Market Forces Cause Detroit’s Lab Network To Launch Operations

Oldest Continuous Operating Lab Network

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CEO SUMMARY: Joint Venture Hospital Laboratories’ success rests on an essential fact: it exists to respond to marketplace demands. The network links laboratory operations of 24 hospitals owned by eight integrated delivery systems in Greater Detroit. Not only is it the oldest continuously operating regional laboratory network in the United States, but it is probably most successful at managed care contracting, with 400,000 lives currently under contract. The broad range of accomplishments of this network confirms that the regional laboratory network concept is viable.

HEALTHCARE’S EVOLUTION TOWARD managed care and clinical integration generated a distinctive new laboratory business model: the regional laboratory network.

Such networks are a relatively new phenomenon. Not until 1995 did laboratories in communities throughout the United States begin forming regional laboratory networks. Since that date, as many as 40 such networks are either organizing or in operation.

In fact, during 1995 and 1996, the laboratory movement received a lot of ballyhoo, much of it unwarranted. With few exceptions, regional laboratory networks have disappointed their organizers. The birthing process is lengthy, rancorous and seething with politics. Economic gains expected by members seldom appear.

Thus, it is ironic that the oldest regional laboratory network may also be the most successful. It is Joint Venture Hospital Laboratories (JVHL) in Detroit, Michigan, founded in 1992.

“Originally we were a partnership of four laboratories operated by different health systems,” said Jack Shaw, Executive Director of JVHL. “Managed care is what caused us to come together. The early 1990s was the time when local managed care plans began to contract for exclusive provider arrangements.”

“Each of the original four partners was a consolidated laboratory owned by an integrated healthcare system. Each of the four partners had significant outreach business,” continued Shaw. “For that reason, every founding partner in JVHL stood to lose a considerable amount of outreach testing volume if it was excluded from provider status by any of the important local managed care organizations.”

Because the network was formed in response to outside market pressures, it had clear-cut goals. This gave organizers a common purpose. Progress was swift.

“Gaining provider status for upcoming managed care contracts was essential if we were to retain our existing business,” added Shaw. “Fear of loss motivated all our network partners to slice past politics and rapidly develop a viable business plan.”

According to Shaw, by early 1993, the legal and organizational work was completed. JVHL began aggressive bidding for managed care contracts. Its first contract involved 90,000 lives.

No Models To Follow

“When we started this, there were no models to follow,” noted Shaw. “It was not clear whether organizing a network was the right approach to the managed care problem our individual laboratories faced. But continued evolution of the healthcare market in Detroit has validated the foresight of JVHL’s founding four laboratory partners.”

JVHL was originally organized as a partnership. “At that time, there were no LLCs (limited liability corporations),” Shaw explained. “Later we decided to use the LLC model because it facilitated contracting. With an LLC, we can assume risk and create a withhold for each different managed care contract.

“Another distinctive aspect of JVHL is the fact that we do not use the messenger model. It has been our experience over the past five years that the messenger model is cumbersome and, quite frankly, inhibits swift responses to changes in the marketplace.

“We operate without the messenger model because JVHL acts as the external negotiating agent for the participating laboratory members. Our member laboratories sign participating hospital provider agreements that authorize JVHL to bargain for them. That is a key point in this arrangement.”

Conflicts Of Interest

The individual interests and actions of participating members sometimes conflict with those of JVHL. “There have been occasions when an individual laboratory wants to bargain on their own. We’ve had to work through those situations. But with one exception, we are a non-exclusive network. That exception is simple. If JVHL holds a contract, a member, by itself, cannot negotiate that contract away from JVHL.

“By no means is this the last word on that subject,” observed Shaw. “As the marketplace evolves, each JVHL member laboratory has their own business objectives. We sometimes have to work through those situations.”

The network’s emphasis on gaining and keeping provider status with managed care plans is the glue which binds together the eight integrated health system laboratories.

“However, all members recognize that JVHL is a market-driven network,” he continued. “It does not exist to consolidate testing and lower costs among network laboratories. Rather, the primary business objective of JVHL is to permit constituent laboratories to bid for, and service, managed care contracts to which they would normally be excluded.”

The network’s emphasis on gaining and keeping provider status with managed care plans is the glue which binds together the eight integrated health system laboratories. It allows JVHL to avoid the disagreements, political infighting and lack of focus which plague most laboratory networks. As a business entity, JVHL succeeds because of its well-defined objective and alignment of financial incentives for all the participating laboratories.

Operationally, JVHL designed a simple governance structure. The need for a paid executive director to advance the interests of the network was recognized. This led to the funding of a dedicated, part-time executive director beginning in 1996.

An executive committee meets monthly, for ten months each year. The executive director reports to the president (elected for a two-year term) of the executive committee. “Each member has equal representation on the executive committee,” noted Shaw. “The executive committee operates primarily on the basis of consensus.”

