CEO SUMMARY: Regionalization of laboratory services is about to become a dominant industry trend. Four groups of players will drive this process and each needs to recruit hospital laboratories to participate in their regional model. This is the first generation of attempts to create financially viable laboratory systems with regional capability.
REGIONALIZATION OF LABORATORY and pathology services is rapidly becoming a reality in the United States. An irreversible transformation of both pathology and the clinical laboratory industry is now under way.
For the first time in the history of the clinical laboratory industry, there are multiple examples of regional laboratory provider systems. The trend is identical within pathology, with the first regional pathology systems now emerging in several states.
Four segments of the lab industry seek to regionalize laboratory services. Each segment has different motives for creating a regional laboratory system.
The first segment consists of the three national laboratories, Quest Diagnostics Inc., Laboratory Corp. of America and SmithKline Beecham Clinical Laboratories. These three companies want to leverage the existing infrastructure of regional hub laboratories which they operate in different cities around the United States.
The second industry segment consists of smaller independent commercial laboratories, still found in almost every city and rural area of the United States. These laboratories are closely bonded with the healthcare community they serve. They are well positioned to become part of any regional laboratory system which develops in their market.
Examples of laboratories in this segment are Pathology Associates Medical Laboratories in Spokane, Washington; Pathology Medical Laboratories in San Diego, California; and Medical Arts Laboratories in Oklahoma City, Oklahoma.
The third segment is made up of consolidated hospital laboratories which operate successful outreach programs. Like the national laboratories, these organizations are aggressively approaching individual hospitals. Their growth strategy is to expand their market service area by recruiting additional hospitals.
Three examples of such consolidated hospital laboratory organizations are MDS-Hudson Valley Laboratories in Poughkeepsie, New York; Presbyterian Laboratory Services in Charlotte, North Carolina; and Centrex Clinical Laboratories in Syracuse, New York.
Individual hospital laboratories comprise the fourth segment. Their strategy is to form regional laboratory networks for the purpose of test sharing (to lower costs) and acquiring managed care contracts (to protect market share). Outreach sales and marketing is generally not a primary objective for these networks.
Pioneers in the laboratory network movement were Joint Venture Hospital Laboratories in Detroit (1993), Bay Area Hospital Laboratory Network in San Francisco (1995) and Reference Laboratory Alliance in Pittsburgh (1995—ceased operations January 31, 1997). For many reasons, hospital laboratories find networks the most appealing strategy. As a result, numerous other regional laboratory networks are springing up throughout the United States.
Earlier issues of THE DARK REPORT chronicled the compelling economic and cultural factors now forcing laboratories to form regional systems. (See TDR, June 10, 1996.) The first marketplace experiments in response to these forces are now in operation.
Recruiting efforts by these four industry segments will pressure hospital laboratories to affiliate with a regional laboratory system. Hospital laboratory administrators face the dilemma of choosing the right regional model for their laboratory.
For many laboratory administrators, the choices are not appealing. Marriage with one of the three national laboratories is frequently not a preferred option. Teaming up with a strong independent laboratory in the area requires overcoming a history of competition by the par- ties involved.
At this early stage in the regionalization process, most hospital laboratories opt for the “safest” regional laboratory model—the regional laboratory network. However, it is the prediction of THE DARK REPORT that hospital laboratories will find regional laboratory networks to be economically ineffective over the long haul.
Lab Regionalization Centers Around Four Setsof Players
Four groups actively want to create regional laboratory service organizations. Competition will intensify as these players romance hospital laboratories to join their particular model of a regional laboratory system.
Their proposition: “Outsource or joint venture with us.” Their drawback: Hospital administrators resent the fact that these labs still suck the outreach business from the hospital’s medical campus and are unwilling to put those revenues into the proposed joint venture.
Independent Regional Laboratories:
Their proposal: Strength in numbers. “Join us and we can dominate the market.” Positive aspect: Independent laboratories generally have good quality, high service levels and solid client relationships.
Consolidated Hospital Laboratories:
Their proposal: “We know your needs as a hospital and we can keep testing local at our core lab.” Another benefit: The best of these consolidated laboratories are very good at outreach sales and marketing.
Regional Hospital Laboratory Networks:
Their attraction: “Join us, share testing to lower costs and there is no restructuring of your existing laboratory.” Drawbacks: Historical mistrust, political infighting and lack of executive leadership cause most networks to endlessly debate simple business issues.
The greatest benefit of such networks will come from teaching rival hospital laboratory administrators that they can work together to mutual benefit. As they develop good working relationships over time, THE DARK REPORT believes that clusters of hospital laboratories within the network will begin partnering consolidation projects among themselves. It is this laboratory consolidation phase which will bring the most significant economic benefits. It will also strengthen the market position of the network.
