CEO SUMMARY: Commercial laboratory consolidation has left Chicago with only a handful of laboratory providers. New management at MacNeal Hospital’s for-profit laboratory division recognized this opportunity. During the past three years, the outreach program was revitalized and the sales force was expanded.The result has been increased revenues and a steady decline in the lab’s average cost per test.
IN MANY REGIONS OF THE COUNTRY, consolidation of the commercial laboratory industry has created great opportunities for hospital-based laboratory outreach programs.
Commercial lab consolidation, which occurred through the mid-1990s, fundamentally changed the competitive market for physicians’ office testing. Surviving labs cut back services to save money. Many labs operate fewer patient service centers and their lab facilities are often staffed with too few people to properly handle customer service requests.
Genesis Clinical Laboratory, a for-profit division of MacNeal Hospital, located in the Chicago suburb of Berwyn, recognized this opportunity. During the past three years, it built an outreach sales and marketing machine that added an additional $6 million per year to outreach sales volume. Genesis has also profitably expanded into markets as far away as Indianapolis.
“In Chicago, we recognized that commercial lab consolidation during the past five or six years had radically altered the competitive marketplace for physicians’ office testing,” stated Gene Heidt, President of Genesis Clinical Laboratory.
“We saw nothing but opportunity,” he continued. “Greater Chicago is a huge market for lab testing services. But, including the two national labs, there exists just a couple of independent labs and hospital outreach programs. We believed that a well-managed lab outreach effort could be both fast-growing and profitable.”
Reenergizing The Lab
Heidt was hired in June 1997 to reinvigorate a languishing laboratory organization. “MacNeal Hospital, with 427 beds, is a teaching hospital and tertiary center,” explained Heidt. “Before my arrival, its lab division had operated without a senior executive for a number of months. I was given the goal of reenergizing the existing lab outreach program and improving the profit performance of the laboratory.
“I inherited two sales reps and about $11 million per year of outreach business, most of it from nearby physicians who were affiliated with the hospital,” said Heidt.
Excellent Case Study
For hospital lab administrators interested in lab outreach, Heidt’s business plan and successful implementation provides an excellent case study. He concentrated on internal operations improvement while at the same time ramping up a productive outreach sales and marketing campaign.
“First, it was necessary to replace the two existing sales reps,” recalled Heidt. “For lots of reasons, the quality of their new accounts and their sales production was below standards.
“After terminating these two individuals, we hired a sales and marketing manager with a proven track record of high performance,” he added. “This new manager was charged with the responsibility for building our sales.”
Because of his background in commercial labs, Heidt understands the fundamentals of professional selling and recognizes its importance to the financial stability and success of his hospital-based lab organization.
“It’s important that our sales people have the ‘right stuff’ to succeed” he said. “We’ve built up our sales force and now have seven sales reps in the field. None had a background in clinical laboratory or pathology when we hired them. But they all had a proven track record of sustained sales production.”
Outside Sales Training
To prepare them for clinical lab sales, Genesis provided outside sales training. “Genisis contracted with Communispond and their “Socrates Selling Skills program for sales training. Socrates developed an individualized two-day, off-site training program for us.
“Next, we developed a sales compensation plan that pays them only for producing the types of accounts we want,” continued Heidt. “For example, we require a monthly average of new account revenues be maintained. Also, we want our sales people to focus on larger accounts, so we don’t pay any commission on accounts that bill under $1,000 per month. We pay a healthy commission rate for accounts that exceed $5,000 per month in net revenues.”
New clients have signed up at a sustained pace. Heidt says that the opportunity for hospital lab outreach programs to scoop up new business is just as good as it was ten years ago. “The surprise for us is not just that it’s a wide-open market, but that all the selling tools used in the late 1980s to bring in new physician clients work just as well today,” he said.
Managed Care Issues
Managed care is no longer the factor it was a couple of years ago. “When we sent our first sales reps into the field, United Healthcare Corporation had an exclusive capitated contract with Quest Diagnostics,” said Heidt. “But when United dropped capitation with its provider doctors, it also dropped capitation on its lab services contract. Since then, managed care contracts have not been an issue for us or our new client accounts.”
Within the Chicago market, Heidt sees three main selling points that motivate physicians to switch laboratory providers. “First, price is still an issue,” he explained. “Illinois remains a client bill state and pricing for lab tests remains an important concern. However, in Indiana, we see less of that. Patient bill seems to predominate.
“Second, physicians are definitely interested in the computer technology offered by their lab provider,” noted Heidt. “This goes beyond simple test ordering and results reporting. The ability of a lab to let the physician study his lab data in a variety of ways is clearly something that appeals to our physician clients.
Genesis Clinical Laboratory Wants To Advance Its Internet-Based Lab Information Services
“WE SEE HIGH DEMAND BY OUR PHYSICIANS for Internet-based laboratory information services,” noted Gene Heidt, President of Genesis Clinical Laboratory.
“Many of our physician clients are already Web-savvy,” he continued. “When we intensified our sales program three years ago, we started putting the ClinScan system into physician offices. On January first of this year, we began to introduce Advanced Health Technologies’ Dr. Chart to our existing and new clients.
“Physicians recognize the added value of Web-based lab test ordering and results reporting,” Heidt said. “By mid-year, we had generated about $1 million in annual sales volume as a result of Dr. Chart.
“We are aggressively looking for the next generation of Internet lab information products,” added Heidt. “It is clearly something we must do to appeal to existing clients and new physician accounts. Also, we can already see how the right ASP product can lower our costs by a significant amount. This will not only come from savings in test ordering and results reporting, but in operational gains due to reduced accessioning labor and similar applications.”
Doctors “Buy Local”
“Third, we sell on the themes of ‘small is better’ and ‘we’re local.’ This has great appeal to most physicians, because they want to support local healthcare resources and they’ve probably had too many unwanted problems from larger, out-of-town labs.”
One big change at Genesis Clinical Laboratory is its new owner. Vanguard Health Systems, Inc. purchased MacNeal Hospital during the past year. Vanguard, a privately held, for-profit company, was very interested in the profit potential of Genesis’ outreach laboratory operations.
“The outreach sales program at Genesis generates two important financial benefits for MacNeal Hospital and our new owners,” observed Heidt. “First, our average cost per test for both inpatient and outpatient specimens has been dropping. This is a direct result of economies of scale, as the increased outreach volume hits our lab. Second, our outreach revenues generate operating profits for the hospital. This means we generate extra capital, some of which is available to expand our lab testing services.”
Genesis Clinical Laboratory provides an outstanding example of how hospital-based laboratories can develop, and sustain, thriving lab outreach programs. Heidt and his management team understand the importance of a professionally-managed sales force, supported by a well-managed laboratory organization.
New Hospital Owners
In just 36 months, Genesis has added $6 million in annual outreach revenues, grown to seven sales reps, and expanded into neighboring Indiana. The success posted by Genesis is more evidence that hospital laboratories have an inherent competitive advantage over independent commercial labs. It is a reminder that hospital lab administrators are missing a great opportunity to help physicians around their campus while strengthening the
capabilities of their lab.