New Hybrid Lab Systems Provide Peek At Future

Here’s an assessment of the earliest variations of regional laboratory systems now operating

CEO SUMMARY: As the first generation of regional laboratory systems begin operation, the marketplace is about to separate winners from losers. Stakes are high for hospital laboratory administrators. If they choose to affiliate with the wrong model, the consequences can cause extended disruption to both their laboratory and the hospital it serves.

FOUR COMPETING CONCEPTS of regional laboratory systems confront hospital laboratory administrators. Each concept offers potential benefits, but only one of the four concepts has demonstrated sustained success in the marketplace.

Here is an overview of the most relevant regional models to come into existence during the last two years. They represent a first look at innovative and pioneering efforts to establish regional laboratory systems.

Two caveats are in order. First, getting accurate information about these pioneering organizations is difficult because few laboratory managers will talk publicly about setbacks and problems. Second, many players in the regional laboratory system arena are economically motivated to represent their success as something greater than it was. That is why laboratory executives should perform extensive due diligence before committing their laboratory to join a proposed regional system.

Of the four types of groups attempting to organize regional laboratory systems, the national laboratories are probably the most ubiquitous. A significant number of hospital laboratories find themselves in regular conversations with sales representatives of the three national laboratories. A fourth company, Dynacare Healthgroup of Canada, is just as aggressive as Quest Diagnostics, Laboratory Corporation of America and SmithKline Beecham Clinical Laboratories. Dynacare should also be included in this segment.

Of the four groups attempting to organize regional laboratory systems, the national laboratories are probably the most ubiquitous.

Most business proposals extended by these laboratories do not represent a true regional laboratory system. In the case of the three national laboratories, they seek to generate more volume for their regional testing laboratories. For that reason, their proposals tend to involve outsourcing, contract management of the laboratory and similar arrangements.

Probably the only true regional laboratory system initiated by a national laboratory partner during the last two years is found in Louisville, Kentucky. In December 1995, Columbia/HCA and LabCorp announced an agreement that LabCorp would manage three hospital laboratories in Louisville, representing over 900 beds.

Simple Concept

The concept was both simple and obvious. LabCorp operates a large regional laboratory in Louisville. If Columbia and LabCorp were to consolidate and integrate the three hospital laboratories with the regional core, significant savings would accrue to both companies.

During 1996, laboratories at Columbia’s Audubon Hospital, Southwest Hospital and Suburban Hospital were integrated with the LabCorp site. Although not problem-free, the transition was considered successful by both companies. The first public presentation on this regional model will be made at the upcoming Executive War College on May 20-21 in New Orleans.

Considerable cost savings were expected by both companies in this commercial lab/hospital lab consolidation. Columbia considered this to be an experiment. If successful, Columbia intends to develop similar consolidation laboratory ventures in other cities where the national labs have large regional laboratories.

Columbia is also developing another regional model, this time in Atlanta, Georgia.Canadian-based MDS Healthcare is the partner. Both companies are jointly building a core reference laboratory in Atlanta. It will incorporate automated laboratory systems from MDS’s Autolab subsidiary. Testing from Columbia’s 18 Georgia hospitals will be performed at the laboratory.

The joint venture also intends to compete for outreach business in the state. Although this regional laboratory system is not yet in operation, it demonstrates the type of regional market solutions Columbia is investigating.

Another commercial lab-hospital lab model which has regional implications is Dynacare’s Houston operation. Dynacare and Hermann Hospital entered into a joint venture almost two years ago. Although the partnership had a rocky start, executives in the joint venture indicate that outreach revenues are increasing steadily. Encouraged by the flow of new outreach business, the joint venture is now soliciting outreach accounts in cities outside the Houston metropolitan area.

Because Dynacare is aggressively courting other hospitals in Texas, should the venture with Hermann Hospital demonstrate sustained profits, it would be reasonable to expect additional hospitals in Houston or east Texas to join the partnership.