Subcommittees deal with five key areas: operations, marketing, quality assurance, finance and billing/LIS. “These committees are staffed voluntarily by our members. These committees are the working engines for our network. They are responsible for developing and maintaining the services necessary for the network to function.

“We also pay for centralized administration, marketing and finance,” said Shaw. “We started by having these functions handled on a voluntary basis. That became overwhelming to the volunteers. With downsizing in their own laboratories, squeezing extra time for JVHL duties proved almost impossible. More importantly, the work itself was difficult to accomplish on a timely basis. During the last year we brought these functions in-house and run them from the office of the executive director.”

Dual Network Membership

The system of dual membership between equity and non-equity members developed for two reasons. Shaw explained, “First, this permits us to expand the service area covered by our laboratory network. There are also logical partners for our network who may not wish to make an equity investment.

“The second reason for accepting non-equity partners comes from the managed care plans themselves,” he said. “The MCO (managed care organization) may require us to include a non-JVHL provider. That MCO may have a key link with a healthcare organization outside our organization. If that is the case, we have the flexibility to include that provider in our network and gain provider status with that particular contract.”

Shaw noted that JVHL’s sustained operational success now requires it to expand in order to access additional managed care contracts. “We have matured to the point where we have confidence that JVHL now has a permanent place in the market.

“Currently our network serves an area which contains 60% of Michigan’s population. We have eight equity members representing 24 hospital laboratories. This gives us a solid service infrastructure, including 90 PSCs (patient service centers and 84 courier vehicles.

“I might add that we’ve always con- sidered these high numbers of PSCs and couriers to be a network strength. However, our thinking is evolving. Economics within our healthcare market may not warrant these numbers. Bigger may not make us better.

“Presently we have a study group looking at ways to realign this infrastructure to improve service and eliminate redundancy,” stated Shaw. “Already our members recognize that MCOs don’t want to pay for unnecessary infrastructure. For that reason, we want to initiate smart management changes before the marketplace forces them upon us. It reflects upon the maturity of our network that we are responding to these kinds of dynamics in the marketplace.”

Another smart management strategy is JVHL’s approach toward information systems. “I am constantly amazed at how other regional laboratory networks make LIS such a major impediment to start-up. Our solution was both simple and low-cost,” said Shaw. “We deter- mined that all necessary information could be reduced to an ASCII format. One of our members took the initiative to develop a tape format.

“After three or four versions, we arrived at an ASCII tape format that every member laboratory could produce from their own LIS. Each reporting period, every member laboratory sends us a tape. These are loaded into our network host computer, run by one of the members. The necessary reports for JVHL are generated in this way.”

But what about results reporting? “That is a capability we would like,” responded Shaw. “We notice on RFPs issued by the national HMOs that they commonly want disease management information. Although we don’t capture that information now, we have made the development of this capability a major goal for 1998. We believe we can accomplish this on a practical basis without buying a new computer system.”

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Unique Funding Method

JVHL also has a unique method of funding itself. “We operate JVHL on a zero- income basis,” Shaw explained. “JVHL collects the revenue, takes a portion to cover administrative expenses, and remits the balance to the members.

“During the last year, those administrative expenses totaled 8% of collected network revenues. Thus, 92% of the money went directly to the member laboratories. This money is divided quarterly, using a relative value methodology for the work performed that is loosely-based on Medicare relative values.”

With the business savvy shown by JVHL leaders in the design and operation of the network, there is a continual awareness of the need to be a “value-added” provider to clinicians and managed care plans. “We regularly evaluate what we do, what the marketplace wants from a laboratory and how we can bring unique and valued services to our clients,” commented Shaw. “We consciously avoid participation in national contracts with the three national labs if JVHL is restricted to providing access to our patient service centers and stat lab agreements. Our goal is to be the primary source for physician office testing in our market areas.”

TIME LINE OF EVENTS FOR JVHL NETWORK

Here are key events in the development and evolution of Joint Venture Hospital Laboratories:
1992: Organized as a partnership of four health system-affiliated laboratories in response to exclusive provider contracting initiatives by local MCOs.
1993: Obtained provider status on first managed care contract.
1994: Began providing laboratory services under this first contract, serving 80,000 lives.
1995: Awarded exclusive two-year contract on 350,000 lives. Added two equity members. Reorganized as LLC.
1996: Added one equity member. Hired first paid executive director.
1997: Added one equity member. Awarded fee-for-service contract involving 20,000 lives.

Value-Added Factors

“We want to provide value-added factors such as including emergency room testing,” he added. “Since our laboratories are part of integrated systems, we can offer this service. Plus, we know how to properly price such services. Capabilities such as these set us apart from the national laboratories. Managed care companies like to bundle as many laboratory services as possible. This is one example where JVHL increasingly becomes a single solution for the MCO.”

Given that most regional laboratory networks are struggling just to get off the ground, why has Joint Venture Hospital Laboratories been successful? The answers are surprisingly simple.

First, an outside market influence motivated the network’s founders to meet together, develop a business solution and implement it without delay. For JVHL members, the threat that managed care plans would exclude them from serving their own laboratory outreach customers was the motivation to organize the network and make it work.

