CEO SUMMARY: It was about 15 years ago when William Beaumont Hospital and Beaumont Reference Laboratories first began offering molecular diagnostic testing services to clinicians. This successful effort came about because of effective strategic planning, use of consulting expertise at key junctures, and careful evaluation of the finances for each molecular assay added to the menu. Here’s a step-by-step assessment of how this laboratory’s executive team built their molecular program. Learn why hospital administrators supported this program and provided the needed funding.
IT’S A TOUGH ENVIRONMENT for most community hospitals to establish a financially-sustainable molecular diagnostics program. That is why the sustained growth in molecular testing atBeaumont Reference Laboratory(BRL) teaches some useful lessons.
“The molecular market is untapped,” stated Frederick L. Kiechle, M.D., Ph.D. “There’s a lot of money out there,” Kiechle serves as Chairman of the Department of Clinical Pathology atWilliam Beaumont Hospital, and as Medical Director of Beaumont Reference Laboratory, its for-profit outreach lab. Kiechle launched the molecular laboratory at WBH in 1991, three years after assuming his leadership role.
“Laboratories interested in pursuing a molecular program will face three initial challenges,” observed Kiechle in a presentation at the Executive War College on Lab and Pathology Management, held in New Orleans last May. “The first challenge is to identify opportunities. The second is the actual development of the molecular dimension in your lab. Third is the knowledge needed to do the first two. Creating and managing a molecular testing program draws upon a different base of knowledge and management planning skills.”
Beaumont is a two-hospital health system. Its flagship is William Beaumont Hospital in Royal Oak, a tertiary care hospital which handled 6.5 million procedures in 2004. At 1,061 beds, it is among the largest inpatient hospitals in the country. Beaumont Troy Hospital is a 254-bed community and teaching hospital and is ranked among the nation’s busiest smaller community hospitals.
To develop an effective molecular diagnostics strategy for Beaumont, Kiechle’s team did their homework. “From the beginning, we had four key objectives which we viewed as bench-marks for a successful molecular pro- gram,” Kiechle said. “First, we needed to support the yearly specimen volume growth rate of 10% to 20% at BRL. Second, we wanted to generate revenue cycle metrics to monitor financial data for BRL and the hospital. Third, we immediately wanted to address the need for adequate capital equipment funds for future needs. Fourth, we knew we needed to reduce the number of send-out tests.”
KEY OBJECTIVE ONE :
1. Support Outreach Lab’s 10%-20% Annual Growth Rate
“WE KNEW OUTREACH GROWTH at BRL would help our molecular program, just as the availability of molecular testing would help BRL’s continued growth,” noted Kiechle. “Growth of both programs has been mutually interdependent. Both lab operations benefit from increases in the numbers of clients and test volumes.
“Essentially, the business strategies for growth in molecular testing and out- reach specimen volume at BRL were developed in tandem over the past decade,” he continued. “This supported expansion in our molecular test menu and one measure of success is this statistic: the molecular lab grew 13% in 2004, from 38,792 procedures in 2003 to 43,824 procedures last year.
KEY OBJECTIVE TWO:
2. Generate Metrics to Measure Revenue Growth Cycle
“PRECISE MANAGEMENT requires timely, detailed, and accurate data,” noted Kiechle. “From day one, we organized our program so as to provide us with rigorously-measured financial data. We then used this information to drive management decisions about everything from test selection to technology, equipment, space, and staffing needs.
“For example, William Beaumont Hospital hired a consulting company called Healthworks Alliance, Inc. to review the hospitals’ revenue “pipeline”—more specifically, what we referred to as our ‘leaky pipe’,” observed Kiechle. “The problems identified are familiar to all hospitals and laboratories. Revenue leaks could be attributed to: no referrals, registration errors, insurance not verified, no authorization, chargemaster incomplete, and out-of-date CPT coding.
“With the help of HealthWorks, WBH assembled five different employee teams to analyze these problems and implement fixes,” Kiechle noted. “The teams targeted five specific areas: comprehensive contract management, dedicated authorization, chargemaster maintenance, real-time code scrubbing, and comprehensive denials management.
“Also, each department formed a revenue cycle team to investigate con- tracts and develop metrics for that department, which, in our lab, we now review on a monthly basis,” Kiechle explained. “One issue stood out above the others. It was apparent that we needed comprehensive contract management.
