CEO SUMMARY: Announced last month, the new laboratory joint-venture partnership with Sonic Healthcare’s Sunrise Clinical Laboratories will allow WCHN to compete with other health systems and prepare to respond to health insurers’ requests that hospital systems offer lower rates in value-based payment models. WCHN has already seen payers shift to low-cost providers. For this reason, it expects its lab partnership with Sonic Healthcare to help it cut costs while supporting patient-centric lab testing.
IN FEBRUARY, the Western Connecticut Health Network and Sonic Healthcare announced a clinical laboratory joint venture. WCHN is creating this JV to integrate clinical lab testing services more efficiently as the three-hospital health system makes the transition from fee-for-service to value-based payment.
In the joint venture—called Constitution Diagnostics Network— Sonic’s Sunrise Medical Laboratories in Hicksville, N.Y., will do the esoteric testing while the clinical laboratories in WCHN’s three community hospitals (Danbury Hospital, Norwalk Hospital, and New Milford Hospital) will run the more routine clinical and anatomic pathology testing for the three facilities.
Three Hospital Labs Involved
The three hospitals have a combined revenue of $1.1 billion and 882 beds. About two-thirds of those beds are in the New Milford and Danbury hospitals which operate under one license. The other third are in the Norwalk Hospital, stated WCHN’s Chief Strategy Officer Michael Daglio.
The partnership will allow WCHN to compete more effectively with other health systems in state, such as Connecticut Laboratory Partners, which Quest Diagnostics acquired from Hartford Healthcare last year.
“We expect that this lab joint venture will help WCHN be better prepared when health insurers look for hospital systems that can offer lower rates, meaning those designed for a health system built on a model of value-based care,” observed Daglio.
In an interview with THE DARK REPORT, Daglio explained that the partnership addresses several pressing financial questions that the network couldn’t fully answer with its own resources. Each of WCHN’s three hospitals has a lab, though the ones in Norwalk and New Milford are enhanced stat labs. The joint venture will develop a core lab at Danbury Hospital.
The challenge for Sonic and WCHN is how to reshape that traditional community-hospital structure to serve an environment that wants lower costs and greater efficiency while maintaining quality.
“We want to move toward being a value-based health network but our roots are in traditional hospital-based models,” Daglio noted. “Our laboratory is a hospital-based model with hospital-based rates. Even though we serve physicians in the community through an outreach program, there’s no way we can do it at costs and prices comparable to those of Quest Diagnostics or LabCorp. But we know that we need to move in that direction to succeed in the value-based world.
Health System’s Move to Value-Based Care Designed to Meet Needs of Patients and Payers
WHILE THE U.S. CONGRESS considers whether to repeal the Affordable Care Act, one of the goals behind the act will always remain in place, stated Michael Daglio, the Chief Strategy Officer for Western Connecticut Health Network.
The ACA was built on a value-based care delivery model, and patients and payers will always want care delivered in this model, Daglio explained.
“We don’t know what’s going to happen with the ACA, but we do know that achieving high quality at low cost is a value proposition that’s never going away,” he said. “Regardless of what model prevails in the future, we will always need to increase quality and lower our costs.
“That’s what payers want; that’s what patients want,” emphasized Daglio. “Today, payers foot the bill. But patients increasingly are becoming aware of the cost of healthcare through high-deductible health plans.
Patients are no different than anyone else. They want high quality care at a low cost. That’s what we want to provide and so that’s our strategy here at WCHN, even if that means that we don’t always fill our beds.
“The other day I was asked: Isn’t your goal to fill the beds? And I said, ‘No. Our goal is not to fill the beds,” responded Daglio. “WCHN’s goal is to care for the population in a meaningful way.’ If that means a patient has to come in because they’re acutely ill or they have a traumatic event, then yes, we want that patient in a bed. But if there are other alternatives to treat that patient outside the hospital, such as if patients have surgery and we can discharge them to home, that’s what we will do.
