LabNet of Ohio Profits From Network Projects

Efforts at shared testing and group buying pay big dividends for urban and rural labs

CEO SUMMARY: Since its inception seven years ago, this regional lab network has worked diligently to create the service infrastructure necessary to pursue managed care contracts. Along the way, LabNet of Ohio has found gold in such business initiatives as shared testing and group purchasing. Now it wants to supplement its good coverage in Southern Ohio with lab members from the northern half of the state.

LIKE MANY OTHER regional laboratory networks, managed care was the threat that launched LabNet of Ohio, Inc. back in 1994.

But financial success for this 20-member network has come from shared testing, group purchasing, and a couple of other unexpected business opportunities. In particular, the shared testing initiative has proved significantly rewarding.

“1994 was a time when, as Larry Garner, an organizer and early champion of LabNet, used to say ‘our hospital labs were getting carved out of managed care contracts left and right’,” recalled Michael McGowan, Laboratory Director at Marietta Memorial Hospital and a member of LabNet’s executive board. “That loss of business was painful and we wanted to do something to stop it.

“Since 1994, however, the managed care threat never materialized as expected,” said McGowan. “Instead, our network has generated considerable economic benefits through shared testing and group purchasing.”

The most notable accomplishment is a shared testing arrangement that was organized with the goal of directing send-out testing to LabNet members. “We have 75% participation in our shared testing program,” stated McGowan. “Three member labs are the testing centers. They are Children’s Hospital in Columbus, Ohio State University Medical Center in Columbus, and TriHealth Laboratories in Cincinnati.

“Referring members direct the majority of their send-out testing to our three ‘reference labs’,” explained McGowan. “Whatever they can’t test in-house is directed to a national reference lab. LabNet’s primary relationship is with ARUP Laboratories, Inc.

“We’ve been able to maintain adequate access and pricing without [managed care] contracts…”

The referral testing arrangement was launched in 1996, when LabNet of Ohio was incorporated as a limited liability corporation (LLC). Laboratory information services at that time were totally manual.

“Our member hospitals provided working capital in 1996 so that we could begin the process of creating CPU-CPU connections between our member labs,” McGowan said. “All three of our testing centers were using Sunquest LIS, so that became the foundation for our system. Additional hardware was installed at Children’s Hospital and each sending lab got a PC workstation in its send-out area.

“Currently we test in one direction, from sending labs to the testing center labs,” added McGowan. “Our goal is to have CPU-CPU links among all member labs. Two years ago that would have cost us about $1 million. With new technologies and the Internet, the price of this capability is falling rapidly and will soon be within our reach.”

Original Strategic Vision

LabNet’s ability to rapidly develop this shared testing arrangement is a direct result of its original strategic vision from 1994. “We are building a laboratory service infrastructure to serve that individual patient who holds a LabNet testing card for his health plan,” noted McGowan. “Our regional laboratory network is organized to provide managed care contracting services under the ‘messenger model’.”

“As this patient is logged in by a hospital lab for testing, that lab decides which tests it will perform, based on the network’s contract price for that test,” he continued. “Any tests that it doesn’t want to do are then referred to the network’s testing center labs.

“Regardless of how many labs do tests for this patient, LabNet will then generate a single report to the physician and send a single bill to the payer. This arrangement allows all the testing to remain in Ohio and that’s our dream,” stated McGowan.

Managed Care Contracts

So how many managed care contracts does LabNet hold today? “None!” declared McGowan. “We’ve been able to maintain adequate access and pricing without contracts because of our unique combination of rural and urban hospitals, along with the unexpected ‘demise’ of managed care in Ohio.

“Specifically, managed care never pushed into rural areas as expected,” noted McGowan. “That’s allowed rural hospitals to keep lab services as part of their full service capabilities with different HMO contracts. In the urban areas, the power of managed care is declining in favor of PPOs and discounted fee-for-service lab agreements.

“The upshot of this is, over the last five years, LabNet has been able to say ‘no’ to unprofitable managed care con- tracts, keep a strong hold on its existing fee-for-service work, and develop the shared testing and shared lab information system capability that will push us to a higher level of service for physicians and health insurers,” McGowan said.

LabNet of Ohio has a self-sustaining cash flow and currently employs on a full-time basis an operations manager, an LIS analyst, a marketing rep and a customer service rep, supplemented by a part-time customer service rep. LabNet uses a contract service to handle its courier needs.

Borrowed From RLA

“Remember the Regional Laboratory Alliance (RLA) in Pittsburgh?” asked McGowan. “We borrowed liberally from its business plan. That lab network did several shrewd things. For example, like RLA, LabNet is actually a broker for testing. It gets a discount from its testing centers. Referring labs pay the ‘gross price’ per test to LabNet, and LabNet refers the ‘net discounted price’ forward to the testing center lab. The difference pays LabNet’s salaries and operating expenses. Everybody’s happy because the overall cost of lab testing within the network has declined significantly.”

This financing mechanism means CFOs of the hospital member are also happy with the network. “I’d estimate that each participating hospital originally invested about $65,000 to get LabNet up and running,” said McGowan. “Since start-up, all operating costs for our network have been recouped from ongoing shared testing arrangements.”

Group Purchasing Benefit

Another area of substantial benefit is group purchasing. “We fell into this somewhat unintentionally,” said McGowan. “Back in 1996, one vendor’s sales rep noticed that several of our members used his company’s instruments. He offered a discounted package for the network that allowed our smaller members to pick up some worthwhile savings.

“Inspired by that, we began to develop a more sophisticated buying program,” he continued. “Now we have a quite an impressive book of contracts. At my 200-bed hospital, we’ve saved $70,000 just on chemistry slides during the past two years. In fact, our purchasing program has been so effective that we plan to develop a GPO (group purchasing organization) among the LabNet members.”

LabNet wants to expand, and is running into the typical “chicken and egg” dilemma. McGowan explains the situation: “To expand our geography, we’ve approached hospitals in other parts of Ohio. Using our sending lab/testing lab formula, the urban hospitals ask ‘who will send to us?’ while the rural (sending) hospitals say ‘who is close and will do our testing?’ To date, neither group of labs has been willing to sign up first.

“However, we believe the demonstrated financial benefits cannot be ignored by these prospective lab members,” he added. “We remain optimistic about developing a truly state-wide testing capability. That will make us very attractive to the larger health plans.”

Impressive Track Record

LabNet of Ohio’s impressive track record during the past six years demonstrates there is still vitality in the regional laboratory network business concept. It also illustrates that collaboration between urban hospital labs and rural hospital labs can be mutually beneficial. Above all, it is strong evidence that regionalization of laboratory services is ongoing.

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