CEO SUMMARY: It’s a daunting task to rationalize and integrate lab testing services among 21 hospitals spread out between Eastern Wisconsin and the south side of Chicago. Since the joint venture was announced April 2000, management initiatives have generated lower costs. But the number one obstacle to faster progress has turned out to be information system capabilities between the two systems.
WHAT HAPPENS WHEN A HOSPITAL system finishes several rounds of rigorous laboratory consolidation? What management strategies can be employed next to generate further cost savings and service enhancements from lab operations?
These are the questions which led to the laboratory joint venture between Aurora Health Care, headquartered in Milwaukee, Wisconsin, and Advocate Health Care, which operates hospitals in the northern suburbs of Chicago, Illinois. The joint operating agreement forming the laboratory venture, called ACL Laboratories, was completed in April 2000.
By making the decision to place their individual lab operations under a common management structure, the Aurora and Advocate health systems became an example of an infant trend in the lab industry. That trend is for two or more health systems to unify, integrate, and consolidate their lab operations across the participating systems.
Although the Aurora/Advocate lab joint venture has only operated over the past 19 months, it has already learned a number of strategic business and management lessons about this type of laboratory joint venture. The first lesson is that the unique composition of each participating healthcare system dictates the form and function of the lab testing services. One lab solution may not meet the needs of all partners.
This is particularly true of ACL Laboratories, which serves two large health systems. Aurora operates 12 hospitals and generates $1.9 billion in annual revenue. Advocate has 11 hospitals and revenues of $2.2 billion. In deciding to place their laboratory under a common management structure, these two health systems created what may be the largest hospital-based laboratory organization in the United States.
THE DARK REPORT recently traveled to the Midwest and visited the labs of Aurora and Advocate to learn, first-hand, about the management strategies guiding this huge lab joint venture. Not surprisingly, the scale of this lab venture has created some unique complexities.
Hospital Lab Is Profitable
“ACL’s financial numbers tell an interesting tale,” stated Jay F. Schamberg, M.D., General Manager of ACL Laboratories, “As a cost center, laboratory services spends $170 million per year in both systems. As a revenue center, laboratory services generates $235 million per year.
“The fact that we are profitable is an important point. It explains one reason why our system administrators support the laboratory joint venture,” noted Dr. Schamberg. “Our laboratory brings in a substantial amount of money to the benefit of the systems. We’ve provided the numbers to our administrations and they recognize the importance of lab testing revenues.”
Delivering Added Value
In many hospitals and health systems, there is a belief by administration that lab services are a cost. Consequently, these labs are managed to control and eliminate expenses. At ACL Laboratories, the opposite is true.
“We made a strategic management decision to develop very sophisticated tools that measure net revenues, costs, and productivity within the laboratory,” noted Dr. Schamberg. “This detailed information about our finances and productivity gives us great credibility with the two health systems.
“As we create improvements in lab operations,” he continued, “they can see relevant financial and operational measures moving in the right direction. This gives our governing board, called the Laboratory Oversight Committee, the confidence to support us with more capital and the resources we need to expand the testing services offered by our lab.”
When the joint venture was formed in 2000, Aurora Health Systems had finished a rigorous, multi-year project to consolidate its laboratory services. Since most of the 12 Aurora hospitals are clustered around eastern Wisconsin, it had created a core laboratory at West Allis Memorial Hospital, just outside downtown Milwaukee. The core lab serves hospitals located as far north as Green Bay, Wisconsin.
Limited By Geography
Within the Advocate system, some laboratory consolidation had been completed, using Lutheran General Hospital in Park Ridge, Illinois as the site of the core lab. But geography and traffic had constrained the lab’s efforts to shift sizeable amounts of testing from other hospitals in the system.
“The location and needs of Advocate’s hospitals dictated a different strategy for our laboratory organization,” noted Imad Y. Almanaseer, M.D., Chairman, Department of Pathology at Lutheran General. “Within our system, consolidation of lab testing has been done selectively, where it can contribute to better quality and lower costs.”
“It’s important to understand that both health systems knew, at the start of this lab joint venture, that the lab organizations were different in fundamental ways,” stated Dr. Schamberg. “This fact shaped our management strategies. We needed to build upon the existing strengths of both laboratory organizations. Opportunities to further unify and integrate lab operations would present themselves over time.”
Both Dr. Schamberg and Dr. Almanaseer can reel off a list of successful management initiatives that include savings from group purchasing, integration of courier and logistics, and establishing specific testing centers of excellence to serve both health systems. But both physicians are candid about the major obstacle preventing ACL Labs from moving on bigger management priorities.