KEY OBJECTIVE THREE:
3. Secure Funding for Future Equipment Needs
“CONVINCED BY OUR DETAILED STUDY of the market and our well-developed business plan, supported with detailed benchmarks and measurements, our administration made a commitment to fund the molecular laboratory’s start-up and initial growth,” stated Kiechle. “This included our request for capital equipment funds. Further, administration understood that it would take at least three years to achieve profitability.”
KEY OBJECTIVE FOUR:
4. Reduce the Number of Send-out Tests
“AS A RESULT OF OUR METRICS STRATEGY, we determined which tests we could bring in-house, and when,” said Kiechle. “Further, our comprehensive contract management initiative contributed to this effort. That team, after its review of BRL’s send-out testing, was able to reduce that number by 31% in one year. This strategy alone generated annual savings of $548,000!”
With these four key strategies as a guide, implementation of the clinical molecular testing program at Beaumont was organized around six target areas. “For example, our first concern was to accurately determine our market share potential, in terms of: 1) geographic area; 2) population; and, 3) physician mix,” stated Kiechle.
“Next, we used this information to determine our molecular test menu. The third, fourth, and fifth target areas involved assessment of our technology, our work force skills, and physical space needs. Sixth, we had to create an effective marketing strategy for our molecular services,” he explained.
MANAGEMENT TACTIC ONE:
Know Market Share Potential for Molecular Testing Services
“OBVIOUSLY IT IS IMPORTANT TO KNOW the mix of specialty physicians and how they utilize molecular tests in your lab’s service area,” commented Kiechle. “We started this process by tracking reference lab client utilization. We wanted to determine which subspecialties were ordering which procedures, and how many they ordered.
“We looked at the number of physicians who actually ordered molecular assays,” he continued. “We wanted to identify how many procedures per physician were ordered in each group practice. This allowed us to zero in on the specialties of internal medicine and ob-gyn as the physicians most likely to regularly order molecular tests.
“The next dimension of our marketing study was to identify the number of physicians in these specialties and estimate the potential annual volume of molecular tests they are likely to order each year,” added Kiechle. “This marketing estimate was con- firmed by doing a population study for our laboratory’s service area.
“Here is where Roche Diagnostics, and their ‘Molecular Center of Excellence’ program provided us with experience and expertise,” noted Kiechle. “With their help, we deter- mined the range of geography around Greater Detroit that could be in the BRL service area. This became our target market.
“Next, we calculated the population within our target market,” he said. “Using the national numbers for molecular diagnostic revenues, we determined what percentage of that national sales figure would be generated by the population in our market against the national population. In our case, that yielded a potential market for us of $43 million for molecular diagnostics testing.”
“We considered a potential molecular market of $43 million to be worth pursuing. This is the economic justification of our business plan and shows the health system administration that we know our business,” Kiechle stated.
“The next step in our marketing study was to determine the specific types of tests and the volume of test orders that will originate from client physicians in our target market,” he noted. “We started by looking at our two hospitals that do testing, Beaumont Hospital at Royal Oak (which includes BRL), and Beaumont Hospital at Troy.
“This uncovered valuable insights. For instance, we discovered that Factor V Leiden was more popular in the inpatient/outpatient arena at WHB in Royal Oak than it was in the inpatient/outpatient arena of the Troy facility or the outreach arena of Beaumont Reference Lab.
“The study also revealed that HPV is extremely popular in the outreach segment of our laboratory business,” Kiechle said. “The lesson to pass along is that it is important to study the target population of referring physicians to identify their ordering patterns before setting up
MANAGEMENT TACTIC TWO :
Selecting the Right Molecular Tests to Offer
“OUR FIRST CRITERION for selecting our test menu was determining which send out tests we could convert to inhouse,” he observed. “Second, we studied send-outs from a profit perspective—that is, looking not just at the volume of tests we sent out, but the charges paid to the send-out lab.
“These charges are rarely recovered by billing the patient’s insurance, due to a Michigan law which does not allow referring laboratories to mark up tests over the cost paid to the send-out lab,” explained Kiechle. “For the tests we bring in-house, we estimate revenue based on our cost to perform the test compared to average third- party reimbursement for that test.
“In 1992, we started with three Southern Blot assays,” Kiechle stated. “We expanded our test menu considerably when we introduced Tm Bioscience’s extended panel for inherited disorders.
