CEO SUMMARY: Because of Premier’s influence with 1,700 of the nation’s 5,000 hospitals, laboratory administrators and executives should realize that this strategic services alliance between Premier and Quest Diagnostics Incorporated will change traditional laboratory practices, regardless of whether the alliance proves successful or not. This interview with Premier Vice President John Biggers reveals the story of how Premier came to recognize the need for breakthrough changes to hospital laboratory management. It also provides an incisive look at which market trends Premier and its owner hospitals see as currently reshaping laboratory services.
Part One of Two Parts
THE FOLLOWING IS AN EXCLUSIVE INTERVIEW conducted by our editor, Robert Michel, with John Biggers who was Vice President of Corporate Business Development at Premier. He is now VP of Operations for Premier Clinical Laboratory Services.
EDITOR: John, I would like to set the theme for this interview. Many clients of THE DARK REPORT are pathologists and laboratory administrators running hospital laboratories. I would like to help them understand two things about this unprecedented strategic alliance between a major buying consortium involving 1,700 hospitals and a national laboratory. First, why did Premier decide it wanted to do something this radical in the area of clinical laboratory services? Second, what specific business reasons led Premier to create a strategic services program?
BIGGERS: Those two questions cut to the heart of the matter. Your first question is really about Premier and what we saw happening to our member hospitals. They constantly ask us to do more to help them lower costs and improve quality. It was feedback from members that made us realize that clinical laboratory services could be a potential breakthrough for creating positive change in clinical practices both within and without the hospital. It should go beyond the traditional reference laboratory purchasing agreement.
EDITOR: What was Premier’s goal in looking at clinical lab services?
BIGGERS: Premier wants to be in the business of creating breakthroughs in the health care industry. The senior management of Premier has made this a prime directive for our organization. Premier ought to be changing the way healthcare is provided so as to create benefits which never before existed. That usually means doing things in a completely different way. For that reason, I like to say that the corporate business development unit of Premier is in the business of creating breakthroughs. It may take you 50 projects before you create a breakthrough, but that one breakthrough is worth the 50 attempts.
EDITOR: It is important for clients of THE DARK REPORT to understand how the philosophy of “breakthrough management” underpins this strategic services alliance. Could you talk a little about why Premier thought that clinical laboratories could provide the kind of breakthrough that Premier seeks to create?
“Premier’s corporate mission concerning breakthroughs is directly responsible for the clinical laboratory alliance.”
Bill Nydam, EVP, Premier, Inc.
BIGGERS: When we started looking at the clinical laboratory area, there was really no directive. As a matter of fact, it was a blank sheet of paper, Robert. But we were getting feedback from some of our hospital CEOs. They said to us “I’m trying to create an integrated delivery system here. Maybe the laboratory area is a good rallying point. Maybe that’s something that we can try as a collective effort.” This alerted us to the potential. If successful, the core laboratory concept might be an effective way to reshape and further integrate clinical services in integrated delivery systems (IDS). I think this was the first time that people realized we could look at clinical laboratories with a radical new perspective.
EDITOR: Are you saying that it was input from Premier’s hospital CEOs which brought recognition to the fact that laboratory services could be a critical success factor in fostering clinical integration?
BIGGERS: Yes. There is intense activity among hospitals to improve how clinical information is captured, stored and used. Everyone is aware of the fact that, although the clinical laboratory is typically around 5% of the hospital’s budget, it generates as much as 80% of the useful diagnostic information in a patient’s file. A number of CEOs among our owner-hospitals pointed out to us that clinical laboratory data might be a fulcrum to leverage improvement in both clinical and operational integration within their healthcare system. A lot of our hospitals recognized that this was a good
area to rally around as they attempted to build up their networks.
EDITOR: What you are saying, then, is that a number of hospital CEOs recognized that the laboratory represented untapped potential to create change everywhere in the system. Is that right?
BIGGERS: Partially. Premier recognized that a number of our more innovative hospital CEOs were ready to consider “radical” proposals if it had the possibility to foster a breakthrough.
