CEO SUMMARY: Premier’s strategic alliance with Quest Diagnostics Incorporated represents a fundamental shift in the marketplace for hospital-based clinical laboratory services. This was a project developed by Premier, in response to its evaluation of marketplace trends affecting hospitals and their laboratories. For that reason, lab industry executives should pay close attention to why this alliance was created.
MANY LABORATORY EXECUTIVES and pathologists underestimate the profound changes represented by the strategic services alliance between Premier Inc. and Quest Diagnostics Incorporated.
Clinical laboratories have traditionally been an environment where radical change was unwelcome and unwanted. This is even more true of hospital-based labs than commercial labs. Thus, it is not surprising that the May 18 announcement of the Premier-Quest alliance was met with skepticism by a sizable number of laboratory administrators and directors.
THE DARK REPORT defines this event as highly significant. Our opinion is that Premier is acting in concert with market trends. It has accurately spotted an opportunity to nurture radical change within the integrated healthcare community by altering the way hospital-based laboratories are organized.
In the last issue of THE DARK REPORT, we analyzed this strategic alliance from Quest’s perspective. Ken Freeman, CEO and Chairman of Quest Diagnostics, outlined for our clients the reasons why his company was involved with Premier.
In this issue of THE DARK REPORT, we begin our coverage of this alliance from Premier’s perspective. The interview with a Premier executive which follows here gives you an insider’s understanding of how Premier came to see clinical laboratories as a linchpin to fostering clinical integration.
“Our ‘breakthrough’ mission means that we try, every 18 months or so, to come up with a blockbuster concept that can change healthcare services for the better.”
Executive Vice President, Premier Inc.
This strategic services alliance has the potential to be huge. Premier’s members control about $6 billion dollars per year of laboratory testing. Quest Diagnostics performs $1.5 billion of testing. Combined, these two entities control 25% of the estimated $30 billion per year of laboratory testing performed in the United States. Further, Premier represents 1,700 of the nation’s 5,000 hospitals, about one-third of all hospitals.
Thus, lab executives should not lightly dismiss this strategic services alliance. Its potential to reshape the clinical laboratory landscape is huge. Further, it is consistent with other marketplace developments affecting hospital laboratories. For example, the Tenet Healthcare arrangement with SmithKline Beecham Clinical Laboratories to restructure 31 hospital labs in southern California was a response to the same marketplace trends identified by Premier.
“Premier wants to develop ‘break- through’ initiatives that help our member hospitals,” said Bill Nydam, Executive Vice President at Premier. “These breakthroughs should fundamentally change the way healthcare services are delivered and generate benefits which had previously been unattainable. Our corporate mission concerning breakthroughs is directly responsible for the clinical laboratory alliance.”
Ways To Add Benefit
“Originally we looked at pharmacy, we looked at lab, we looked at any number of hospital services for ways that Premier could add benefit to our hospital members,” continued Nydam. “Clinical laboratories jumped to the top of the list, based on reasons familiar to every laboratorian. Up to 80% of diagnostic information generated on a patient in a hospital comes from the laboratory.”
Because diagnostics information impacts length of hospital stay and therapeutic decisions, Premier and a core group of its hospital owners realized that clinical laboratory services could be the catalyst for widespread, even radical, change.
“Plus, our hospital owners were frustrated with the lack of speedy responsiveness that seemed to be common from many laboratories,” observed Nydam. “Although they were focused on cost reduction, we found that it was happening in little steps. For example, they would try to become more efficient within their own hospital. Then they might try to organize a network or centralize testing among several hospitals, maybe with a core lab or joint venture.
“But it was taking as long as ten years for the laboratories, on their own initiative, to work through these incremental steps,” he added. “This is why many of our owner hospitals were frustrated with the pace of change in their institutions.”
Thus, Premier’s senior management realized that clinical laboratories could be fertile ground for innovation for two reasons. First, because of the widespread use of laboratory testing within and without the hospital to guide clinical decision-making. Second, because lab administrators, on their own initiative, were making improvements at a pace that could be described as glacial.
The interview which appears on pages 7-12 describes the step-by-step process which Premier used to study the problem, identify solutions, and create the hoped-for breakthrough product in clinical laboratory services.
Clients of THE DARK REPORT should objectively weigh the facts and motives which caused Premier to finally appreciate the potential of clinical laboratory services to impact the entire healthcare community.
First, Premier wants to do something non-traditional to laboratory services. From the start of this particular project, Premier sought to develop a paradigm-shifting way to radically alter the organization and delivery of lab services.
Second, CEOs at some of Premier’s more influential hospital owners recognized that clinical lab services could be the catalyst to clinical integration within their system. Laboratory services represented a way to do two things: 1) to increase the speed of clinical integration; and 2) to deliver improved clinical outcomes which enhance the quality of care while reducing costs.
Third, as outlined in the interview which follows, Premier’s own study team of lab directors, pathologists, hospital COOs, and a CFO agreed that problems and opportunities in the lab industry gave clinical laboratory services the potential to be a grand slam home run if the right structure for improvement could be developed.
Fourth, also as outlined in the following interview, Premier recognized that hospital laboratory overcapacity was probably the single most important factor affecting the cost of lab services. They would have to address overcapacity as part of this new project.
Fifth, Premier was willing to create, build, or fund whatever was necessary to restructure laboratory services in an effective way. After looking at all options, it was decided that partnering with a commercial laboratory which already had infrastructure, trained managers, and experience was the best way to go. This was for reasons of speedy implementation, to lower front-end capital costs, to access national managed care con- tracts, and to develop a national utilization and outcomes database.
Sixth, Premier has designed the strategic services alliance to be voluntary for its members. It created a win-win arrangement that gives incentives to hospitals, Premier, and Quest to work together. Strategic services stand apart from the standard national reference testing contract.
Financially, the stakes are immense. Premier believes that short-term savings in the range of 10% to 20% are attainable. Longer term, Premier hopes to drive the cost of hospital lab testing down to levels comparable with the national commercial laboratories.
Given the fact that Premier members control $6 billion per year of testing, a 20% improvement would deliver $1.2 billion in savings to be shared by member hospitals, Premier and Quest. That is certainly a goal worth pursuing, and it is independent of other benefits, such as clinical integration and reduced test utilization.
Laboratory administrators and pathologists have screamed for years that hospital administrators tend to overlook the potential value of laboratory testing to impact healthcare costs on a grand scale. Premier has finally heard that message.
Now it will be interesting to see if these same laboratorians are willing to embrace radical changes to the lab- oratory’s organization, structure, and leadership which can generate potentially huge benefits to the hospital and its surrounding medical community.
Strategic Services Alliance Between Premier And Quest
Premier Inc. and Quest Diagnostics Incorporated announced a two-part strategic alliance on May 18, 1998.
The Reference Testing Agreement is one component. It is a five-year contract covering the traditional range of pricing and services for reference laboratory testing. The agreement makes Quest Diagnostics the primary reference provider to Premier.
The second component is the Strategic Services Contract. Basically, this arrangement allows any participating hospital, Premier, and Quest to work together to create additional value in the laboratory. Premier can earn cash and Quest stock for the participating member hospitals.