“Those are the goals that we have now because we are caring for the population,” Daglio concluded. “To do that, we need to deliver high quality care at a low cost.”
Four Issues To Address
“To be effective with value-based care, there are four primary issues we need to address,” he added. “They are: 1) convenient access to testing and results; 2) high quality; 3) greater patient and physician satisfaction; and, 4) lower cost.
“Our health system needs to hit each of those four goals,” Daglio said. “In particular, we must achieve the first three while simultaneously reducing our costs. That will enable us to compete on a lower price and thus be more competitive in a value-based world. WCHN absolutely must find a way to lower pricing to insurance companies and employers to remain competitive with lab services.
“Our joint-venture partnership with Sonic will allow us to move toward those goals,” he continued. “Sonic and Sunrise Laboratories will connect us more closely with our physician offices. And they will run the patient service centers so that we can provide a more convenient patient experience on the front end.
“In addition, as our joint venture partner, they will help us move to value-based pricing to meet that final piece of it, which is the cost side,” noted Daglio. “How we get to the cost side of value-based care is by accessing the scale and efficiencies that Sonic brings to the partnership.
“Sonic will manage our health system laboratory on the inpatient side and as they do, we will be able to leverage their expertise in lab productivity,” he stated. “By that I mean, they have the expertise to establish more efficient laboratory workflows that we do not have now.
Helping To Lower Lab Costs
“Also, we will connect to their supply chain which will allow us to get supplies for the lab for a much lower cost than we can get now,” he said. “Supplies are the second highest line-item expense in any lab. So, that could bring us significant savings on the inpatient side that we would otherwise not achieve on our own as a three-hospital system.
“For example, maybe our labs run tests that could be done just as effectively and with the same level of quality, but at a much lower cost at a laboratory that does much higher volumes of these same types of tests,” Daglio added. “One goal with the lab JV is for Sonic to help us achieve lower test costs while maintaining essential access and turnaround times for inpatient, outpatient, and outreach tests.
“Another major goal for this partnership will be the data we will pull from our laboratories,” he said. “Right now, we do a good job of managing utilization. However, with Sonic we will have access to more sophisticated data that will allow us to manage utilization more effectively.”
More Effective Competitor
All of the benefits WCHN gets from its joint venture with Sonic will allow the hospital system to compete more effectively against other hospital networks in the Nutmeg State, predicted Daglio. “With this partnership, we can compete with the other big labs in Connecticut on price, service, and local quality,” he said.
“Before joining this partnership, we never felt there was an option for us to compete with commercial lab companies because they have such scale and such competitive pricing,” Daglio said. “Now, with our partnership, we also have the sophistication of a large laboratory company behind us, and we have the scale we need to grow and compete successfully.
“Another benefit to the lab JV is that we believe we can be more competitive with other hospitals that haven’t converted to a value-based model,” he added. “They may continue to see an erosion of their lab test volume just as we have seen in recent years.
“The trend we see is that health insurers are slowly steering patients away from those laboratories and imaging centers that are too expensive,” observed Daglio. “Generally, the more expensive providers are hospital-based and oriented to serve fee-for-service payment systems. This is why we’ve already seen some steerage from payers toward lower-cost providers.
Preparing For Shift To Value
“The payers are not going to shift everything tomorrow,” he noted. “But we think—over the next five years or so—that price and volume erosion will eat into our ability to afford to offer healthcare services effectively.
“This partnership with Sonic helps us get out ahead of the curve while also becoming more competitive with other hospital-based laboratories that haven’t moved in that direction yet.
“As this model proves successful, other hospitals could consider joining our laboratory joint venture,” Daglio said. “Laboratory testing is the kind of service that we can offer to other hospitals. Doing so would mean that—instead of always competing with other hospitals—we have a way to share certain services, such as lab testing. If we can build a company here that other hospitals can share in, I would welcome that opportunity.”
Contact Michael Daglio at 203-852-2353 or Michael.Daglio@wchn.org.