EDITOR: Then was your goal really to revamp both the way clinical laboratories are organized and how clinicians use diagnostic information?
BIGGERS: Basically yes. This is what caused Premier to look at laboratory services. Although I’m not a laboratorian, it was placed in my hands almost two years ago. The first step I took was to learn what was happening within the laboratory industry. I spent several months educating myself, finding out what kind of pressures our hospitals were facing, what was happening to clinical laboratories.
EDITOR: So you used this time to study the market and learn about the problems of clinical laboratories?
BIGGERS: Right. As I recall, there are five basic trends I identified as impacting laboratories of our member hospitals. One trend is the shift from inpatient testing to outpatient procedures. Two, reimbursement is declining, so hospital laboratories get less money for the tests that they do. Three, fundamental inefficiencies in how hospital laboratories operate have never been resolved.
EDITOR: For example?
BIGGERS: Not operating 24 hours a day. Not getting as much productivity from laboratory staff and testing instruments. These are issues familiar to any laboratory administrator. The fourth thing I saw was something I considered significant. Most hospital laboratories didn’t have good access to managed care contracts. As the big commercial laboratories got national managed care contracts, our hospital labs were excluded as providers.
EDITOR: What you are saying, then, implies that Premier considers access to physicians office testing to be an essential part of basic clinical and operational integration?
BIGGERS: That must occur if our member hospitals are to develop integrated delivery systems. As we studied their need to access managed care contracts, we weren’t sure if that was a fad that would evaporate or whether it was a trend that would continue. But we wanted to develop a way for the hospital laboratories of our members to be successful at achieving provider status with managed care plans on the national, state, and local level.
EDITOR: What was the fifth trend you identified?
BIGGERS: The big thing that was evident to me was the basic overcapacity. There’s too many clinical laboratories out there. Period. In fact, I would say hospital laboratory overcapacity plays a key role in affecting the success in meeting the other four market trends we identified.
EDITOR: Once you identified the problems confronting Premier’s hospital laboratories, what was your next move?
BIGGERS: I contacted laboratories at our member hospitals. Now I was ready to find out what they were doing to meet the challenges of the marketplace as well as the pressures from their hospitals.
EDITOR: Did you discover anything interesting in this phase of your search?
BIGGERS: Robert, I saw an entire spectrum of responses. Some of our hospital labs were doing nothing, just sitting back and waiting to see what would happen next. Others were quite aggressive and doing progressive things. In fact, from this group, just about everything I saw were steps in the right direction. But even the proactive labs were not doing everything necessary for them to be successful.
EDITOR: So you learned that most laboratory administrators were not going as far as they could…
BIGGERS: …we saw some member laboratories that were forming networks, trying to represent themselves for managed care contracts on a state-wide basis, for example. But individually and collectively, we didn’t see any kind of formalized approach on how they would cut their costs. This concerned me, because I didn’t want our hospitals winning managed care contracts if they couldn’t do them in a profitable way.
EDITOR: What other attempts at man- agement solutions did you see?
BIGGERS: Other hospital labs were forming regional laboratories built upon the concept of a core lab. Some core labs were within the hospital walls, others were free standing. I also found some joint ventures with commercial labs, as well as a little bit of outsourcing. But the experience of our member laboratories with outsourcing seems to be that, after five or six years, whenever that contract was up, they typically took back their laboratories using new management. Outsourcing seemed to be a solution to stop financial bleeding. Once it was ended, the hospital wanted to step back in and assume direct control over their laboratory again.
EDITOR: After seeing what laboratory administrators were trying to accomplish on their own, how did Premier respond?
BIGGERS: Well, now I had a first-hand understanding of the basic problems facing clinical laboratories. I also had some knowledge about the best and worst of what our hospital laboratories were attempting to do in the marketplace. To form a plan of action, I recruited a group of laboratory experts. I went to our laboratory purchasing committee. This committee includes laboratory directors and material managers. I outlined what Premier had learned about clinical laboratories, and our goals to develop a “breakthrough” arrangement for laboratory services.
