New Alliance Is Example Of Coming Paradigm Shift

Motives behind the Premier/Quest deal perfectly illustrate marketplace evolution

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CEO SUMMARY: This strategic alliance represents a fundamental shift within the clinical laboratory industry. It is a response to market forces which should not be ignored by laboratory executives and pathologists anywhere in the country. Whether the alliance succeeds or fails, it will launch the laboratory industry into new directions.

IT WILL TAKE SEVERAL YEARS before the success or failure of the strategic alliance between Premier, Inc. and Quest Diagnostics Incorporated can be determined.

Even if the thinking and design of the alliance is sound, many variables could trip up the alliance. Changes to the marketplace, inadequate reimbursement for lab testing, and management lapses are just some of the variables which could cause the alliance to fail.

But for readers of THE DARK REPORT, it is more important to understand the market forces driving this alliance. It is equally important to understand the management thinking which created this strategic alliance.

In an exclusive interview with THE DARK REPORT, Quest Diagnostics’ Chairman and CEO Ken Freeman shared the vision which drives this strategic alliance. It provides a road map for the future direction of hospital lab-commercial lab relationships.

“This agreement comes after a very long dialogue with Premiere,” stated Ken Freeman, Chairman and CEO of Quest Diagnostics. “There has been intense discussion over the past year between our two organizations, involving a sizeable number of people at all levels. Our mutual goal was to create a break-through arrangement.”

“To signal the different nature of this alliance,” added James Chambers, Senior Vice President, Marketing and Business Development at Quest Diagnostics. “it will be marketed to Premiere’s members under the term ‘PACE,’ for ‘Partners Aligned For Clinical Excellence.’ This alliance is a different way for Premiere to help its members create increased value.”

According to Freeman, Premier shared a three-point strategic vision that drives its efforts to add value for its members. These three points are the reason for the unconventional nature of this strategic alliance between the national purchasing organization and a major commercial laboratory.

First, Premier wants to maintain its traditional activities at direct purchasing. It defines this as improvement to transaction costs.

Second, Premier wants to look at processing costs. Whether it is laboratory, radiology or other clinical services, can the process be done differently to achieve better results and more efficiency?

Third, Premier seeks to achieve a “breakthrough.” This is a paradigm-shifting change from current practices which leads to significant gain in performance, quality, and cost reduction.

“Premier wanted to offer its members something more than simple savings from a low-priced national testing contract,” explained Freeman. “Premier wanted to develop a new way for hospital laboratories to save significant amounts of money while improving service. That required both our companies to think ‘out of the box’ and combine our knowledge and resources to the best advantage of Premier’s members.”

According to Freeman, Premier recognizes the market forces now plaguing the laboratory industry. “There is over-capacity in both the hospital and commercial laboratory segments,” he noted. “Reimbursement declines continue to hammer away at the economics of laboratory operations. There is a fundamental shift away from inpatient to out-patient. Compliance is now a big issue for all laboratories.”

Forcing Change On Labs

“Both Premier and Quest realize how these pressures in the marketplace are forcing change upon laboratories,” continued Freeman. “Healthcare providers that continue ‘as-is’ have a limited future. It is important to drive the paradigm for survival. The Strategic Services Alliance is designed to be a break-through product which can help hospital laboratories meet the new demands of the changed healthcare environment.

“That is why Premier is willing to develop and offer a strategic sourcing arrangement to its members. Of course there is risk in trying something new,” he added. “But look at the alternative. To do nothing means to wither.”

Freeman’s comments accurately describe any industry undergoing radical transformation. It is usually innovators and new companies which survive, not the historical giants. Who remembers National Airlines or Pan American Airlines? Where is Zenith Television Company? But adaptation and innovation can lead to long life. Motorola’s successful switch from televisions to cellular phones and digital electronic equipment required radical shifts to management’s thinking. But unlike its American competitors who used to make television sets, Motorola shifted to become a leader in the new generation of technology.

Three-Pronged Strategy Drives Premier & Quest

Premier works to develop member services using three strategic drivers:

1. Maintain continual improvement in transaction costs. (Traditional price-based purchasing contracts.)
2. Offer resources to help members lower processing costs. (Consulting expertise and other support to improve operations.)
3. Achieve “breakthroughs.” (Shift the paradigm by accomplishing things previously thought undoable.)

Quest Diagnostics Incorporated has a three-pronged strategy which guides its business development:

1. Be the highest quality provider of laboratory testing, because high quality goes hand-in-hand with low costs.
2. Become the preferred partner with large buyers of laboratory testing information services.
3. Reassert a traditional role as the ground breaker in the industry. (Tracing back the roots of Paul Brown, M.D. at MetPath and Al Nichols, M.D. at Nichols Institute.)

“Premier’s goal of creating a breakthrough led to the dual contract nature of the alliance,” explained Chambers. “The traditional reference laboratory contract will serve one segment of Premier’s membership. The strategic services alliance is Premier’s way of offering other segments of its membership a variety of choices for adding value in their laboratories.”

To help the alliance stay close to the customer, there is a joint quality committee. “There will be eight or nine representatives from each organization,” said Chambers. “It will include medical staff. The committee will keep the alliance responsive to needs of Premier’s members while reacting to new developments in the marketplace.

Freeman’s insights into the management philosophy that created the Strategic Service Alliance validate THE DARK REPORT’s ongoing conviction that market pressures will force hospital laboratories and commercial laboratories to rationalize resources on a city-by-city basis.

Tenet’s Activities

The strategic alliance of these two companies represents a true paradigm shift in our industry. It must be viewed in combination with Tenet Healthcare’s activities in Southern California, where SmithKline Beecham Clinical Laboratories is helping Tenet consolidate and regionalize the laboratory operations of 31 hospitals. (See TDR, January 19, 1998.)

As hospital service companies, both Premier and Tenet have done the same thing: they identified national laboratories as having management experience, logistical infrastructure, LIS capabilities and sales/marketing experience which they could not find within their participating hospitals.

That should send a clear message to hospital lab administrators throughout the country. Hospital owners want a degree of radical change hospital laboratory management is perceived as incapable of accomplishing. So hospital “owners” are going to national laboratories to access this capability and introduce change into their hospital labs.

In the case of Premier and Quest Diagnostics, there will be no attempt to “cram” this strategic alliance down the throats of member hospitals. Both organizations are committed to the principles of quality management, which means understanding the needs of customers and dealing with them on a win-win basis.

But the reasons why Premier invested the time to develop this strategic alliance are the reasons why THE DARK REPORT believes it represents a paradigm shift. Our partnering article on pages 9-13 provides compelling evidence that progressive hospital laboratories now appreciate the value which the right commercial laboratory partner can bring to the table.

Premier Adds Hamon To Its Laboratory Team

Premier, Inc. is signaling its serious intent to develop a menu of value-added laboratory services for its member hospitals. The national healthcare consortium has hired Robert Hamon, Administrative Director of Presbyterian Laboratory Services in Charlotte, North Carolina.

Hamon will join Premier’s national laboratory team and will work from Premier’s Charlotte offices. He is one of the more adept laboratory executives in our industry. He guided PLS through almost 14 years of non-stop growth and made the consolidated hospital-based laboratory a major player in the Carolinas.

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