Second Group

The second group of regional laboratory system developers are the independent commercial laboratories. They remain numerous. Dun & Bradstreet estimates reveal that there are 1,000 of these laboratories which generate at least $2-3 million per year in revenue.

Several intriguing regional laboratory models are emerging from this market segment. In Spokane, Washington, Pathology Associates Medical Laboratories (PAML) formed a statewide alliance with two Catholic hospital systems. Nine hospitals in the Providence and Franciscan Health Systems are partnering with PAML in a network called PacLab Network Laboratories. The consortium became operational late last year.

This regional laboratory system is organized to acquire and service managed care contracts. The hospitals can also take advantage of PAML’s low average cost per test and management resources. Another interesting aspect of this venture is that PAML’s profession- ally managed sales and marketing team will be selling PacLab’s testing services to the physicians who practice at each of the nine hospitals.

PacLab seems well-designed to meet the needs of all participants. Besides offering testing services throughout Washington state, PAML’s executive leadership team is available to bring additional management skills to the network. Early successes by the network will validate PacLab’s strategic plan.

PML followed a disciplined strategy of providing high service levels, maintaining strategic relationships and refusing unprofitable managed care contracts.

Another venture between an independent laboratory and a hospital system is Physicians Medical Laboratories (PML) in La Jolla, California. Its partner is the ScrippsHealth System. There is extensive consolidation of testing between the four ScrippsHealth hospitals and PML’s core laboratory. The service region is San Diego County.

Despite the fact that laboratory reimbursement in California has declined precipitously, PML followed a disciplined strategy of providing high service levels, maintaining strategic relationships and refusing unprofitable managed care contracts. With its regional partner, PML seems to enjoy financial stability unknown to other laboratory competitors in the San Diego area, such as Unilab and Quest.

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Hospital Laboratories

Consolidated hospital laboratory companies comprise the third group with a regional laboratory system concept. Three such laboratories were
mentioned in the preceding story: MDS-Hudson Valley Laboratories in Poughkeepsie, New York; Presbyterian Laboratory Services in Charlotte, North Carolina; and Centrex Clinical Laboratories in Syracuse, New York.

All three developed identical strategies. First, hospital testing is consolidated at an off-site core laboratory. Second, they aggressively market their outreach services to physicians practicing around the hospital campuses.

All three companies recognized the importance of a professionally designed, well-executed sales program. Good sales combined with consistent service has earned each laboratory the dominant market share in their specific service areas. The steadily increasing volume of outreach specimens is a key reason why each laboratory achieves a declining average cost per test year after year.

Successful Formula

This successful formula can be replicated, but it requires the consolidated laboratory organization to recruit hospitals within a 60-90 mile radius to join their consolidated laboratory. As those hospitals sign up, hospital testing is consolidated and outreach marketing begins in the new hospitals’ medical office complex. When properly executed, the financial results are impressive.

Benefits to the hospital owners are significant. Besides the operating profits earned by the consolidated laboratory for its owners, all three laboratories provide participating hospitals with continually lower testing prices. Service levels to both the participating hospitals and the outreach clients exceed that of competing laboratories. As a regional strategy, this model has established a track record not yet matched by any of the other three regional concepts.

The fourth regional concept is that of regional laboratory networks. This concept is the most popular among hospital laboratory administrators for several reasons.

First, the administrator retains total control over his laboratory. Second, participation in the regional laboratory network does not require any downsizing, consolidation or restructuring of the member laboratories. Third, participating in a network requires a relatively small commitment of time, money and resources when compared to the other regional laboratory models.

JVHL is probably the true godfather of the network movement. It was organized in 1993 and began servicing its first managed care contract on January 1, 1994. Currently, seven hospital systems are equity owners, representing 24 hospital laboratories. The network services managed care contracts representing 400,000 lives.

The fourth regional concept is that of regional laboratory networks. This concept is the most popular among hospital laboratory administrators for several reasons.