“It’s the information systems,” stated Dr. Almanaseer. “Both hospital system labs run on Sunquest LIS. But an effective interface has yet to be implemented and that makes it difficult to move specimens between labs and across the two systems.”
Billing For Lab Outreach
“Another obstacle is outreach billing capability,” added Dr. Schamberg. “For years, Aurora has enjoyed a thriving lab outreach program. We’ve got a separate billing department from the hospital and it uses Antrim. In contrast, as the Advocate health system formed, lab outreach was never developed. So they have a relatively limited capability to bill for outreach tests.
“Establishing the ability to bill for outreach testing across both health systems represents a significant opportunity for us,” declared Dr. Almanaseer. “Our priority is to implement an aggressive outreach program around the Advocate hospital campuses once the LIS and lab billing informatics solutions are in place.”
A parallel initiative is under way to unify the informatics capabilities of the pathology group practices which serve Aurora and Advocate. “Here is an example of where a consolidated lab organization helps us avoid reinventing the wheel and incurring unnecessary costs,” observed Dr. Almanaseer. “Our pathologists at Advocate are using the latest version of DHT’s CoPathPlus™. Pathologists at Aurora are using an earlier version of CoPath.”
“Work is under way to implement CoPathPlus within the Aurora pathologist group,” he continued. “It will take considerably less effort to include their tests into our existing tables than if they were upgrading on their own.”
As the information systems are unified across all the hospital laboratories, a plan to further consolidate and rationalize testing flows is ready to roll out. “For example, Advocate has a well- developed lab for molecular and genetic testing,” observed Dr. Schamberg. “Its expertise is established and significant and so it makes sense to make it the center of excellence for molecular and genetic testing.
“That principle applies equally to outreach testing. Aurora’s core lab is already set up and it handles a significant volume of outreach testing every night,” he continued. “As lab information solutions are put in place, it will make sense for most outreach specimens originating in Chicago to come to Milwaukee for testing.’
…it demonstrates that collaborative efforts by independent healthcare systems to rationalize laboratory services across extended geography can be successful.
In both Chicago and Milwaukee, ACL labs is not plagued by the same shortage of med techs seen in other cities. “We’ve had no problems maintaining the required staffing levels of medical technologists,” noted Dr. Schamberg. “It’s the histology lab where we could use additional trained technical staff. To fill our staffing needs, we’ve established an educational pro- gram to train histotechs.”
Detailed Numbers Drive Management Decisions
Inside Aurora Health Systems’ Laboratory division, a detailed financial program supports rapid and accurate decisions by its administrative team.
“We’ve developed a system of analysis which allows us to take a detailed look at almost any cost or productivity variable in our laboratory organization,” said Jay F. Schamberg, M.D., General Manager of ACL Laboratories. “It is accessible by Web browser and permits us to do real-time analysis of our lab operations.”
Dr. Schamberg and his team have used this financial accounting system to drive lab costs down. From an average cost per test of $10.20 in 1997, ACL’s cost per test was reduced to $9.01 for 2000.
Significant To Marketplace
THE DARK REPORT believes that the ACL Laboratory joint venture between Aurora Health Systems and Advocate Health Care represents market significance for at least two reasons.
One, it demonstrates that collaborative efforts by independent healthcare systems to rationalize laboratory services across extended geography can be successful. Despite the 100 miles which separate hospitals in Chicago and Milwaukee, ACL Laboratories is successfully improving services and unifying lab operations.
Two, this lab joint venture is representative of a handful of similar attempts by two or more multiple-hospital health systems to operate a shared laboratory organization. As such, it is an example of what may be an emerging trend. After all, once hospital systems have consolidated lab operations internally, “external” lab consolidation is an obvious way to further reduce costs and expand lab testing services.
Because ACL Laboratories is an early effort to combine very large testing operations of two independent healthcare systems, it offers some relevant lessons in strategic positioning and lab management.
Lab Information Systems
To no one’s surprise, the importance of laboratory information systems is reinforced by the experience of ACL Laboratories. Once a common LIS capability is established, it is ready to move forward on any number of significant performance improvement opportunities. These include expanding outreach efforts in Chicago, more movement of specimens among the two systems’ core labs, and referring specific tests to appropriate centers of excellence labs within the two systems.
The other key lesson is that good financial and productivity data can provide irrefutable proof that a hospital laboratory generates net operating profits to its parent hospital or health system. As that happens, it becomes easier for laboratory administrators and pathologists to get capital and additional support for ongoing expansion of laboratory testing services and further projects to reduce lab expenses and boost productivity.