CEO SUMMARY: Canada’s single-payer healthcare system is undergoing transformation. Rising costs now compel individual provinces to re-engineer their existing healthcare arrangements. In Alberta, commercial laboratories were forced to merge and cooperate with hospital-based laboratories.
UPHEAVALS WITHIN CANADA’S HEALTHCARE SYSTEM radically transforming laboratories. This is particularly true of Alberta, where the province brought both hospital and commercial laboratories into a common operating framework.
The result is a province-wide regional laboratory system, comparable in many ways to the emerging laboratory networks found in the United States. But unlike the United States, laboratories in Alberta were given no choice, no time and no money to implement the regionalization program.
Laboratory regionalization in Alberta meant that laboratories in academic centers, hospital-based laboratories and private commercial laboratories were literally forced to combine themselves into a more efficient laboratory system.
“It would be difficult to accurately describe how revolutionary these changes were to laboratories in the province,” stated David Dawson, M.D. “A large portion of the laboratory workforce has been displaced. For example, the laboratory sector lost about one-third of its pathologists and technologists during the last two years.”
Dawson, a pathologist, is the Laboratory Director of the David Thompson Regional Health Authority in Red Deer, Alberta. This is one of 17 regional health authority boards created by the province during a 1995 restructuring of the healthcare system in Alberta.
“Alberta’sprovincialgovernment wanted radical change to the healthcare system and wanted it to happen quickly.”
—David Dawson, M.D.
“All of this began because the province faced a large operating deficit,” said Dr. Dawson. “Healthcare was about one quarter of the province’s total expenditures. Our provincial government decided they were going to control healthcare costs. They stated their intention to achieve major reductions.”
“Alberta reduced costs by doing several things,” explained Dr. Dawson. “First, they announced that they would cut provincial funding for healthcare by 20%, effective July 1, 1995. A further reduction in funding for laboratory services would occur on April 1, 1996. Second, they created 17 regional health authorities in the province and appointed boards.
“These replaced the existing elected hospital boards,” he continued. “The regional health boards were then given a global budget and global responsibilities to meet the healthcare needs of their specific region.
“These budget cuts are not the whole story,” noted Dr. Dawson. “Provincial population growth between 1992 and 2000 is expected to be about 20%. Inflation over this same period will be 13%. Per capita provincial healthcare spending in the year 2000 is expected to be two-thirds of its value in 1992. Thus, further efficiencies will be required if these spending targets are to be met.”
It is the severity of Alberta’s action which triggered how laboratories responded. “Originally there were four laboratory components in Alberta’s system. Two of these, the Provincial Health Laboratories and the Red Cross Blood Transfusion Services, are expected to undergo major changes in the future,” said Dr. Dawson.
“Hospital labs and private (commercial) labs comprised the other two components,” he continued. “Under previous budgets, hospital labs got $100 million per year for reimbursement. Private labs, which served physician offices, got $110 million per year. These funds were combined and reduced at the source by an average of about 30% during the past two years.”
All hospitals in Alberta were publicly funded through global budgets. But commercial laboratories in Alberta were paid differently. Like clinicians, they were paid on a fee-for-service basis. They billed the provincial government for reimbursement.
“Effective July 1, 1995, the provincial government abolished the schedule of benefits for commercial laboratories,” Dr. Dawson said. “They no longer accepted bills from the commercial laboratories. They took the monies which had been paid to commercial labs, less the 20% each for year one and year two, and gave those monies to the regional health authorities.”
This placed responsibility on the regional authorities to determine how laboratory services would be organized and reimbursed for their particular region. “These changes proved brutal for commercial laboratory operators,” stated Dr. Dawson, “But in the region where I work they were responsible companies and working relations were good. The choice was clear. Either the commercial labs would compete against the hospital laboratories, or both groups would meet together to develop win-win opportunities.”
“In this region, cooperation was the result. Given the magnitude of the challenges, the laboratory service has coped remarkably well with the massive change,” he explained. “When problems arose, there was enough goodwill between stakeholders to resolve them. It hasn’t always been easy, but for the most part it worked.
“Also, because there are seventeen regional health authority boards, each board developed a slightly different plan for laboratory services in that region. However, such differences were not major. The need to cut tremendous costs out of laboratory services simplified decision making.”
What resulted were regional laboratory systems similar to those predicted by THE DARK REPORT based on lessons learned form the regional network case studies at the Executive War College on Medical Laboratory Networking in Pittsburgh last May. (See TDR, June 10, 1996.)
Our prediction is that hybrid regional laboratory systems will emerge in metropolitan areas. These systems will be a combination of consolidated hospital laboratories, local commercial laboratories and academic or teaching hospital laboratories.
