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Case history of a lab consolidation; these two hospitals traveled a long road, from informal test sharing to an extensive merger study, to get their successful joint lab venture.

Case history of alab consolidation

Our thriving consolidated liboratory, formed to serve two Chicago-area community hospitals, recently celebrated its sixth birthday. But as an idea, the joint venture is quite a bit older than that. Gestation took a long time.

The story dates back to the early 1960s, when a single group of pathologists began working with the two institutions. Highland Park Hospital currently has 330 beds. Lake Forest Hospital, located six miles to the north, has 156 beds and also operates an 87-bed extended-care facility.

The pathologists started an informal program of shared testing in the mid-1960s. For example, when Lake Forest acquired a chemistry profiling system, all the panels from both hospitals went there. Highland Park, in turn, handled some basic immunology testing for Lake Forest. Whenever a new technology became available at one hospital, its laboratory shared the expanded capability with the other.

Eventually, problems threatened this arrangement. The laboratory staffs expanded, each hospital wrestled with issues of space and capital, and differences of opinion arose about service levels. It becomes difficult trying to add new services when you have to work with two different administrators, two chief financial officers, two personnel officers, and two boards of directors.

The pathologists were concerned that the sharing arrangement would atrophy instead of grow. This led them to talk with the hospital administrations about merging the labs. In 1974, a committee called the Laboratory Advisory Board or LAB was formed to study a possible consolidation.

LAB was composed of equal representation from both hospitals and the pathology group. A consultant was enlisted to identify methods of consolidation and steps that had to be completed along the way. The committee, insisting on in-depth discussion of all issues, felt the study would take one year. It took four.

Committee members had a variety of legal, financial, and operational concerns. There were potential legal ramifications, for example, and two employee benefit programs to be combined. No one was sure what form the organization would take. Questions and doubts arose about the tax situation, unrelated business income, the boards' fiduciary responsibility, and pathologists' equity in the joint lab venture. Then came the service issues--availability of testing, possible deterioration of service, and staff morale. Not surprisingly, too, employees at both laboratories were anxious about their future.

During this period, it became apparent that any of the three LAB factions--the pathologists, administrators, or board members --could effectively derail the study and possibly even the merger. One plus, though, was involvement of only a single pathology group.

Though the sharing arrangement continued throughout these delays, it did not grow. Everything, including lab capital expenditures, was on hold pending the merger--except that the merger never seemed to happen. Meanwhile, the committee kept amassing data until the pile of summary documents was four feet high.

The committee ended its fourth year of study with reams of financial projections and several structural alternatives. It finally reached a firm conclusion in favor of consolidation.

Objectives included better service for physicians and patients, and better utilization of staff and instrumentation. Pooling laboratory procedures at a single site would eliminate duplication of capital and take advantage of economy of scale. The larger variety of combined work, including business from outside sources, would broaden the scope and improve the quality of testing. Consolidation also was seen as a way to enhance the working environment for technologists and pathologists and create new educational and professional opportunities.

Several different operating models were developed. One option would have maintained the status quo. This was the least acceptable plan to the pathologists, who had waited years to get beyond the informal sharing program. Another possibility was to stop all sharing and let each hospital follow an independent course. Or the hospitals could combine the labs in some form without pursuing outside business.

The model chosen was to combine the labs and pursue outside business.

The committee then evaluated several structures for the combined laboratory. The pathologists preferred a plan in which they would share equity in a for-profit corporation owned in three equal parts by themselves and the two hospitals. However, the concept, in the 1970s, of community hospitals owning a profit-making business created discomfort among some members of LAB.

Prospective payment has since made the idea palatable to many community hospitals. Both of our hospitals later restructured and now have for-profit arms.

Another issue blocking agreement was part-ownership by the pathologists. Some hospital officials perceived a possible conflict of interest.

After an emotional debate ranging over several months, the committee endorsed a joint venture. The labs would be consolidated in a not-for-profit partnership owned by the two hospitals.

This plan received a go-ahead from the hospital boards in late 1978, but it still had more than a year to go before becoming a reality. Implementation began in May 1979. Over the next eight months, procedures and systems were designed and planned to enable the joint venture to start operation Jan. 1, 1980. Benefit programs, payroll systems, pension plans, accounting systems, and even new envelopes and letterheads had to be considered. The process of relocating certain tests from one laboratory to the other and consolidating department also required careful planning and timing. Transportation of specimens and results required purchase of an automobile and hiring drivers. Figure I summarizes the major steps to formation of Consolidated Medical Laboratories.

The tax-exempt joint venture is governed by a board of directors consisting of one pathologist, the two hospital chief executive officers, and one board representative from each hospital. Day-to-day operational direction comes from an operations group made up of the laboratory medical director and laboratory manager from each hospital and the administrative director of the joint venture. A small office staff handles business and personal systems.

The hospitals contract with CML for laboratory services, and CML has an agreement with the pathologists for their services. The agreement automatically renews every three years if neither side objects.

CML sells testing to the hospitals at cost. The total that both pay, determined each month, is the laboratory's gross expense minus income from our outreach program. This operating cost is then allocated to the hospitals according to individual utilization.

Hospital laboratory employees were understandably concerned about their jobs under the new setup. Many meetings were held to reassure them.

The two hospital benefit plans had to be consolidated into one for CML employees. In most situations, where a benefit was different, the better of the two was selected since the hospital boards had decreed that no benefits would be lost. The boards also insisted that no jobs would be lost and that no one hired prior to the joint lab venture would be forced to relocate to another facility.

Taking the best of both benefit plans wasn't as simple as it sounds. Medical coverage, life insurance, pension plans, and other features were entirely different. We needed the assistance of consultants to determine what would be fair.

The business plan originally called for a freestanding lab located between the two institutions, but that has yet to develop because of an unfavorable cost/benefit ratio. We did proceed to specialize to a degree within each hospital. Microbiology and histopathology were centralized at Highland Park, which has the larger lab. Technologists who relocated, not a great many, did so voluntarily. The Lake Forest lab handles all RIA testing and houses our outreach program, which has grown beyond original expectations. (We also operate satellite testing facilities in the area.)

One of our major aims was to set up a reliable courier service. During the days of informal sharing, hospital volunteers had shuttled the specimens back and forth, but a consolidated, separate laboratory organization could not rely on that kind of system. We started with a single car and two drivers. Now there are three cars and nine part-time drivers making pickups and deliveries up to 12 hours per day, seven days a week. The vehicles average 40,000 miles a year. Outside clients and the satellite labs account for two-thirds of the mileage, hospital runs for the rest.

An increase in combined expenses for the first and second years was forecast, and indeed took place. The hospitals had held off on capital expenditures for their laboratories pending the outcome of the consolidation study. As a result, a number of instruments had to be replaced.

A laboratory computer system was also an integral part of the joint venture. The hospitals had estimated a $200,000 outlay for this purpose, but the actual cost was $580,000. Even so, the single system probably saved the hospitals $200,000 to $300,000 when compared with the cost of computerizing separately at each institution.

Overall, the various participants are very pleased with CML. Expenses in 1985 were less than in 1982, while services have improved and expanded, test volume has increased, and turnaround time has decreased. Each objective developed for the consolidation has been met or exceeded.

Clinicians like the new laboratory computer and have had very few complaints about CML. In fact, when ancillary departments were studied recently, the laboratory ranked first at both hospitals in terms of service and physician satisfaction.

Table: Figure I The steps to consolidation
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Copyright 1986 Gale, Cengage Learning. All rights reserved.

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Title Annotation:part 1
Publication:Medical Laboratory Observer
Date:Feb 1, 1986
Words:1528
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