EDITOR: So this is actually a different process than evaluating national reference contracts. This is when you first introduced the goal of developing a “breakthrough” strategy unrelated to national reference testing arrangements?
BIGGERS: Well, we tried to help them understand that laboratory services need- ed to contribute more to clinical integration. Given the nature of laboratorians to maintain current operations, they weren’t overly excited about it. But two members of the committee, David Rabbitts of Wuesthoff Health Systems and Jay Schamberg, M.D. of Aurora Healthcare, were recruited to help us develop our strategic concept. We wanted representation and input from their committee because we knew that whatever emerged would certainly be related to any reference laboratory agreement this committee developed.
EDITOR: So you created a task force of laboratorians to develop the concept and structure of the laboratory “breakthrough,” but do it in concert with activities to develop a national reference testing contract.
BIGGERS: That is correct. We eventually developed a team of ten people. There were three laboratory directors, two pathologists, two chief operating officers, two free-standing, for-profit commercial lab CEOs (owned by our hospitals), and one chief financial officer. It represented a good blend of different people that were affected by the clinical laboratory of the hospital. This committee commenced its work about one and a half years ago.
EDITOR: As you describe this process, it is Premier asking laboratorians and other hospital functions to initiate and refine the strategic service concept. What happened next?
BIGGERS: This group took the five trends I had observed and used those as a basis to begin their work. After editing and adding to my market assessment, we set out to develop what the characteristics of a winning laboratory of the future should look like.
EDITOR: This is interesting. So step one was to identify market trends affecting hospital-based laboratories. Step two was to identify the essential traits of a successful laboratory organization. What did the team learn in step two?
BIGGERS: It didn’t take long to get consensus on what the successful laboratory of the future looked like. Once completed, it gave us a good framework to develop that winning laboratory.
EDITOR: It means that step three in your process was to actually design and build the laboratory of the future. And at this stage, it remained totally a Premier project, is that correct?
BIGGERS: Yes. As part of step three, we looked at the numbers. First, Premier is large enough to build this thing on its own. Premier members represent approximately $4 billion in laboratory testing costs within our hospitals. We represent another $1 billion of testing that’s performed in physicians’ offices and nursing homes affiliated with our hospitals. Finally, from all sites combined, we represent an additional $1 billion that is referred out to commercial laboratories. However, although this represents $6 billion per year in laboratory testing, we also realized that we have varying degrees of control over the different entities that refer out these tests.
EDITOR: That’s interesting. The three national laboratories combined only do about $4.5 billion per year in laboratory testing. How did this change your thinking?
BIGGERS: By looking at the cumulative total of testing controlled by our hospital members, the study team realized that we could at least get the efficiencies of scale enjoyed by the three national laboratories. The question was how to accomplish that.
EDITOR: I can see the evolution in the team’s thinking. You got them to realize that quantum improvements in testing cost and quality could be achieved, but only if they could combine the laboratory testing from Premier’s members in smart ways. What came next?
BIGGERS: We quickly identified sev- eral challenges. First, it costs money to try to build this much infrastructure. Second, it requires time to create the infrastructure. Maybe the healthcare market won’t give us that time. Three, Premier is a voluntary organization. Unlike a corporation such as General Electric, we are not one big entity that can just drive a corporate priority through the system.
EDITOR: Yes, each of your members has their own needs. You must deal with a “United Nations” situation of competing interests.
BIGGERS: We also knew that if we tried to do this piece by piece and roll it out nationwide, we wouldn’t have national coverage. That would affect our ability to immediately pursue managed care contracts. It was going to be a long road. Probably the most powerful road, but a long road. Next we looked at the feasibility of buying some of this infrastructure versus making it. We studied the commercial laboratory industry as if the labs were up for sale at an auction. What values would we pay? What values would we get for our money? Throughout this process, we remained open to all options, including acquisition of a commercial laboratory or to contractual relationships with selected commercial laboratories.
