CEO SUMMARY: Economic pressures are forcing even the traditional and staid Veterans Administration to extensively reconfigure its laboratory services. At this year’s Executive War College in New Orleans, participants learned how one eight-hospital VA region consolidated testing around two core labs, entered into a partnership with a commercial laboratory, and used telepathology to serve a remote VA hospital after the retirement of its sole pathologist. The region’s goal is to reduce expenses by 20% while maintaining and enhancing lab services.
RADICAL RESTRUCTURING of hospital laboratory services is not limited to the private sector. Even the hide-bound and often-bureaucratic Veterans Administration in energetically embracing laboratory consolidation.
“Reality finally hit us square in the face,” stated Bruce Dunn, M.D., Chief of Pathology and Laboratory Medicine at the Milwaukee and Iron Mountain Veterans Administration Hospitals. “The VA system is clearly under the gun to improve performance. Congressional cutbacks to the VA’s medical budget are quickly changing the way we do business at VA hospitals throughout the country.”
Dr. Dunn was in New Orleans this May to address the Executive War College. His hospitals are part of VISN 12, one of 22 regional laboratory networks in the VA’s healthcare system.
Laboratory operations in all VISNs are undergoing major restructuring. However, both the pace of laboratory consolidation and the degree of innovation varies dramatically from one VISN to another.
“The direct impetus for change came from two sources,” explained Dr. Dunn. “First, funding for laboratory services was to be reduced by 5% in 1997 and another 5% in 1998. Second, in meetings with hospital and laboratory administration, we agreed on a goal of reducing laboratory expenses by 20% over a three year period.
“These are radical goals for a medical I organization built upon predictable, year-to-year increases in funding. It is important I to recognize that medical and technical staff in our laboratories were not used to extensive change,” he added. “That is why we expected them to resist any restructuring plans that affected them personally.”
VISN 12 is comprised of eight hospitals in Northern Illinois, Wisconsin and the Upper Peninsula of Michigan. These laboratories also serve a network of VA outpatient clinics located throughout these areas.
“Our challenges were no different than any other hospital-based laboratory,” stated Dr. Dunn. “We have redundant laboratory services. We’ve got multiple, independent pathology resources with excess capacity. We’ve had different standards of efficiency and quality at our various laboratory sites.
“So it should not surprise you that we adopted many things from private hospital laboratory restructuring projects,” he noted. “We didn’t want to reinvent the wheel and we also wanted to know that the types of cost-cutting measures we adopted had been successful in other laboratories.”
This “borrow from the best” philosophy triggered three fundamental restructuring strategies. First, core laboratories were to be created in Milwaukee and Chicago, so testing could be consolidated at these sites. Second, a unified system for logistics and laboratory data needed to be developed as a necessary step for further enhancements to lab services in the region. Third, excess capacity in both clinical laboratories and pathology departments had to be eliminated, using tools like downsizing and increased specimen volumes.
Along with Dr. Dunn, key players in the planning and implementation of this project were Gregorio Chejfec, M.D., Chief of Laboratories at Hines VA Hospital in Chicago; Thomas O’Donohue, Laboratory Manager at Hines; John Heffner, Laboratory Manager at Milwaukee VA Hospital; and Edward Sasse, M.D., Consultant Biochemist for VISN 12.
“In the planning stage we realized the importance of aligning incentives and motives at all sites where laboratory testing and pathology is performed,” observed Dr. Dunn. “Our goal was not a ‘one-time’ costsaving program. Rather, we wanted to create a new culture and a new organization within VISN 12 that would foster ongoing improvements to the services we offer while consistently whittling away at expenses.”
Dr. Dunn’s observation reveals that leadership within VISN 12 understood that survival and success would only come from a new culture and a new attitude within the laboratory network. Thus, any strategic management plan for regionalization needed to address ongoing incentives and the operational culture for the newly-revamped laboratory system.
“One complicating factor in our planning effort was simply to identify who was in charge at each site,” said Dr. Dunn. “Was it the VA itself? Was it the affiliated medical school? Now that we have a network, was it the network director? Was it the hospital lab director? Frankly, this is one challenge that we are still trying to work through.”
“Remember that several things are unique to the VA medical system,” he continued. “Our mission at the VA is patient care, teaching, research, and one other unusual function: the VA is here to back up the medical services provided by the Department of Defense, particularly during war or other times of hostile action.”