Pioneering Networks

Two pioneering networks received significant publicity in the laboratory trade press. In 1996, Bay Area Hospital Laboratory Network (BAHLN-San Francisco) and Reference Laboratory Alliance (RLA-Pittsburgh) were the talk of the industry.

A flurry of speeches and trade press articles inspired the creation of regional laboratory networks in almost every corner of the United States. Today there are probably 30-40 laboratory networks at some stage of planning or operation. As many as 10% to 15% of the nation’s hospital laboratories may already be participating in a network.

Despite this activity and support, it is still an unproven business concept. Pittsburgh’s RLA ceased operations only 13 months after operational launch. San Francisco’s BAHLN struggles to maintain a critical mass of participation, shared testing and managed care contracts.

The two most interesting networks to watch are Detroit’s Joint Venture Hospital Laboratories (JVHL) and Nashville’s Middle Tennessee Healthcare Network (MTHN).

JVHL is probably the true godfather of the network movement. It was organized in 1993 and began servicing its first managed care contract on January 1, 1994. Currently, seven hospital systems are equity owners, representing 24 hospital laboratories. The network services managed care contracts representing 400,000 lives.

The fourth regional concept is that of regional laboratory networks. This concept is the most popular among hospital laboratory administrators for several reasons.

JVHL’s developers built the network as if it was a private, “for profit” business. The network generates a consistent flow of income which is used to pay for an executive director and fund services such as couriers, billing, reporting and similar functions. It is now in its fourth year of operations.

With its established market clout, JVHL is in serious negotiations with a commercial laboratory to assume that laboratory’s outreach testing volumes as it exits the Detroit market. If that happens, JVHL would move one step closer to becoming an integrated regional laboratory system.

In contrast to JVHL, the Middle Tennessee Healthcare Network is a newborn. It began formal operations earlier this year. It is a consortium of 13 healthcare systems representing 22 hospital laboratories. What makes MTHN worth watching is the comprehensive strategic business plan which its organizers carefully developed.

MTHN President and CEO Roy Wright helped the development team craft a detailed, professional business plan. They anticipated capital needs and developed an ongoing revenue source to provide the necessary cash flow to fund continuing operations without regular capital calls to the equity owners.

Should MTHN execute its business plan with skill and sophistication, it may provide an excellent template for regional laboratory networks in other areas of the country to copy.

THE DARK REPORT predicts that regional laboratory systems will evolve around the four basic models described above. Because each healthcare market is unique, no single concept will emerge as a universal answer. Quite the contrary, expect to see many unique versions of the four basic concepts.

At this stage in healthcare’s evolution, the consolidated laboratory model utilized by MDS-Hudson Valley, Centrex and Presbyterian Laboratory Services represents the most successful vehicle for meeting the needs of managed healthcare.

EXECUTIVE WAR COLLEGE To Provide Personal Networking Opportunities

OF THE REGIONAL LABORATORY SYSTEM MODELS mentioned in this story, the following representatives will be at the EXECUTIVE WAR COLLEGE, either as speakers or attendees (list complete as of press time). Here is an opportunity to get first-hand information about their regional models.
Columbia / HCA- LabCorp Louisville Joint Venture: Patrick Hess, Ph.D., Ron Wagener, Ph.D, Jeffery Whitesell, Columbia Audubon Hospital.
Dynacare-Hermann Hospital: Bill Pesci.
PacLab Network Laboratories: Thomas Tiffany, Ph.D., Noel Maring, Terri Montano, Pathology Associates Medical Laboratories.
MDS Hudson Valley Labs: Glen Fine.
Presbyterian Lab Services: Bob Hamon.
Centrex Clinical Laboraries: Jack Finn.
Reference Laboratory Alliance: Louis Durigon, Darrell Triulzi, M.D., Institute For Transfusion Medicine.
Bay Area Hospital Laboratory Network: Kathy Romano, Sequoia Hospital.
Joint Venture Hospital Laboratories: Jack Shaw, JVHL; Joe Skrisson, Beaumont Reference Laboratories; Barbara Goch, Oakwood Healthcare System.
Middle Tennessee Healthcare Network: Roy Wright, JoAnne Schroeder, Kim Charlton, R. Whitehead.
MDS-Columbia/HCA: Teri Brown, Autolab.