“That is virtually identical to the larger regional laboratory systems in Alberta,” noted Dr. Dawson. “In order to function with the available budget, each region squeezed out duplicate instruments and excess medical technologists. Consolidation of testing was achieved wherever it made sense, regardless of whether a commercial lab, an academic center or a hospital lab was to get the specimens.”
Dawson Sees Changes In Pathology Activity
“As Laboratory Director of the David Thompson Regional Health Authority, I must coordinate services across a primarily rural area,” stated David Dawson, M.D. “My primary activity has changed from looking through a microscope to communicating with others.
“Clinicians are now more interested in effective use of laboratory testing. Many physicians realize that if the laboratory is not able to keep its expenditures down, funding will need to be diverted from other services which they do not wish to see downsized.
“All of this must be accomplished with less staff,” noted Dr. Dawson. “Formerly we had six pathologists and three Ph.D.s in clinical pathology at my hospital. Now there are five pathologists and one Ph.D. Yet we have more work because we cover more locations.”
Traumatic changes were endured by almost all laboratories in Alberta. But the most radical change occurred to commercial laboratories. “In Edmonton, there were two large commercial labs and three smaller private labs. A combination of buyouts and mergers created one private laboratory. It is now called Dynacare Kasper Medical Laboratories.
“Also in Edmonton, most of the hospital laboratories were converted into stat labs. As much testing as possible was centralized,” Dr. Dawson said. “Within the Edmonton region, there is collaboration between hospitals, the academic center laboratory and the commercial laboratory.”
“Also, the two large commercial laboratory competitors in Alberta agreed to eliminate duplicate facilities, and concentrate on specific regions of the province,” added Dr. Dawson. “Dynacare Kasper has focused on Edmonton and the northern part of the province. Calgary Laboratory Services is focusing on Calgary and the south.”
Huge costs were wrung out of the system as a result of this consolidation and rationalization. “A good example of how cost savings were achieved involves collection stations,” noted Dr. Dawson. “Edmonton and Calgary each have about 700,000 people. There were approximately 120 collection sites in each city. Most collection stations were operated by the commercial labs. These have been reduced to about 20 collection sites in each city.”
“A similar reduction took place in rural areas. Commercial laboratories operated collection sites in the rural towns. Those sites were closed. Collections are now done primarily at the local hospital.”
In Alberta, this regionalization activity was not limited to laboratories. “Because of the huge cutbacks in the global healthcare budget given to each regional authority, hospitals and other providers underwent restructuring as well,” explained Dr. Dawson. “Major acute care hospitals were closed in both Edmonton and Calgary. Hundreds of acute care beds were either closed or converted to long term care. More emphasis has been placed on community-based services and ambulatory services.”
“In my community, the Red Deer Regional Hospital’s acute care beds were reduced from 343 to 261. Small acute care rural hospitals were converted to other uses. These budget cuts caused a significant realignment of healthcare services in every part of Alberta.”
Health Services In Quebec Province Undergoing Similar Restructuring
QUEBEC IS RESTRUCTURING ITS PROVINCIAL HEALTHCARE SYSTEM for the same reasons as Alberta. “Rapid increases in the cost of healthcare now force Quebec to look for ways to save money,” said Jean-Pierre Emond, Ph.D. “Because the government funds the healthcare plan, they have direct influence over hospitals and physicians in the province.”
Emond is Supervisor of the Automation and Protein Laboratories at Notre Dame Hospital in Montreal, Quebec, Canada. He recently hosted the Editor of THE DARK REPORT during a site visit to the laboratory. “Most people know that Quebec has a strong socialist slant to the government. Yet the need to control costs has caused the government to negotiate with unions to reduce the number of jobs in healthcare.”
Emond explained that two hospital systems are being organized in Montreal as part of a cost-saving initiative and to reduce the number of beds. “Six hospitals will affiliate with McGill University Hospital,” he explained. “Two other hospitals will affiliate with Notre Dame Hospital to form University of Montreal Hospital (CHUM). In both systems, certain hospital facilities will be converted over to rehabilitation services.
“Here at Notre Dame, we received staffing reduction targets for the laboratory. We will achieve those reductions through attrition and by an early retirement program. Also, laboratory testing from the three hospitals will be consolidated within the CHUM system. So we will be doing more work with fewer people.”
Unlike Alberta’s “slash and burn” approach to cutting healthcare costs, Quebec seems to be cautious in its efforts to save money. However, just the fact that the government is willing to publicly negotiate employment cutbacks with the unions bears powerful testimony to the financial squeeze that rising healthcare costs are creating upon Quebec’s provincial budget.
“In view of the turmoil surrounding major changes to both hospital and laboratory systems since 1995, patient services have been remarkably well maintained,” observed Dr. Dawson. “Everyone worked hard to preserve adequate levels of service and quality during the transition.