These four models of regional laboratory systems are marketplace solutions to managed care’s insatiable demand for continuously decreasing costs. Clinical laboratories will be required to deliver diagnostic tests at the lowest possible cost while maintaining high quality services to the clinicians. The existing infrastructure of commercial and hospital laboratories is unable to meet those requirements.
Proof of Inadequacy
Proof of this inadequacy is found in the published financial performance of commercial laboratories since 1994. It is mirrored by the economic problems now becoming obvious in the hospital world. The well-publicized fiscal difficulties of hospitals in New York perfectly illustrate the problem of hospitals throughout the country. Neither commercial labs nor hospitals have demonstrated a viable solution to such financial challenges.
These facts are indisputable. They are evidence to hospital laboratory administrators that change must come to their individual laboratories. THE DARK REPORT predicts that during the next 24 months a substantial number of hospital laboratories will find themselves involved in some type of regional laboratory system.
It will be hard for hospital administrators to deny this reality, for they are the prime targets of the four groups of regional organizers mentioned earlier in this story. During the previous three years, hospital laboratory managers were visited regularly by sales representatives of the three national laboratories wanting to “do a deal.” Despite this intense marketing effort, few hospital/commercial laboratory deals were consummated during this period.
Similarly, hospital laboratory administrators were pressured by peers to join regional laboratory networks. All four groups of regional laboratory system organizers require the specimen volume of individual hospital laboratories to make their particular project viable. That is why hospital laboratory administrators will find themselves courted by an increasing variety of local players.
Emerging Regional Systems
In the story which follows, the earliest emerging regional laboratory systems are identified and evaluated. Each of these organizations is in its infancy, so any success stories would be premature.
This makes it important to realize that every regional laboratory system now emerging must be considered experimental. Success depends on a good market strategy, outstanding management and good execution of the business plan. Laboratory administrators who possess these skills will be in high demand in the years to come.
Consolidation And Regionalization Are Different Market Strategies
REGIONALIZATION IS DIFFERENT from laboratory consolidation. It is important to understand the difference. Consolidation usually involves the dismantling of individual laboratories for the purpose of feeding more specimens to a centralized laboratory site.
With an increased flow of specimens through the central laboratory, two things occur. The average cost per test declines at the central laboratory, improving its competitive position. Second, because of the larger volume of tests flowing through the central laboratory, more assays can be done internally, minimizing send-out work.
Regionalization differs from laboratory consolidation. The objective of regionalization is to develop a laboratory system capable of providing services to an extended geographical area. This permits the regional laboratory system to provide services to managed care plans. It also permits the regional lab system to make best use of existing laboratory assets in a given marketplace.
Compare an actual example of consolidation with laboratory regionalization. When Quest (as MetPath) acquired the Texas laboratories of Damon Clinical Laboratories and Nichols Institute in 1994, it made the decision that Dallas would be the central laboratory to serve the state.
Thus, it closed the major laboratories operated by Damon and Nichols in cities such as Houston, El Paso and San Antonio. Those specimens were consolidated into the main laboratory in Dallas. Consolidation of testing caused Quest to downsize or close satellite laboratories throughout the state.
Laboratory regionalization has the goal of establishing laboratory service resources throughout a geographical area, without building new laboratories. MDS-Hudson Valley Laboratories (MDS- HVL) represents one approach to regionalization. Based in Poughkeepsie, New York, MDS-HVL is the dominant outreach laboratory provider in the Mid-Hudson marketplace. It is owned by two hospitals and a commercial laboratory.
MDS-HVL’s off-site core laboratory provides testing to both outreach clients and its four hospitals. MDS-HVL’s growth strategy relies on recruiting hospitals within a 90-mile radius to join the consolidated laboratory operation.
New hospitals benefit from lower testing costs and an expanded menu of locally performed tests. The sales and marketing team from MDS-HVL will also assist in opening new outreach accounts.
MDS-HVL benefits from the lower average cost per test generated by the increased specimens from the newly recruited hospital. More importantly, MDS-HVL can now market its outreach testing to physicians located in the medical campus around the hospital. Because of physicians’ loyalty to their local hospital, this is a winning strategy for both the hospital and MDS-HVL.
One way to view the difference between consolidation and regionalization is to consider that laboratory consolidation is more of an internal strategy. The primary benefits accrue from centralizing specimens at the main laboratory.
In contrast, laboratory regionalization is more of an external strategy. The goal is to extend the service reach of the organization throughout a target market area. It is to integrate lab services and align them with the needs of the healthcare community within the service area covered by managed care plans in the region.