Unrealized Gains Targeted By Premier’s Lab Initiative

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CEO SUMMARY: In part one of this exclusive interview, Premier’s John Biggers described the reasons why the 1,700 hospital consortium developed a strategic services program for clinical laboratories. In this final installment, Biggers provides insight as to how the program will work and what the objectives will be. Biggers’ comments deserve careful reading, particularly by hospital lab directors and pathologists, because it is a real-world demonstration that hospital-based laboratories, as an industry, are on the verge of a radical readjustment in their organization and relationship with both clinicians and hospitals.

Part Two of Two Parts

THE FOLLOWING CONCLUDES our exclusive interview between Robert Michel, Editor, and John Biggers who was Vice President of Corporate Business Development at Premier. He is now Vice President of Operations for Premier Clinical Laboratory Services.

EDITOR: In the first part of this interview, you and I discussed the reasons why Premier, Inc. decided to emphasize clinical laboratory services as a business initiative. You also shared with us how Premier evaluated its options for establishing such a program and eventually made a decision to create a strategic services alliance with Quest Diagnostics Incorporated as the partner. In this segment of the interview, I would like you to discuss two things. First, what specific outcomes do Premier’s member hospitals hope to gain from revamping laboratory services? Second, how will this strategic services program actually be introduced to Premier’s 1,700 hospitals?
BIGGERS: Both of your questions are intertwined. The benefits will result from the implementation plan. Premier is convinced that clinical laboratory services can be the vanguard for effective integration of clinical services within both the hospital and the extended integrated delivery system (IDS). In so doing, the process of laboratory integration will have several
effects. One, it will reduce the cost of laboratory testing to the hospitals and IDSs. Two, laboratory integration will expand the actual testing resources available to clinicians even as lab overcapacity is reduced or eliminated. Three, it will initiate changes to clinical practices which enhance the quality of healthcare while reducing the cost of providing it.
EDITOR: John, each of these three goals is precisely what pathologists and laboratory administrators have screamed that they could do for years. They’ve argued that clinical laboratories have the potential to impact clinical practices in ways which are disproportional to its cost.
BIGGERS: Their message has now been heard. Our internal studies convinced the highest levels of management at Premier, as well as some of the most influential executives of our largest hospital system members, that clinical laboratory services are the best way to anticipate and meet the challenges of managed care.

“Laboratory testing is involved in a majority of clinical decisions…and its potential to do more has gone unrealized”
John Biggers, VP, Premier, Inc.