Patients Tend To Be Older
“Unlike most hospitals, which serve a range of patients from the general population, our primary patient is a veteran. Our patients also tend to be older, and come to us with multiple medical problems. They are challenging patients, and very expensive compared to a general patient population.”
As a result, the VA medical centers treat a patient population with very different characteristics than the typical hospital. “This unique patient population requires us to offer a specific mix of laboratory services,” noted Dr. Dunn. “The regionalization effort had to maintain those capabilities. “Prior to consolidation, our laboratories, for all intents and purposes, acted independently of each other,” he explained. “Six of the hospital laboratories were affiliated with medical schools, and that influenced where and why they referred send-out testing. Across the region, there was no consistency in laboratory operations at individual sites. “We also have the problem of extensive geography. Iron Mountain is 300 miles from Chicago and 220 miles from Milwaukee. Even Madison is 90 miles away from Milwaukee. This far-flung geography is why courier service was determined to be a critical success factor.
“The decision was made to create two core laboratories, one at Milwaukee VA Medical Center and the other at Hines VA Medical Center in Chicago. This consolidation process was made easier by the fact that all eight hospitals use the same information system.
“Another fundamental decision was to rely on outside laboratories for reference and esoteric testing, rather than the academic centers affiliated with our various hospitals,” added Dr. Dunn. “This may not sound like a big deal to most labs, but for us it was, and continues to be revolutionary thinking. Sending specimens to an outside laboratory provider runs contrary to the close relationships between the VA hospitals and their medical school affiliates.”
By choosing one reference lab partner to perform all send-out testing, VISN 12 expected to see a significant reduction in the cost of reference testing. “Not only would centralizing reference testing allow us to drive down the cost,” observed Dr. Dunn, “but concentrating the send-out work from eight hospital labs gave us the option to possibly bring those tests in-house, to improve both costs and turnaround times.”
“The search for a single reference laboratory provider turned out to have other advantages as well,” he continued. “During the RFP process, we decided what we needed was not a low cost, quality reference laboratory provider. Rather, we needed a business partner who could provide us more than just laboratory tests. For example, given the distances between our eight hospitals, we realized that it would be prohibitively expensive to create a courier system capable of meeting our needs. A reference lab partner could provide us better courier service at a lower cost than if we did it ourselves.
“Our selection process determined that Quest Diagnostics Incorporated offered services which best matched our needs,” stated Dr. Dunn. “They are our primary source for reference and esoteric testing. We utilize, and pay for, their courier services to move specimens between our clinics and hospital laboratories. Their LIS is being adapted to provide a direct host-to-host interface with our laboratories.”
“This partnering relationship allowed us to move faster at implementing our consolidation, while savings us considerable money in several operational areas,” he said. “It permitted us to focus our management time on other projects necessary to complete the consolidation.”
Even though most lab testing was consolidated at the Milwaukee and Chicago hospitals, VISN 12 did take advantage of the expertise that existed at various sites. For example, all electron microscopy is done at Madison. Flow cytometry was done at three sites and now is performed at only one of our laboratories.”
VISN 12 Laboratory Regionalization Targeted Several Operational Areas
“This concentration of specialty testing allowed us to keep expertise at certain teaching centers,” explained Dr. Dunn. “It also has helped us generate more specimens. For example, Milwaukee operates a bio-safety level three lab in mycobacteriology. It is one of only two such labs in the state of Wisconsin. As a result, other hospitals are referring mycobacteriology specimens to us.”
Pathology consolidation involved several interesting issues. “At the start of this project, we had 18,000 surgical cases per year and 30 pathologists,” observed Dr. Dunn. “It was recognized that these numbers could be improved.”
“Over the last two years, the number of pathologists fell to 18,” he said. “This reduction came mostly as a result of retirement. It might be said that 18 is still a high number for the annual case load, but given the other responsibilities of our pathologists, it certainly brings us more in line with the existing workload.”
One of the more fascinating aspects of the pathology consolidation involves telepathology at Iron Mountain VA Hospital. “Iron Mountain generates 1,000 surgical specimens and about 40 frozen sections per year. Historically, we’ve maintained one full-time pathologist at this hospital.”
“A telepathology system was installed two years ago to help us cover the work whenever this pathologist was away for meetings or vacations,” said Dr. Dunn. “When he retired at the end of 1996, the decision was made not to fill that position. Instead, we trained a medical technologist to be a pathologist assistant.
