”
Another new school approach to create revenue opportunities is to validate equipment for the manufacturers of clinical laboratory systems. “If your lab is well run and consistently produces quality results, then it has the capability to validate the new analyzers and diagnostic systems for the in vitro diagnostics manufacturers,” he advised.
“Some companies making cutting- edge molecular, next-generation sequencing devices have come to us for method validation,” said Schofield. “One advantage to such arrangements is that our lab gets the equipment just for making sure it works well.
“We are also paid for doing that validation work,” he added. “As reimbursement for clinical testing drops dramatically, your lab must pursue every revenue-generating opportunity.”
In part two of this two-part series, Schofield will explain the old school versus new school applications of rule 4: “Get paid” and rule 5: “Reduce expenses.”
Schofield’s First Three Rules of Lab Business
IN HIS PRESENTATION at the Executive War College in April, Stan Schofield, CEO of NorDx Laboratories, presented his five classic rules of the laboratory business. He described the “old school” approaches, then discussed how labs should pursue “new school” strategies to meet today’shealthcare challenges.
Rule 1 | Add Clients
- Nursing homes
- Hospital integrations–10 at NorDx to date
- Health system–clinical integrations
Rule 2 | Keep Clients
- Add a new test occasionally
- Add local clients
- Clinical trials sometimes
- Hospital management agreements
- Contract with point-of-service health plans
- Method, equipment validation on contract
- More highly complex testing-KRAS, BRAF, viral loads, broad molecular menu
Rule 3 | Create Revenue
- Account rep visits, lunches
- Annual business review
- IT connectivity
- Keep the office staff happy
- Tailored metrics for quality and services
- Report cards for clients – quality/quarterly
- Patient experience monitoring
- Continual improvement
- Participate in all payer agreements
Benchmarking and Other Useful Steps to Demonstrate the Effectiveness of Your Laboratory to Administration
HERE IS A LITTLE PEARL OF INFORMATION to keep in mind about performance data,” offered Stan Schofield, CEO of NorDx Laboratories. “No matter how good you think your lab is, you’re probably not that good.
“Remember the saying that ‘no one has an ugly baby?’” he asked. “It is this aspect of human nature which makes it helpful to call in an outside expert to validate your lab’s true level of performance.
“In particular, that outside expert can help your lab team benchmark your lab against the best in the lab industry,” noted Schofield. “In turn, that has credibility with hospital administration, particularly when your lab needs additional capital and resources to add more value to clinicians and improve patient care.
“This is why it is important to be metrics-driven when creating revenue opportunities in the new school manner,” explained Schofield. “NorDx is a metrics-driven organization. In our health system, not only does our lab report about its costs, quality, and turnaround times, but—for each of these operational functions—we must measure ourselves against our competitors. The only way to do that is to benchmark.”
Schofield recommended a series of steps that labs should take when initiating a benchmarking program. “For step one, benchmark against yourself,” he said. “Start by comparing one year or one quarter against a previous year or a previous quarter.
“For step two, benchmark against your friends, such as affiliated labs,” he explained. “A third step is to benchmark against the competition and the entire lab industry.
“One issue we track meticulously is our finances,” stated Schofield. “We have always thought that our billing operation was a strong performer.
“But benchmarking is the additional step you take to prove it,” he noted. “Thus, we brought in a consultant who understands the lab business and who has a good database to use as a comparison. This consultant showed that our operation was very good when our performance metrics were compared with that of other labs.
“Apply this example to your own lab’s situation,” he continued. “Should someone in your healthcare system suggest taking over your billing operation and replacing it with centralized billing, you will have an answer that is grounded in the metrics that document your lab’s performance.
“You can demonstrate how having anyone else perform this function would weaken the lab operation,” observed Schofield. “You can show that your lab is demonstrably as good as any in the industry. That’s the value that benchmarking delivers to your laboratory.”