EDITOR: In a sense, you describe a sleeping giant which is now aroused and ready for action. Power players at the highest levels of Premier and its most influential hospital system members finally recognize the power of the clinical laboratory. They now want immediate action…
BIGGERS: It’s true, for this reason. As I stated earlier, every couple of years Premier wants to create a breakthrough. We define a breakthrough as triggering outcomes which were previously considered impossible. Our senior management team, in studying how clinical services are delivered, realized the truth known to most lab administrators and pathologists: laboratory testing is involved in a majority of clinical decisions, yet is relatively inexpensive. And its potential to do more has gone unrealized and untapped by the large majority of hospitals.
EDITOR:A consistent theme that underlies all your comments, John, is that the
laboratory should play a bigger role in the healthcare community than it is currently giving.
BIGGERS: Good observation. As our path for the laboratory unfolds into the future, our main objective is to create a national database of clinical information. This database, built around laboratory test data, would be used to optimize healthcare practices and patient outcomes.
EDITOR: Then the real objective of the strategic services alliance is to position laboratories so that they can play an increased role in improving clinical practices.
BIGGERS: Basically yes. But it goes beyond that. CEOs of our member hospitals have a problem that laboratories can solve.
EDITOR: What problem is that?
BIGGERS: Clinical integration.
EDITOR: For example?
BIGGERS: Our hospital CEOs recognize that few, if any, truly integrated healthcare delivery systems exist in the United States today. The CEOs believe clinical laboratory services can be an ideal rallying point for clinical integration. More specifically, a number of our CEOs now think that they can use a well-designed core lab system to break down historical barriers within their healthcare community and encourage rapid integration of clinical services.
EDITOR: Is that the reason why a national data base is one goal for the strategic services alliance?
BIGGERS: Precisely. Such a uniform data base creates the ability to pool patient data from the physicians office with that of the same patient in the hospital. Our strategic services alliance is designed to give our member hospital that capability without any capital required by the hospital. In fact, the hospital will enjoy significant dollar savings even as its laboratory resources are expanded.
EDITOR: This national data base of laboratory test information would eventually impact test utilization, correct?
BIGGERS: That is one of our longterm goals. As clinicians use this information to improve patient care, over time we expect to see the number of tests ordered reduced by as much as 25%. This will require several years to
occur, but it is one additional source of the strategic services alliance.
EDITOR: What you describe is a grand vision. If the strategic alliance delivers as it is intended, individual hospitals and IDSs will realize significant cost savings while getting enhanced laboratory services in the short-term. In the long-term, the strategic services alliances will create a comprehensive national data base of lab test results that clinicians accept and use to improve diagnostic and therapeutic pathways.
BIGGERS: Now you can appreciate why information capability plays a big part in our plans. Quest Diagnostics, our alliance partner, agreed to be the conduit for this information. It should be no surprise to you that, in all our discussions with commercial labs, everybody realizes that added value in lab testing lies not in performing the test, but in how the resulting laboratory data is used. In the future, clinical labs will actively help clinicians use laboratory data for diagnostic and therapeutic decisions. EDITOR: Assembling a national data base of laboratory information is a worthy goal. But so far, no commercial laboratory has yet to demonstrate a practical system that delivers global information in a useful fashion.
BIGGERS: We recognize the challenge in that area. But that is why, when successful, Premier will create an innovative breakthrough for our member hospitals.
EDITOR: Of course, the path you follow to that objective will also produce more immediate benefits to the hospital’s laboratory. Would these benefits be the short-term goals of the strategic services alliance?
BIGGERS: Yes. With 1,700 member hospitals, we believe that we can deliver worthwhile gains to every single one. However, each hospital starts from a different position. We recognize that, for those hospitals where extensive consolidation and re-engineering has already clinical laboratory, short-term gains would be modest. But the opposite is also true. There are many hospitals where potential savings from the laboratory range from 10% to as much as 40%. We’ve established a threshold of 10% in evaluating our first alliance candidates. If strategic services cannot project a minimum of 10% in cost improvement, we don’t think it will justify the hospital’s efforts.