EDITOR: Even to this point, John, you are talking about a process that is internal to Premier. The issue on the table was how can Premier best create the winning laboratory organization model for the the future.
BIGGERS: That is true. In looking at the commercial laboratory industry, for us it sorted into two tiers. Tier one consists of the three major national laboratories. They have extensive reach, but compete against our hospital laboratories for physician office business. Tier two consists of those esoteric reference laboratories capable of providing testing services throughout the country, but which lack the local network of regional laboratories that provide routine and secondary testing in a region. As you know, these esoteric reference laboratories don’t compete with our hospitals for the outreach business from doctor’s offices. Our hospital members tend to like the tier two laboratories better, for that reason and their service to individual hospital labs.
EDITOR: But each tier offers benefits to the kind of “model laboratory” concept you were developing.
BIGGERS: Sure. For example, the three national labs offer something that the others didn’t: a developed infrastructure. They’ve got regional laboratories with extensive courier services already in place in most areas of the country. They have information systems and integrated capabilities that are as good as anything currently in existence. They also have marketing and sales resources already trained and in the field.
EDITOR: It sounds like your study team realized quickly that it could avoid intensive capital investment and long start-up times by looking at how to use existing laboratory resources already in existence. What else went into your analysis?
BIGGERS: It was apparent to us that a lot of infrastructure operated by commercial laboratories was, in our opinion, duplicative to our member hospital labs. That is highly relevant when viewed against the industry problem of overcapacity, particularly of hospital laboratories. This is why we came to a decision that building our own system was not the answer. Probably the best situation for us would be to partner with some combination of the three national laboratories. And believe me, everyone on the committee knew that this would be a tougher sell for our hospitals. But for us, it was clear that this arrangement delivered the most benefit when you look beyond just pricing, but the total cost of laboratory testing.
EDITOR: Given this decision, how did you evaluate the commercial laboratories which were potential partners?
BIGGERS: Only a handful of labs have the capabilities we require. These were the ones we approached. They included Laboratory Corporation of America, Quest Diagnostics Incorporated, SmithKline Beecham Clinical Laboratories, and the major reference laboratories, including American Medical Laboratories, ARUP Laboratories, Mayo Medical Laboratories and Specialty Laboratories.
EDITOR: To most people familiar with the lab industry, there are no surprises on this list. Did any one lab jump out as a favored candidate?
BIGGERS: No. We spoke with all of them. And, quite honestly, it wasn’t decided until the last month which course of action we would take. During the evaluation process, however, it was narrowed down to the three national laboratories. But that was the point where we found making a choice to be more difficult, since they offer a very similar package of services, particularly in the routine testing which has become a basic commodity business.
EDITOR: Were there any tangible differences that you identified among the three national labs?
BIGGERS: Probably the main one is the regional variation. You can find geographical areas where each lab is strong. There seemed to be no way to find the right partner from a perception or reputation standpoint for Premier. Geographically, we have hospital members conducting business in virtually every corner of this country.
EDITOR: That means your decision was based less on geographical coverage by a potential partner. What other criteria did you consider?
BIGGERS: We next looked at the management philosophies of the three companies. Certainly their willingness and reputation come into play. The breadth of testing and related services were relevant. Of course, the structure of the financial package we could both work under was a main consideration. Here corporate ownership gave us some interesting considerations.
EDITOR: In what way do you mean?
BIGGERS: For example, the laboratory division of SmithKline is owned by a pharmaceutical company. That created some complexity, but that didn’t stop us from looking at every opportunity with them. Roche, another pharmaceutical company, owns 49% of LabCorp. That creates some complexities as well as benefits. Quest was the only one that was strictly focused on the clinical laboratory business.
EDITOR:What about differences among the tier two labs?
BIGGERS: We see a similar variety of business structures and philosophies. Each one of them is just a little bit different, with its own unique aspects. But when everything was said and done, it was felt that Quest Diagnostics offered the greatest benefit to our owners and members.