West Hills Lab Outreach Still Thrives in California

Community hospital laboratory holds its own in nation’s toughest managed care market

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CEO SUMMARY: Now in its seventh year, the lab outreach program at West Hills Hospital and Medical Center in Southern California continues to produce significant revenues. The goal was to target physicians’ offices in the medical campus around the hospital and provide them a local laboratory testing option. Funded on a shoestring budget, this outreach pro- gram uses extensive outsourcing to control expenses.

HOSPITAL LABORATORY MANAGERS continue to face the ongoing challenges of increasing test quality and expanding the test menu, while at the same time reducing costs and using lab assets more productively.

It is widely recognized that hospital laboratory outreach programs are one effective way to meet these challenges. Yet the number of hospital laboratories that compete in the outreach market is relatively limited. This is particularly true in California, where reimbursement paid by HMOs for laboratory testing services is probably the lowest in the nation.

Outreach Success Story

Yet West Hills Hospital and Medical Center (WHHMC), located in the San Fernando Valley community of West Hills, California, provides compelling evidence that even smaller hospitals can generate substantial benefits from a modest laboratory outreach program. It is a 236-bed hospital, owned by HCA, Inc., a for-profit healthcare corporation.

In 1999, THE DARK REPORT profiled this unique lab outreach program and featured Laboratory Director Joseph McCauley at the Executive War College that spring. (See TDR, August 9, 1999.) His presentation was among the highest-rated that year because his outreach program was achieving significant success on a shoestring budget.

In the first 24 months of its operation, the West Hills Hospital and Medical Center laboratory outreach program had reached 7,000 billable tests per month and annualized net revenues had climbed to $400,000. To minimize capital investment, WHHMC outsourced the functions of courier services, client services, billing, and collections to United WestLabs, Inc. This relationship continues today.

“Our outreach program is going strong,” stated McCauley. “One important reason for our continued success is the physicians we serve. In our region, many doctors want a laboratory that can offer better service than the big reference labs. We compete on quality and physicians in our community tell us we do a better job. For example, because we test up to 300 specimens per day, in contrast to the thousands at a national lab, we can turnaround results faster. For the most part, results from all the tests performed in our hospital lab are reported to client physicians the next day after the specimen was collected.

Compete On Service

“There’s another service difference. In our laboratory, quality, customer service needs, and questions from clients are answered at all levels within our labs. Physicians like the fact that they have direct and speedy access to the med techs, pathologists, and service reps who personally handle the specimens, the testing, and the reporting,” observed McCauley. “This is one competitive advantage our hospital lab has over the bigger laboratory companies.”

In the four years since 1999, out- reach revenues have stabilized. “Because of how we define our service area, we knew the growth of the outreach program would plateau at some point,” said McCauley. “Currently, our outreach program is doing about 20,000 tests per month. Annual operating profit exceeds $1 million and our average cost-per-test remains under $3.00.”

More In-House Lab Testing

Additional specimen volume from its outreach program allows West Hills Hospital and Medical Center to set up and perform more tests in-house, including hepatitis testing. Not only does this reduce send-out volume, but it provides faster turnaround time (TAT) for both inpatient testing and outreach specimens. “We only refer about 4% of our test volume,” noted McCauley. “We’d like to whittle that number lower.”

Hospital laboratory directors and pathologists should pay close attention to another surprising attribute of the WHHMC lab outreach program. Not only are physician-clients fiercely loyal to their hospital laboratory, but they are willing to split specimens to sustain the business relationship.

“Hospital lab directors and pathologists considering their own outreach program should recognize that physicians show lots of loyalty to their hospital’s lab outreach program,” declared McCauley. “Obviously we cannot bid for most managed care contracts. Nor would we want to, given the low reimbursement that we would have to accept. So we have a simple business strategy.

No Managed Care Contracts

“When asked about managed care con- tracts, we simply state that we don’t bid for these contracts, but we are willing to provide top service for those specimens the physician is willing to refer to our laboratory. Few physicians in our community take issue with this approach. Our client physicians load HMO specimens into one of the national laboratory boxes and put their PPO and fee-for-service specimens into the WHHMC laboratory box,” explained McCauley.

Laboratory directors and pathologists should not overlook the significance of this situation. WHHMC has built a viable lab outreach business without managed care contracts. Its client physicians are willing to split specimens, sending HMO specimens to the larger lab competitors and sending PPO and fee-for-service specimens to WHHMC.

This means WHHMC is testing specimens that have reasonable reimbursement, while its lab competitors are getting only the capitated and highly-discounted specimens. THE DARK REPORT observes that this denies lab competitors the “pull through” testing they need to offset the unreimbursed costs involved in testing specimens covered under the HMO contract. That makes it more difficult for bigger lab competitors to justify patient service centers and other lab infrastructure around the WHHMC medical campus.

Physicians get an additional benefit from using the WHHMC lab outreach program that they cannot get from other lab competitors. “Our LIS has been configured to allow physicians to access both the inpatient and outreach laboratory test results for their patients,” he said. “Our Web connectivity allows them to access these lab test results from their office, their home computer, and even their Palm Pilots and other PDAs.”

Advice To Hospital Labs

McCauley is enthusiastic about the benefits of a laboratory outreach program, particularly for smaller hospitals. “Every hospital laboratory should seriously consider this business opportunity,” he noted. “Just start on a small scale. We did it slowly and carefully and didn’t create the pressure to achieve certain numbers by certain dates. We learned by doing.

“We were also willing to get help in areas that were not our expertise,” added McCauley. “We used outsourcing to accomplish that. We enlisted experts to help us get started the right way. They had the experience in such sophisticated commercial laboratory testing business skills as client service, billing, and collections.

Outsourcing That Works

“The outsourcing arrangement has worked great for us,” McCauley said. “We skipped all the weakness stage and went forward with the strength of their expertise. There is alignment of goals because United WestLabs, our outsourcing vendor, wants us to succeed and sustain the business relationship into future years.”

The outsourcing contract is renewed every few years. “The money we pay is not tied to the financial performance of WHHMC, but rather a fixed dollar amount per month,” explained McCauley. “During our start-up phase, monthly fees were in the range of $15,000. They have risen only slightly during the past seven years, despite the increase in our specimen volume.”

Four Lab Outreach Goals

At the inception of the lab outreach program in 1997, McCauley had four goals:
1)to fully utilize staffing on second and third shifts; 2) to fully utilize equipment during every 24-hour cycle; 3) to perform tests every day instead of several times per week; and, 4) to generate additional revenue for the hospital.

“We’ve achieved each of these four goals,” he said. “As planned, we get more productivity out of our laboratory assets. Despite the substantial increase in test volume, we’ve only added four med tech FTEs during the past seven years. The additional volume has also allowed us to acquire automated instruments that further improve our productivity.”

Hospital Outreach Success

For hospitals of all sizes, a laboratory outreach testing program can generate considerable benefits, both financially and strategically. The story at West Hills Hospital and Medical Center is compelling because: 1) even as a small hospital in the nation’s most difficult managed care market, it has enjoyed a profitable outreach business; 2) it shrewdly used outsourcing to bring in the expertise it needed to offer competitive services to the physicians’ office market; and 3) it gives physicians extra value, such as access to both inpatient and outreach laboratory test data.

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