EDITOR: There is probably a large number of ideal candidates for the strategic services alliance…
BIGGERS: That’s correct. CEOs of several hospitals and hospital systems have already asked us if they could be the early innovators with the strategic services alliance.
EDITOR: So you start with a ready pool of willing volunteers?
BIGGERS: Definitely. In fact, a number of these early innovators are prominent institutions. We are pleased to have strong interest from them. Our game plan specifies that we start with a limited number of projects. They will be selected from this pool of motivated volunteers. Before we splash this throughout the country, we want a clear demonstration of how Premier and Quest, working cooperatively with the hospital partner, can deliver worthwhile savings and service enhancements. We want to demonstrate that this occurs without the kind of disruption or organizational pain which lab administrators often fear, needlessly.
EDITOR: Rumors within the laboratories of Premier hospitals imply that this lab initiative would be “mandatory.” I hear you describing the opposite. You plan to only work with those hospital members which invite the strategic services alliance to make a proposal.
BIGGERS: This is strictly on a volunteer basis. Rumors can take on a life of their own, regardless of the facts. From the beginning, our intention was that the strategic services alliance be a three-way partnership
between each participating hospital, Premier and Quest Diagnostics.
EDITOR: How many projects do you anticipate initiating in the opening months of this alliance?
BIGGERS: Just a handful. I can guarantee you that we want our first one or two or three projects to be extremely successful. You’ll probably see a mix of large systems and small hospitals in the first round of projects. Hopefully the results from a couple of these projects will be remarkable enough to startle our members and cause them to say “If that can happen with their laboratory, then anybody can do it.”
EDITOR: I like that approach. Take the toughest challenges out there and prove that the partnering concept works. Laboratory administrators are like the folks from Missouri. “Show me” is the fastest way to gain their support for new management concepts in their laboratory.
BIGGERS: That is why we will do a limited number of these partnering arrangements, then talk about them a little bit. We want administration at all levels of prospective hospitals to understand the design of this program, see its effectiveness, and know precisely how it would occur in their own institution.
EDITOR: Would you talk more about the goal of bringing Premier hospitals a laboratory cost per test which is as low as that of the commercial laboratories?
BIGGERS: One way to develop a breakthrough in accepted practices is to establish an outlandish assumption, then figure out how you would make it happen. At one point, we asked a simple question: What would it take for a hospital laboratory organization to get a cost per test as low as, or lower, than that of larger commercial laboratories.
EDITOR: But commercial labs derive their rock-bottom costs from pushing high volumes of specimens through their regional testing centers. Hospital labs, by definition, generally can’t access similar volumes of specimens.
BIGGERS: Robert, that is traditional thinking. Now, work out of the box for a moment. Can you think of a few ways you might restructure a hospital laboratory to get low-cost tests?
EDITOR: Well, two things come to mind, both based on aggregating hospital specimens into central locations. One is to partner or outsource with a commercial laboratory in the region. The other would be to create a regional core lab that would do testing for a number of hospitals in the vicinity. In fact, that is what Tenet is doing with its 31 hospitals in Orange and Los Angeles counties in California.
BIGGERS: Those are pretty obvious solutions, aren’t they?
EDITOR: Yes. So is your point that lab directors already know ways to radically push down the cost of lab testing?
BIGGERS: Correct. As Premier’s Bill Nydam pointed out to you, left to their own, lab administrators take as long as ten years to work through
incremental steps of internal re-engineering, lab consolidation and maybe
regional cooperation with other hospital labs in the nearby area. But hospital
CEOs no longer have ten years to wait for the benefits of this.
EDITOR: Even though these laboratory administrators intuitively recognize the need to act, they hesitate to change the status quo…
BIGGERS: …which is why, for a long time, the hospital laboratory industry rode the horse of excess capacity. The truth is that excess
capacity carries a huge price tag. One goal we have is to reduce that excess
lab capacity and lower the overall price tag for lab testing.
EDITOR: But there is more to your strategic analysis than a simple reduction of overcapacity.
BIGGERS: Excess capacity, and the extra costs associated with it, must be viewed in tandem with a fundamental shift in the economics of clinical laboratory operations. Generating more specimen volume into the laboratory today can be at counter-purposes to the integrated clinical environment it services.
EDITOR: In what way?