“What is also remarkable is the reduction in the number of people affiliated with laboratories in Alberta. As I mentioned earlier, there are one-third fewer pathologists now practicing in the province than before. I couldn’t tell you where they have all gone. I know some found positions overseas, in places like Saudi Arabia. Some went to other provinces or the United States.”
Reduction in Training
“One other important change has been the reduction in training programs for medical technologists,” noted Dr. Dawson. “Prior to the cutbacks, Alberta was training about 120 medical technologists each year. It now graduates about 40 per year. Some neighboring provinces have suspended their training programs.”
One positive change seen by Dr. Dawson is increased interest in practice guidelines involving medical testing. “Clinicians now pay more attention to recommendations from the laboratory on how its services can be best utilized. Most clinicians now realize that the laboratory is a limited resource and they must use it carefully.
“Everyone is using the same medical commons. If it is not used wisely, then there is not enough to meet basic needs,” said Dr. Dawson. “Most clinicians have adapted to this remarkably well. Anecdotal evidence indicates that compliance with practice guide- lines has increased.
“Much of my time is spent working with clinicians to insure that laboratory services are as effective and relevant as possible. In this regard, changes from the regionalization effort have brought about more informed use of laboratory testing by clinicians.”
Alberta provides a number of interesting lessons concerning consolidation and regionalization of laboratory services. There are also several parallels to similar activity under way in the United States.
First, rising healthcare costs are motivating the payer to take radical steps to control expenses. Laboratory funding was reduced by 30%-40% over two years. In the United States, employers are turning to managed care plans as a way of controlling healthcare costs.
Second, under the pressure of severe reimbursement cutbacks, laboratories in Alberta were forced to become cooperative. This meant that both commercial laboratories and hospital laboratories quickly found a common self-interest. From that point forward, putting together a regionalization plan for clinical laboratories became feasible.”
Facts About Canada’s Single-Payer System
Canada does not have a true national healthcare system like Medicare in the United States. Instead, each province designs its own healthcare system.
“Healthcare is actually a responsibility of each province,” explained David Dawson, M.D. “The bulk of the money to pay for the program comes from the province itself. The federal government legislated national standards which must be met by the provinces if they are to receive federal transfer payments.”
As each province seeks a solution to control healthcare costs, clinical laboratories are affected in different ways. In Alberta, laboratories were regionalized by the 17 regional health authorities. Quebec is reducing hospital beds and consolidating laboratory functions. Ontario chose to outsource laboratory testing from the hospitals to commercial laboratories.
“The change in incentives makes this possible,” added Dr. Dawson. “Laboratories reimbursed by fee-for-service were not compelled to control utilization. When this method of payment changed, utilization control became imperative for all laboratories. Incentives changed 180 degrees as of midnight on June 30, 1995.”
With both private commercial labs and government-owned hospital labs sharing a common economic interest, the third lesson from Alberta’s experience is how sizeable the cost savings can be if laboratories are forced to rationalize their services.
“Things which you would have thought impossible became immediately doable once people understood the consequences of inaction.”
—David Dawson, M.D.
The cost savings from consolidation were significant. In Edmonton, five private laboratories were consolidated into one organization. Also in Edmonton, the hospital laboratories were downsized into stat labs and testing was centralized to the commercial lab and the academic hospital laboratory. This meant that duplicate instruments and services were eliminated. Excess testing capacity was taken off line and dismantled.
The reduction in collection facilities was astounding. Both Calgary and Edmonton saw a reduction of 85% in collection sites. Each city dropped from 120 sites to about 20. With hospital laboratories consolidating into regional clusters, the number of pathologists and medical technologists declined by one-third.
Management Analysis of Alberta’s project by Mark Smythe. See Page 14
Fourth, the experience in Alberta indicates that a rational plan to regionalize laboratory resources can be made to work. This should not dis- count the difficult negotiations and emotional impact of such serious restructuring. Historic patterns of competition and political turf battles had to be set aside before a workable plan could emerge.
Fifth, with a constrained healthcare budget placed upon all healthcare providers in the system, clinicians gain a greater appreciation for the value of laboratory testing. They realize that better use of testing can improve healthcare outcomes while reducing the cost per episode of care.
These five lessons bear evidence that a similar form of laboratory regionalization will eventually occur within the United States. The pressure to reduce laboratory costs will finally cause competing laboratories in a metropolitan area to combine forces in a rational way. In the process, excess capacity and duplication of lab resources will be eliminated. This process is under way now in California.
There will be more to learn from the experience of laboratories in Alberta, particularly as continued evolution of healthcare in that province requires more sophisticated solutions from the regional laboratory system.