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Narrower Provider Networks Topic during Quest Conference Call

LabCorp discusses different healthcare trends and emphasizes its advances in informatics

SINCE MAY 1, 2012, the nation’s largest clinical laboratory company has had a new CEO, who is Stephen H. Rusckowski. The company’s second quarter conference call provided an opportunity to learn more about how he views Quest Diagnostics Incorporated.

Conducted on July 19, the first topic of the call was the financial report. For Q2- 12, revenues at Quest Diagnostics were essentially flat, at $1.907 billion compared to $1.903 billion for the same quarter 2011. Clinical testing revenues at Quest Diagnostics were up 0.7% for Q2-12. The number of requisitions was also up .07% for the quarter and revenue per requisition was unchanged, compared to Q2-11.

Growth Strategies

Rusckowski was quick to acknowledge the flat rate of growth at Quest Diagnostics. “We are being thoughtful and disciplined in developing our plan to restore top line growth and improve shareholder returns,” he stated, adding that more detailed growth plans would be shared in the fall, following “a thorough review of our businesses and operations as part of this process.”

To support growth, he told analysts on the call that the company was evaluating its selling and marketing efforts, as well as looking for ways to improve the way it brings diagnostic innovations to market. “We do have some good examples of what we need to replicate to grow this business,” Rusckowski said.

In the short term, one major emphasis is to continue the major cost reduction program that was instituted by Quest Diagnostics’ former CEO. It was launched with the goal of eliminating $500 million in costs from the company by 2014. This program is still in place. It is now called “Invigorate,” and “is a top priority for me,” stated Rusckowski. “From my first week on the job, I’ve been personally involved in Invigorate. I am personally chairing this effort.

“I’ve met with the teams focused on the biggest priority, the areas like lab operations, procurement, general administration, IT, to name a few,” he continued. “Each of these teams are required to manage their projects with structured, disciplined, and rigorous program management approaches.

“I am assuring that proper resources are properly deployed to these efforts,” stated Rusckowski. “Finally, I am challenging the teams to look for additional opportunities and to accelerate the pace at which we implement the Invigorate program.”

Continuous Improvement

It is likely that the principles of Lean, Six Sigma, and process improvement figure prominently in this effort. It was back in the late 1990s when Quest’s then-CEO, Kenneth Freeman, instituted a broad productivity improvement program anchored in Six Sigma. Quest Diagnostics has a host of Six Sigma Black Belts and it has had almost 15 years to nurture a corporate culture of process change and continuous improvement.

What will have broad interest for pathologists and lab administrators is how Quest Diagnostics wants to serve the managed care industry. The call with analysts focused on the mutual goals that health insurers and Quest Diagnostics have in narrowing provider networks.

Discussions With Payers

In meetings with payers, Rusckowski stated that discussions centered on the topics of quality and cost. Also discussed were integrated care models, like accountable care organizations (ACO), and how the Accountable Care Act (ACA) will increase the number of people with insurance.

Payers are preparing themselves for change, noted Rusckowski, who said that “in that context, they believe that they need to do a better job of working with us on narrowing their networks for what they would provide. So therefore, they hope to work more closely with us to make sure that we work together because we’re both incentivized to do that.”

The sustained pressure on pricing across the entire healthcare industry was acknowledged and attributed to such factors as rising costs, more chronic disease, and the aging population. “That price pressure will continue,” predicted Rusckowski. “The question is how does that unfold and how does that relate to this market, specifically, with the changes that we see going forward?

“We see people [payers] wanting to narrow their networks,” said Rusckowski in answer to his own question. “Therefore, there should be more consolidation in the volumes around fewer suppliers of laboratory testing services and that plays nicely into what we are all about and what this industry is all about.

“Second, as hospital systems acquire physician practices, they’re looking at what they need to do,” he added.

The same issues of ACOs and the ACA are topics in conversations Rusckowski is having with hospitals and health systems. He explained that hospitals are assessing what they might do with their laboratory operations “and they are starting to have more conversations with us in terms of how we can help them with laboratory management services, where we could potentially look at outsourcing, where we can look at reference testing,” he noted.