“Our telepathology system is real time and dynamic,” he noted. “We are in control of the microscope. The system allows us to change the focus, change the X-Y axis, change the lighting, and change the objective.
“We look at the consolidation of our laboratory and pathology services as a work in progress. This three-year project is the start of an ongoing effort to align services in ways which improve quality and control costs.”
Bruce Dunn, M.D.
Chief, Path & Lab Medicine, Milwaukee VA
“Our telepathology arrangements now allow Milwaukee pathologists to handle the Iron Mountain workload in just two pathologist hours per day,” he said. “From a cbst standpoint, it is somewhere between having an on-site pathologist and sending all the cases to Milwaukee. As it turns out, the telecommunications cost is surprisingly expensive.”
The telepathology system allows the Milwaukee pathologists to guide the pathology assistant (PA) in preparing the specimen. “We have a camera that allows us to look at the gross specimen and direct the PA as to where to take the sections,” explained Dr. Dunn. “Thus, the pathologist oversees all activities. It works exactly as if the PA was at the same site with the pathologist.”
“Two years ago, with an on-site pathologist, turnaround time for AP specimens at Iron Mountain was four days. Now it averages 1.3 days,” Dr. Dunn said. “Most importantly, the physician staff at Iron Mountain can get even faster service if the need arises.” VISN 12’s laboratory restructuring project demonstrates several of the marketplace trends currently under way in the United States and Canada.
First, laboratory consolidation is a necessary step to simultaneously eliminate excess laboratory capacity while lowering average cost per test. VISN 12 used the double core lab and a single reference laboratory provider as primary consolidation tools.
Second, laboratory regionalization must occur as a parallel process. The best combination of maximum service and lowest cost is achieved only by taking all the existing lab resources within a region and integrating them in rational ways. VISN 12 looked at the three-state service area and restructured existing laboratory and pathology resources to create an integrated laboratory network.
Third, pathology consolidation is an inevitable consequence of laboratory consolidation. There is excess pathology capacity in every city, just as there is excess laboratory capacity. The marketplace is forcing hospitals to eliminate that excess capacity. VISN 12 saw the number of pathologists decline from 30 to 18 without a decline in service or quality.
Fourth, speedy implementation of the consolidation/regionalization project is critical to success. Taking too long to make the project happen and generate cost benefits can mean failure instead of success. VISN 12 established specific target dates for implementing its consolidation plan and has pushed hard to meet those dates. Fifth, partnering is a legitimate, even desirable way, to speed up consolidation and maximize the savings. VISN 12 used Quest Diagnostics as a way to quickly launch a three-state logistics system, centralize send-out testing, and create direct computer interfaces between all major laboratory sites in the network.
Another interesting feature about VISN 12’s regionalization plan is that it was developed and implemented in a matter of months, without the help of high-priced consultants. It demonstrates that innovative laboratory management can spring from home-grown sources. Laboratory executives should also keep in mind that VISN 12 is just one of 22 VA laboratory regions which are dealing with the challenges of lower reimbursement. Across the country, laboratory consolidation and laboratory regionalization efforts are under way. Some of these VISN s will have their own brand of management innovation.
(For further information, contact Bruce Dunn, M.D. at414-384-2000, Ext. 1296.)
FIRST CAP INSPECTION OF LABORATORY NETWORK
MUCH OF THE REVENUE GROWTH AT DIANON Systems and UroCor comes from anatomic pathology. As national providers of AP services, both companies market themselves aggressively at the community level.
Most pathologists who practice in community hospitals would like local urologists to refer AP specimens to them. That allows local specimens to be handled by pathologists in that community. Yet when sales reps from DIANON and UroCor began soliciting business from urologists in the community, most pathologists react like “deer in the headlights.” They freeze, do nothing and lose the business.
It is time for pathologists to heed the lessons of the marketplace. In the new world of managed care, pathologists will only achieve financial stability and revenue growth by proactively marketing their services. Community-based pathologists must compete, in their own way, with DIANON, UroCor, AmeriPath and other companies.
This means that pathologists must invest some of their practice revenues in marketing and sales. Pathologists must bring in business management expertise capable of running their practice profitably, making it grow, and increasing its profits.
The examples of DIANON and UroCor demonstrate that professional sales and marketing can cause clinicians to refer AP specimens to national providers. It is now time for local pathologists to study this success and use marketing as the tool to build their practice profits.