CEO SUMMARY: During the past five years, powerful forces in the healthcare marketplace positioned hospital-based laboratories to once again become the dominant force in laboratory testing. But this can only occur if today’s generation of hospital laboratory directors and clinical pathologists fully understand this opportunity and act to properly prepare their laboratory. It will require a change in strategic focus and management thinking. The successful hospital lab director and clinical pathologist of this new market wave will cease to be caretakers of the testing process and become the diagnostic experts of the integrated healthcare system.
MOST LAB INDUSTRY EXECUTIVES would agree that the 1990s was brutal on hospital-based laboratories. It was a decade marked by endless budget cutbacks and staff layoffs.
If the decade of the 1990s was bad news for hospital laboratories, then the decade of the 2000s will be just the opposite. There is every indication that the upcoming decade will be a new “golden age” for hospital laboratories.
The reason is simple. A growing number of senior administrators in multi- hospital systems are recognizing that the clinical laboratory truly has the potential, and the power, to improve clinical out- comes and affect the overall cost of care in a way that is disproportionate to the relatively small dollars spent on laboratory testing.
This is good news for hospital laboratory directors and clinical pathologists. They will enjoy increased importance and respect because clinical laboratories will expand their role beyond the historical function of performing tests and reporting the results to the ordering physician.
This increased respect and influence for hospital labs is a direct consequence from the change in the business goals of integrated healthcare networks (IHN). During the 1990s, IHN CEOs were intensely focused on external business strategies. Now, IHN CEOs must concentrate on internal business strategies. That puts hospital laboratories squarely in the path of the next big national trend in the operation of American hospitals.
Golden Age For Hospital Labs
The impending new golden age of hospital laboratories is a direct consequence of all that occurred during the 1990s. In particular, the major influence now shaping this new golden age is the emergence of multi-hospital health systems as the dominant organization model for urban hospital management. This is having sustained impact on hospital laboratories in a variety of ways.
Invariably, as new hospital systems took form, one of the first clinical services to undergo consolidation was the laboratory. As a result, laboratory organizations in most urban hospitals look much different today than in 1990.
During the last 12 months, the pace of hospital mergers and acquisitions has slowed down dramatically, com- pared to just a few years ago. The reason is simple. The hospital industry has consolidated itself into integrated healthcare networks.
Of the nation’s 4,838 non-government acute care hospitals, 3,078 are now part of an IHN. With 63.6% of the nation’s hospitals part of an IHN, there is little opportunity remaining for further hospital acquisitions. (See sidebar below.)
Effectively, the dominant hospital industry trend of IHN formation ended during 1999. For hospital laboratories, this is a significant development, because 2000 marks a widespread shift in the business goals of IHN CEOs.
Prior to 1999, administration of the typical IHN was focused on an external business strategy. The IHN was doing mergers and acquisitions with other hospitals in the region. These acquisitions were done to establish a competitive presence in the local marketplace.
External Business Strategy
The reasons for hospital acquisitions were several: to build market share; to prevent competing IHNs from establishing a foothold, and to gain the buildings and service resources necessary to win managed care contracts in the metropolitan area.
Once an IHN acquires the basic group of hospitals which anchor its system, the external business strategy ceases to be the primary focus of its CEO. Beginning in 2000, most IHN administrators are shifting to an internal business strategy: achieving operational and clinical integration.
As most hospital lab administrators are painfully aware, the first implementation of the internal business strategy has been to consolidate clinical services. Usually laboratories were the first clinical services to implement consolidations within the IHN. The reason is obvious. It’s easier to move lab specimens between hospitals than shift patients.
THE DARK REPORT observes that most of the nation’s IHNs have already accomplished some degree of laboratory consolidation. In fact, since the mid-1990s, many IHNs consolidated laboratory services in several incremental steps. Each consolidation project squeezed more cost from the laboratory division. The objective was to harvest obvious cost savings by developing a high-volume core lab, standardizing instruments and reagents, creating a unified lab management structure across all hospital labs in the IHN, and achieving a common LIS platform for capturing, storing, and reporting laboratory test results.
Taken collectively across the nation, these hospital lab consolidation efforts brought about a tremendous concentration of management responsibility. It has also thinned the ranks of hospital lab directors. As IHNs acquired new hospitals, they moved to consolidate laboratory testing. This involved eliminating individual hospital lab directors and creating a unified lab administration.
Intermountain Health Picked As Top IHN
In the latest annual ranking of the nation’s top 100 integrated healthcare networks (IHN) by SMG Marketing Group of Chicago, it is Intermountain Health Care (IHC) which tops the list. IHC replaces last year’s top performer, which was Advocate Health System of Oakbrook, Illinois.
Located in Salt Lake City, Utah, ICH includes 20 hospitals, clinics, 2,500 affiliated physicians, 400 contractual physicians, and its own health insurance plans.
SMG uses 31 key IHN data elements to rank the nation’s most progressive IHNs. These include hospital utilization (for IHC, an occupancy rate of 48.9% with a severity adjusted average length of stay of 4.66 days), financials, service & access, physician participation, outpatient utilization, and integration of operations, clinical services, and technology.
Fewer Hospital Lab Directors
One good example of how this process thinned the ranks of hospital lab directors is the Tenet Healthcare lab project in Southern California. During 1998 and 1999, Tenet took the laboratory functions of 30 hospitals in Los Angeles and Orange Counties and created a regionalized lab structure.
Using SmithKline Beecham Clinical Laboratories (SBCL) as a consulting and implementation resource, Tenet created two core labs and 10 (rapid response) hospital lab clusters, based on geographical proximity of the hospitals. When completed, Tenet’s 30 lab directors had been pared down to two core lab administrators and 10 cluster lab managers. In the space of 90 days, 30 hospital lab directors were reduced to 12 lab administrators. (See TDR, January 19, 1998.)