“Currently we perform about 30 molecular tests. We will soon introduce the 9-test Ashkenazi panel and an extended inherited thrombophilia panel,” he explained. “We are also expanding our microbiology/viral assays with tests for Herpes simplex I and II (HSV), Enterovirus, and Varicella-zoster virus. That will increase our molecular test menu to about 40 assays. We plan to introduce a new molecular assay about every three months.
“To sustain our profitability, we monitor, on an ongoing basis, which tests are making money and which are not,” noted Kiechle. “Every molecular lab needs to assess its money-makers against its money-losers.
“Molecular labs have an ongoing problem getting paid for some tests. They may have contracts with major health insurers with reimbursement that covers only a fraction of the actual cost of performing certain molecular assays,” said Kiechle. “For that reason, it is prudent to know exactly what major payers will reimburse for a molecular assay before your laboratory makes the decision to set up and offer that test to clinicians.”
MANAGEMENT TACTIC THREE :
Develop an Effective Marketing Plan
“IT’S NOT ENOUGH to have the best clinical molecular testing program in your area if physicians remain unaware of it and how they would benefit,” stated Kiechle. “That is why it is essential to develop a good marketing plan and support the molecular testing with a focused sales campaign.
“Our marketing study told us what molecular tests were wanted by physicians in our service area. We also knew which specialties would utilize these tests regularly,” he explained.
“So the next step was to develop a marketing strategy and get sales reps into the field to let physicians know that they could order these molecular assays from BRL and to educate the clinicians about when to order such tests and how to follow-up the results,” continued Kiechle. “The investment in a sales staff is significant, but the results are worth that investment. We also received a lot of valuable assistance in this effort from Roche Diagnostics’ ‘Molecular Center of Excellence’ program. We didn’t want to go out and reinvent the wheel by ourselves. We wanted our marketing and sales campaigns to succeed from day one.
“Our first marketing step was to produce a brochure that listed all the molecular tests we offered at that time,” stated Kiechle. “Next, we developed individual marketing pieces for each molecular assay. These described, in detail, what the assay could do, how to use it clinically, how to interpret the positive and negative, and what value it would add to patient care.
“Now that we’ve been in the market for several years, we regularly survey test ordering patterns of our physician-clients,” he added. “In offices where we think they are not using tests to the maximum benefit of their practice, we use these single pieces, along with test samples, to educate them about the value of such tests.”
Another key aspect of our early marketing campaign was what we called our “DNA Symposium.” The symposium provides an elementary introduction to molecular diagnostics. It attracts laboratorians from the four or five states surrounding Michigan, as well as foreign visitors from as far away as Europe and South America,” commented Kiechle. “It has increased the credibility of our molecular diagnostics program within the clinical community.”
According to Kiechle, the clinical molecular diagnostics program at BRL has attained six noteworthy achievements. “First, we converted our high-spend molecular send-out tests to in-house procedures,” he noted. “Second, we aligned test charges, costs, and reimbursement to attain a positive margin. Third, we effectively evaluated the specific needs of our market, then filled that need with our enhanced molecular test menu.
“Fourth, our marketing campaign generated sustained growth in our client base—for more than fifteen years,” Kiechle said. “Fifth, we did a good job educating our targeted client segments in molecular testing and utilization. Knowledgeable clinicians are one reason why molecular test volumes grew in such a sustained manner. Sixth, we effectively monitored our clients’ ordering patterns to determine ordering patterns by specialty and to identify opportunities for up-selling.”
MANAGEMENT TACTIC FOUR:
Assure a Qualified Workforce
“A GROWING MENU of molecular tests requires a growing workforce of individuals trained in these technologies,” he said. “At the launch of our clinical molecular testing program, we hired an M.D., a Ph.D., and several medical technologists. Our molecular lab now has a medical director, one Ph.D. technical director, and seven M.T.s.
“We have an interesting M.T. internship program,” Kiechle stated. “We give our interns loans, instead of stipends. If they work for Beaumont for a certain period of time, the loan is forgiven. They have an incentive to stay.
“In 1991 we started our ‘DNA Symposium’,” he continued. “It provides an elementary introduction to molecular diagnostics, with pragmatic training in molecular laboratory testing, processes and operations. It is designed to appeal to all levels of medical personnel interested in molecular diagnostics, from physicians to technicians.