HERE ARE INDIVIDUALS SCHEDULED to attend the EXECUTIVE WAR COLLEGE whose laboratory organizations are involved in innovative and progressive projects.

Health Network Laboratories:
(Allentown, PA), Beth Rokus: A consolidated laboratory organization which is developing a lab network among health system members and working to expand the number of hospitals participating in the consolidated laboratory company.
Midwest Lab Link: (Mansfield, OH), Fred Crowgey: Five hospital laboratories operating a regional network in Ohio.
Northeast Community Laboratory Alliance: (Burlington, VT), Geoffry Tolzmann: Thirteen hospital laboratories operating a network with coverage in Vermont, New Hampshire and NE New York.
Neponset Valley Health System: (Norwood, MA), James Nolan, M.D.: An outreach laboratory which was one of the first to use laboratory computer links with physicians offices as a pathway to access patient’s hospital records.

NOTE: This is not a complete list and is limited by those laboratory organizations for which THE DARK REPORT has direct knowledge. Attendees with progressive, innovative and successful regional laboratory projects are encouraged to bring them to the attention of our editor, Robert Michel. Contact him personally at the EXECUTIVE WAR COLLEGE. He can also be reached at 503 699-0616.

Superior Profits

The operational and profit performance of these three laboratories is clearly superior to the industry average. Each enjoys consistent growth of specimen volume through effective outreach sales programs. Each laboratory provides a yearly reduction in the average cost per test for hospitals serviced by the core lab. Most importantly, each laboratory earns healthy operating profits which are used to expand service capabilities and regional coverage.

There is another overlooked benefit to these consolidated laboratory companies. They have considerable asset value as a stand-alone business. The hospital owners could sell their equity in these ventures for a significant market price. This is one compelling financial reason that motivates CEOs from competing hospitals to jointly own and operate a consolidated laboratory.

Financial Performance

At this point, neither commercial lab/hospital lab joint ventures nor regional laboratory networks can match the financial performance and effectiveness of these consolidated laboratories. For that reason, THE DARK REPORT recommends that this model be given serious consideration by any hospital laboratory which decides it needs to affiliate with a regional laboratory system.

“Centers of Excellence” As Regional Laboratory Model

In the past twenty years, two cities saw the emergence of highly successful consolidated laboratory companies. In both cases, founders built the laboratory around a “centers of excellence” model.

In Lincoln, Nebraska, it was Clinical Laboratories of Lincoln (CLL). In the 1970s, pathologists and laboratory administrators in Lincoln decided that the duplication of instruments and laboratory testing resources among the city’s hospitals was unnecessary. They recognized that big savings would result if they created a single integrated laboratory system to serve the entire healthcare community in Lincoln.

A core lab acted as the anchor site and each hospital specialized in certain tests. A successful outreach program was developed. Within a few years, CLL became the dominant clinical laboratory in Lincoln. Their market position is so strong that no competing laboratory can afford to come into Lincoln and match CLL’s full menu of diagnostic services.

Nichols Institute purchased CLL in the 1980s and it became part of Quest (then MetPath) at the time of the Nichols acquisition in 1994. Within Quest, CLL is one of the more profitable laboratory divisions.

Terre Haute Medical Laboratory of Terre Haute, Indiana has a similar story. It is also a consolidated laboratory which was developed through integration of the various hospital laboratories in Terre Haute. It runs a successful outreach program.

Like CLL, Terre Haute Medical Laboratory is the dominant clinical laboratory in that market. In fact, management made a conscious decision in the mid-1980s to develop a service mentality that competing laboratories could not match. As a result, they perform testing for a substantial majority of physicians in the region.

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