Urban Hospital Labs
This example typifies the consolidation process that most urban hospital laboratories have undergone during the past five years. It was a direct consequence of the widespread formation of new integrated healthcare networks. That market cycle ran its course in 1999.
The end of this epic period of IHN creation sets the stage for the hospital labs’ next golden age. Each IHN has organizational infrastructure that needs enhanced services, management expertise, and clinical support from its lab division.
Even as the moment arrives when IHNs will ask more from their laboratories, new diagnostic instruments and technologies are entering the marketplace. Match these together, and it is one of those rare moments in life when various market forces come together to make hospital laboratories the right answer to the most compelling challenge facing the nation’s 595 IHNs.
The question is simple. With all the clinical resources now under common management, how does the typical IHN actually best achieve clinical and operational integration?
Few examples exist to guide both IHN CEOs and hospital laboratory administrators. Kaiser Permanente is widely-hailed as a model of effective integration. Group Health Cooperative in Seattle is another. Both organizations sprouted decades ago, and have developed full integration of clinical and operational resources. But their business model is not easily applied to the IHNs which are operated by such owners as Tenet or a Catholic charitable organization.
Hospital laboratory directors and pathologists understand the laboratory has great leverage to improve the quality of care while reducing costs. What will surprise them in coming years is that their IHN CEO will come to recognize the same fact.
There is an oft-quoted statistic among laboratorians. It lacks definitive attribution, but has the ring of truth. This statistic says that 60% of all decisions to admit or discharge a patient from the hospital rely, to some degree, on laboratory test results. In contrast, the laboratory typically represents only about 5% to 9% of a hospital’s annual operating budget.
THE DARK REPORT sees evidence that a growing number of senior IHN administrators are recognizing that the laboratory may be the right tool to expedite clinical and operational integration. Their need for better clinical outcomes at ever-decreasing costs will force them to give more recognition to the value of laboratory testing. It means closer cooperation with their laboratory management team and pathologists.
Compelling proof of this fact comes from Premier, Inc., the national group purchasing organization (GPO) that serves 1,700 member hospitals. In May 1998, it announced a major strategic services alliance with Quest Diagnostics Incorporated. The goal was for the two companies to assist hospitals and healthcare systems gain the maximum potential benefit from their laboratory organization.
Failed To Meet Expectations
In the past 23 months, the strategic services alliance has failed to meet expectations. That performance has surprised few industry observers. After all, hospital administrators like to keep control over all their operations, and that includes the laboratory. The Premier-Quest alliance had some difficult business challenges to succeed in its goals.
But THE DARK REPORT has always believed that there was another reason why the news of the Premier-Quest strategic laboratory services alliance was important. Premier’s decision to participate in the upgrading of hospital laboratory function and performance is a validation of the hospital laboratory’s vital role within the integrated healthcare system.
For that reason, we extensively interviewed Premier executives Bill Nydam, then Executive Vice President at Premier, and John Biggers, then Premier’s Vice President of Corporate Business Development. The two-part interview was revealing as to the potential of the clinical laboratory to be a fulcrum of change within IHNs. (See TDR, June 15 and July 6, 1998.)
Nydam characterized Premier’s laboratory alliance as a “breakthrough” initiative that “should fundamentally change the way healthcare services are delivered and generate benefits which had previously been unattainable.”
Biggers stated that “A number of CEOs among our hospital owners pointed out to us that clinical laboratory data might be a fulcrum to leverage improvement in both clinical and operational integration within their healthcare system. A lot of our hospitals recognized that this was a good area to rally around as they attempt to build up their networks.”
These statements, made after 18 months of intensive meetings with Premier’s various hospitals and IHNs, demonstrate that, even in 1998, a sizeable number of IHN CEOs appreciated the potential of clinical laboratories to help the integration of health care.
The truth of these statements is further validated by the appearance of multi-hospital laboratory shared services ventures during the past 24 months. In this issue, we’ve mentioned Spectrum Laboratory Network in Greensboro, North Carolina and the just-announced combination of the lab divisions of Aurora Healthcare(Milwaukee) and Advocate Health Care (Chicago).
Measure And Quantify
THE DARK REPORT’s prediction of a new golden age for hospital laboratories will not happen overnight. There will be progressive IHNs which act ahead of their peers. It will take them a couple of years to measure and quantify the successes generated by these projects.
But once that occurs, the compelling economics of a proactive hospital laboratory organization will make it imperative that all viable IHNs give a greater role to diagnostic testing within their systems.
It is important to recognize that these developments will take place even as radical improvements are made to laboratory technology. This includes automated, modular workstations which steadily shrink in size. There will be increased point-of-care testing technology. Molecular and genetics-based assays will provide new opportunities to detect disease earlier, with greater accuracy, and at less expense.
Of course, overhanging all these changes is the Internet and healthcare E-commerce. The information revolution will work its magic on the clinical laboratory. It will tie together all these emerging new technologies.
Enhanced Laboratory Role
For hospital lab administrators and pathologists, the enhanced role of the laboratory within the typical IHN means doing more with fewer people. It will require flexibility to adapt new technologies earlier in the implementation curve.
At the same time, diagnostic testing will move outside the core lab and closer to the patient. The PennState-Geisinger Health System is undergoing precisely this type of evolution. To support it, laboratory administration is moving outside the core lab and interacting with clinicians and other providers in the locations where specimens are collected and the tests performed.
This new golden age of hospital laboratories is already upon us. Healthcare market dynamics of the 1990s, in creating an IHN-dominated hospital industry, have prepared the stage.
Now it is up to resourceful hospital lab administrators to demonstrate how the potential of lab testing to lower costs and enhance outcomes can be converted into reality.