In answer to an analyst’s question on this point, Rusckowski answered. “We do have an opportunity… [to work] together with the health plans to get more volume and they see an opportunity in their cost structure—and we see an opportunity with our volumes—to do that with them.”

Early Retirement Program

Another strategic initiative underway at Quest Diagnostics that will interest lab administrators is a voluntary early retirement program that will be offered to “certain qualified employees.” Cost savings are estimated to be $40 million per year when implemented.

“The program will allow us to reduce the size of our workforce, reduce our average wage bill, and update the skills of the workforce,” explained Rusckowski. One goal of the Voluntary Severance Program is to improve the productivity of Quest Diagnostics’ labor force and he emphasized that point, noting “we are very, very tight on any hire we make and specifically looking for opportunities to drive productivity.”

As all of these corporate initiatives illustrate, Quest Diagnostics explicitly recognizes that there will be ever-greater pressure on providers to reduce costs. To remain competitive with the national labs in coming years, local laboratories and hospital lab outreach programs will need to emphasize cost reduction within their own operations. For smaller labs to survive in downstream years, it will be necessary to operate with a much lower cost structure than they do today.

LabCorp Executives Emphasize Different Priorities and Discuss Emerging Health Trends

DURING THEIR SECOND QUARTER CONFERENCE CALL with financial analysts, executives at Laboratory Corporation of America emphasized different factors in the lab testing marketplace than were discussed during the Quest Diagnostics conference call.

In their conference call, also conducted on July 19, executives at LabCorp first addressed the financial performance of their company. Revenue for second quarter was up 1.4%, at $1.423 billion versus $1.403 billion in Q2-11. Specimen volume was flat. Revenue per requisition increased 1.5%, compared to the same quarter in 2011.

Following the financial report, LabCorp executives detailed a rather lengthy list of achievements. CEO David P. King described some of the accomplishments of LabCorp’s “Five Pillar” strategy. In the informatics realm, the numbers demonstrate the sizeable changes unfolding in how office-based physicians use information technology.

“We have added over 3,500 new client EMR interfaces year-to-date and are on pace to exceed 7,500 in 2012,” stated King who added that the company’s Beacon platform “is now deployed to more than 14,500 sites and has more than 66,000 users.”

Patient Experience

One continuing theme at LabCorp are innovations designed to raise the competitive bar in the lab testing marketplace. King spoke to the patient experience, explaining that “we have expanded our patient self-service offerings through two key enhancements.

“First, our online appointment scheduling system now allows patients to enter demographic and insurance information,” he said, “reducing their registration time at our PSCs and enhancing our efficiency and their experience. Second, in select markets, we have introduced the telephonic voice recognition system to schedule appointments in our patient service centers.”

Local laboratories should take notice of how LabCorp is using informatics to “auto-mate” many types of transactions with patients. Among other things, these features eliminate paper and reduce the time and labor required for LabCorp to serve a patient.

“We successfully completed the pilot of our Beacon patient portal,” stated King. “The portal is a secure and easy-to-use online solution that enables patients to receive and share lab results, make appointments, pay bills, set up automatic alerts and notifications, and manage health information for the entire family. We continue to see rapid adoption, with more than 2,000 new patient registrations each week, and we remain on track to launch the portal nationwide later this year.”

Managed Care Trends

LabCorp’s executives did not discuss “narrow provider networks” during their conference call. Instead, the emphasis was on how both health insurers and integrated health systems were likely to address utilization of laboratory tests and other clinical services.

“I think that there is increasing focus in managed care on… the trend of utilization,” observed King. “And it’s also what tests are being selected. …it’s not just managed care by the way, it’s integrated delivery networks, it’s health systems, [that] are focused on what tests are being ordered, why tests are being ordered, and if they are being ordered from the right provider.”

LabCorp is prepared for what it estimates will be a 5% reduction in Medicare Part B lab test reimbursement for 2013. It believes that those laboratories that do well in future years will be efficient and low cost.

“The higher-cost, less-efficient providers are going to be disadvantaged,” declared King. “And the more-efficient providers— particularly the high-quality, more-efficient providers like LabCorp—are going to be in a strong position.”

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