“For a long time, the hospital industry rode the horse of excess capacity. The truth is that excess capacity carries a huge price tag. One goal is to reduce that excess lab capacity.”

BIGGERS: Ten years ago, if you generated a lab test, you got paid for it. Today, if you generate test volume for the sake of generating volume, it is simply an expense to your health system.
EDITOR: I see two reasons why your analysis is correct. First, if a laboratory is on a prospective, or capitated reimbursement arrangement, then additional testing adds expense without generating offsetting revenue. Second, if the laboratory is part of an integrated delivery system which offers total healthcare against fixed premiums, then unneeded lab tests simply become unnecessary costs for the parent system.
BIGGERS: Yes, laboratory expenses for inpatient testing now represent a cost to the CEO. That is why our goal for the strategic services alliance is three-fold: 1) to reduce the cost per laboratory test to a level approaching that of commercial laboratories; 2) to expedite clinical integration within the IDS; and 3) to position laboratory data so as to improve clinical outcomes while lowering the cost of care. The last two items should also favorably impact utilization.
EDITOR: John, you also believe these goals can be accomplished with little or no capital investment by the hospital partners. Explain that please.
BIGGERS: There is a clear-cut advantage for hospitals to participate in the strategic services alliance. We seek to create the optimal organization at no capital cost to the hospital owners. Their participation should result in direct savings of 10% to 25% in laboratory costs. The alliance will provide information system interfaces to connect the hospital, the laboratory, physician offices, and reference laboratories. These interfaces will build upon the existing information systems. Once this capital infrastructure is operational, it potentially can be used to access other clinical data such as radiology, cardiology, physical therapy, and pharmacology between the hospital and various providers within the IDS.
EDITOR: This created infrastructure is a side-benefit from the laboratory project. It opens up new opportunities for the hospital to interact clinically with the physicians offices.
BIGGERS: Yes. That is another aspect that appeals to our more perceptive hospital owners.
EDITOR: Talk a little bit about how laboratory outreach business will be handled in the alliance.
BIGGERS: As part of the strategic services alliance, Quest Diagnostics will offer to purchase the outreach testing for any hospital partner.
EDITOR: I assume that Quest will be working to increase the market share of outreach testing generated by the alliance from that hospital’s nearby medical campus?
BIGGERS: That is the plan. But there is a more global motivation behind this aspect of the strategic services alliance.
EDITOR: Please explain.
BIGGERS: First, we want to be smart about where testing is done. Remember that lowest cost per test and improved laboratory services are the immediate goals. But other issues must be addressed as well. If several hospitals in a city are part of the strategic services alliance, inevitably the decision must be made as to how testing will flow from various sites in the regional effort. I know that readers of THE DARK REPORT are familiar with the political issues and turf problems surrounding many attempts to create some form of regional laboratories.
EDITOR: Then having a mechanism to put outreach testing in “neutral hands” while still allowing the alliance to benefit from increasing the outreach specimen volume is part of the strategic design?
BIGGERS: We certainly hope so. We believe that laboratory regionalization requires a “United Nations” solution, a neutral third party who has credibility with all participants. Certainly every lab director knows of discussions between laboratories to create core labs or networks which lasted for two, three, even four years. Yet at the end of that time, there was little agreement and even less tangible action.
EDITOR: So you believe that Premier and Quest Diagnostics, in combination, can help participating hospitals develop effective regionalization plans?
BIGGERS: Yes, for an important reason. Everybody gets to win something if the project can be designed and implemented. Premier has business planning skills and credibility with the hospital CEOs. Quest Diagnostics has hands-on experience operating a multi-site regional lab system, including LIS
resources, courier networks, sales, marketing, and managed care relationships.
EDITOR: So your strategic plan has a built-in mechanism for moving past what I will call “parochial interests?”
BIGGERS:We know that most regional laboratory initiatives flounder rather than succeed for reasons of politics, turf, and control, Robert. However, the strategic services alliance brings an array of business acumen and capability which is frequently lacking from these projects. Plus, most regional laboratory programs are initiated by the lab directors, who must try to sell their CEOs and senior administrators on the concept. Our regional projects will generally have the full support and authority of the hospital CEOs. For that reason, we anticipate that traditional points of conflict will not get in the way of a rapid implementation once all participants agree on the plan.
EDITOR: As we prepare to close, do you have some final comments for clients of THE DARK REPORT?
BIGGERS: Basically, I would like to reaffirm the original motives behind this strategic services alliance. Hospital laboratory administrators and pathologists should recognize that Premier has spent almost two years studying various opportunities to create breakthroughs in healthcare. We recognize that clinical laboratories have untapped potential to help expedite clinical integration, while at he same time providing their parent hospitals with enhanced service at reduced cost. It is confirmation of what laboratorians have preached to us for years. Now we are true believers and ready to pursue and harvest those benefits.
EDITOR: Should Premier succeed with this concept, it will bring definite changes to hospital-based laboratories.
BIGGERS: Yes, but keep in mind that this entire effort will take place one hospital laboratory at a time, over a period of several years. Only a handful of hospitals will participate in our first round of strategic service alliances.


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