Second, JVHL approached the network as if it were a stand-alone business. This is an important concept. JVHL’s founders developed a cash flow program that funds the network’s activities from current revenue. JVHL differs from the “shared testing” networks in that it finances its ongoing operating costs of the network from contract revenues.

Executive Director Needed

Third, JVHL recognized that a dedicated executive director was needed. A business plan was developed that funded that position, beginning in 1996. With a part-time, dedicated executive director on the job, JVHL’s key business initiatives are regularly pushed forward. This gives the network an edge when competing against the national laboratories who want the same managed care contracts.

Fourth, JVHL has consistently delivered the support services required for the network to fulfill its managed care contracts. This is the credibility which encouraged other laboratories to join the network, either as equity partners or participants. Recruitment of these new members gives JVHL more market reach and added clout when negotiating managed care contracts.

Fifth, JVHL used a “keep it simple stupid” approach to systems and management. It avoided the messenger model. Its unified reporting uses low-cost ASCII-downloads from each member’s LIS. It achieved centralized billing and consolidated utilization reports with a minimal outlay of capital and time.

It should not be surprising that JVHL is poised to become a state-wide regional laboratory network. The design of its business plan, its governance and actual performance have earned it the respect of both managed care plans and other hospital-based laboratories.

“One thing we are learning about the managed care companies in Michigan is that they do not like to change,” declared Shaw. “Once they identify something unique about a laboratory provider and establish a contract relationship, there is inertia within the managed care plan to stay with the existing relationship.”

Pioneer Networks Include Pittsburgh, KC & San Francisco

DURING 1995, THREE OTHER regional laboratory networks were operational. Like JVHL, these were pioneering efforts at the network business model.

In San Francisco, Bay Area Hospital Laboratory Network (BAHLN) launched operations with 18 participating hospital laboratories. The network’s goal was to lower costs through shared test and pursue managed care contracts. Since that date, the network has met with mixed results.

In Pittsburgh, Reference Laboratory Alliance (RLA) brought 40 hospital laboratories into a network model. RLA was organized as a regional reference lab, with 36 community hospitals funneling send-out work to the four tertiary laboratory partners. RLA also gained provider status for the Keystone/Blue Cross contract, returning a substantial volume of outreach specimens back to member laboratories. The emergence of two competing healthcare systems rendered RLA redundant, and it ceased operations on January 31, 1997.

Kansas City’s Regional Laboratory Alliance (RLA) likes to call themselves “the other RLA.” Launched with four hospitals and a regional laboratory, its immediate goal was to prevent loss of outreach testing from a managed care contract. After three years, this network seems to be flourishing relative to San Francisco and Pittsburgh.

Dominant Market Position

“THE DARK REPORT is demonstrating that hospital laboratories which offer competitive services and pricing do achieve a dominant market position within their chosen service area,” he continued. “That is certainly the experience of our equity members and the net- work itself. Where we do a good job and provide good laboratory services, we get the business and keep it.

“What has made this possible is JVHL itself. Without the ability to contract for laboratory services at a regional level, our individual lab outreach programs would have been denied provider status years ago. The regional laboratory concept was the critical piece which allowed us to match our strong clinical resources at the local level with managed care’s needs for a region-wide contract provider.”

Marketplace Principles

Shaw’s description of events in the Detroit marketplace aptly reinforce the marketplace principles expounded by THE DARK REPORT. Hospital-based laboratories must operate with a business mind set. They must utilize professional sales and marketing programs to increase specimen volume. They must adopt regionalization strategies to meet the needs of managed care plans.

Those hospital-based laboratories which implement these management initiatives will be rewarded with a financially stable operation, growing employment base and dominant market share…just like the member labs of Joint Venture Hospital Laboratories!

JVHL’s Upcoming Strategic Initiatives

JVHL continues to evolve. As manage- ment capabilities are developed, the network then pursues new priorities which can improve its competitive market position. These are some current initiatives:

Expand Marketing of JVHL: JVHL wants to directly approach employers and TPAs (third party administrators) as well as gain more managed care contracts.
Provide Statewide Coverage: With statewide laboratory coverage, JVHL gains a strong selling point with MCOs.
Develop Integrated Information Systems: Continue evolution of IS capability, including TPA functionality.
Reduce Costs For JVHL Members: With administrative resources now in place, the network intends to explore opportunities for members to reduce their operational costs.
Shared Compliance Programs: To avoid unnecessary duplication of costs, JVHL intends to sponsor training, information.
Improving Utilization Of Existing Lab infrastructure: The network is looking at ways to better utilize existing draw stations, courier routes, instrumentation and excess capacity.
Group Purchasing: An obvious opportunity to help members achieve lower costs.
Internalized Esoteric Tests: Look at consolidating send-out work of member laboratories.
Investigate Strategic Alliances: Are there good opportunities for synergy with national or regional laboratories? Exploratory discussions are ongoing.

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