“As I mentioned earlier, this pro- gram is very practical and explains how to make molecular technology work in your lab. This symposium has accomplished two things. It has added to the credibility of our molecular testing program and has helped us identify individuals interested in working in our molecular lab.”
MANAGEMENT TACTIC FIVE:
Anticipate Technology Benchmarks
EVERY MOLECULAR DIAGNOSTICS program needs a strategy for introducing and updating technology to coincide with expansion of its test menu and volume,” noted Kiechle. “This is the payoff to your original objective of securing adequate capital equipment funds for future needs.
“At start-up in 1992, our capital out- lay for equipment was $200,000. At that time we were performing three molecular assays and did a total volume of 307 that year,” recalled Kiechle. “In 1993 we obtained our PCR license and the equipment required to do this type of testing. This helped immensely in our ability to introduce that technology and use it to expand specimen volume and revenues.
“We’ve followed a parallel strategy in our clinical laboratory. Funding to acquire new instrument systems and laboratory automation solutions has allowed us to keep pace with growth in specimen volumes—while generating the revenues necessary to amortize our capital investments and return operating margins back to the lab and our health system,” observed Kiechle.
MANAGEMENT TACTIC SIX:
Secure Appropriate Space
“A MOLECULAR testing program not only needs appropriate equipment and qualified people to do the work,” stated Kiechle, “but also must have an appropriate setting. Our laboratory occupies three and a half floors in what’s called the Research Institute. It is a building designed to properly support clean rooms and other facility features necessary for molecular testing. It is also designed to support workflow for other laboratory processes. The building has easy access for our reference lab couriers, for example. It allows us to support inpatient, outpatient, and outreach testing activities from this centralized site.”
To further build upon these achievements, Kiechle can identify several improvement goals for the BRL molecular testing program. “We want to improve our revenue cycle data,” he stated. “Success ultimately hinges on our ability to make decisions based on hard facts—read ‘accurate, detailed, and timely data.’ We want to carefully look at a full year’s revenue cycle in our department to see how well we’ve performed. That means doing a complete payment validation of every transaction that has taken place.
“As part of this revenue cycle study, we intend to define all the discrepancies between contract charge and actual payment. This is a definite problem on the molecular side. For now we use the test costs that we know, along with average reimbursement figures for those tests. These numbers go into our financial models. We’ve engaged some consulting resources to help us in this effort,” commented Kiechle.
“Patents, licensing fees, and royalties are also an issue that calls for a united response from the diagnostic testing community,” declared Kiechle. “The negative impact of gene patents is substantial and frequently discourages the utilization and development of genetic tests.”
“Another initiative we’ve launched is to do a better job of educating third-party payers about the value provided by molecular-based diagnostics,” he explained. “All of us in the laboratory industry need to become more proactive on this point. We must consistently emphasize and inform payers about the value of the tests we provide.
“Next comes the issue of licenses and royalties,” he continued. “In a not-for-profit health system, these types of costs can be budget-busters. We’d like to find innovative and legal ways to work around patents and licenses. One strategy is to use ASRs (analyte-specific reagents) as a source of new assay protocols.
“Patents, licensing fees, and royalties are also an issue that calls for a united response from the diagnostic testing community,” declared Kiechle. “The negative impact of gene patents is substantial and frequently discourages the utilization and development of genetic tests. This is not good for the laboratory business nor for patient care.”
For Beaumont Reference Labs, the success of its clinical molecular diagnostics program is no accident. From its inception, the executive team at BRL has taken the time to carefully study the proposed services, gather accurate data, and then develop a detailed business plan. This is good management execution and maximizes the ability of the lab to succeed with the proposed business plan.
Armed with good numbers and a good plan, and supported by the expertise from several of its key laboratory vendors, BRL’s lab leaders gained the confidence of the parent health system administration. Pathologists and lab directors interested in expanding their own molecular testing activities should take careful note of this fact.
BRL’s lab administration made a solid business case to their bosses. After gaining the go-ahead, the lab maintained its credibility with the parent health system by achieving the financial and performance objectives defined in the business plan. This creates a collaborative environment between the laboratory and health sys- tem administration.
Molecular Test “Winners”
Seen from these perspectives, the story of BRL’s flourishing molecular testing program is one of good management execution. In its next installment about the WBH/BRL molecular testing program, THE DARK REPORT will look at how this laboratory identifies molecular “winners” and molecular “losers” on its testing menu.