Competition and cooperation: labs in a complex industry.

Hospital laboratories and reference laboratories have symbiotic relationship. While many hospitals and reference labs compete with each other for local outreach testing, we often simultaneously depend on and support one another at the operational and regulatory levels. Indeed, hospital labs and reference labs are quite interdependent. We often have relationships with the same vendors and provide support to the same physicians. We work side by side through a complex network of resources and regulations to provide the highest quality testing services for patients.

Hospital and reference lab relationships, however, can be complicated--we often compete in one area while we support each other in another. That is simply the nature of our industry, and it is a complexity common in many other industries, as well. Competition is healthy, and it is here to stay Hospitals and reference labs should accept the complexity of our industry and embrace the benefits of competition.

The business of lab testing

The size and complexity of the laboratory testing market are staggering. Last year, an estimated $35 billion was spent of medical laboratory testing in the United States. That figure represents more than 5 billion test results reported back to physicians--90% of which were performed by either a hospital lab or a commercial reference lab.

A doctor orders a test on a patient and, although nearly transparent to most people in the general public, that simple action mobilizes a process involving many other people, resources and, often, other medical facilities. Regulations and self-imposed policies seek to govern virtually all aspects of the process and ensure basic quality standards. Despite the controls in place, however, our testing industry remains largely decentralized. Approximately 6,500 hospital labs spread throughout the country perform a large majority of that testing. In many respects, the lab industry is web-like, with multiple pathways and options that a patient specimen can follow before test results are generated and reported back to the requesting physician.

Combine that size and complexity with growing economic pressures and labor shortages, and we have an intensely competitive environment. It is fairly obvious that with many testing choices available to patients, physicians, hospital and reference labs, competition for each and every lest is fierce.

What is less obvious is the level of lab interdependency, cooperation and support provided at the operational and regulatory level. Virtually every medical testing lab in the United States depends on another lab at some point in the process of producing results on patient specimens--even when the two labs may be fierce competitors in the marketplace. The level of cooperation and interdependency varies from low to high, but it is just as real and present as competition. Perhaps there is no better example of this complicated interdependency than in the relationship of some hospitals and their reference lab partners.

Four faces of the hospital/reference labs relationship

There are four primary relationships between reference labs and hospital labs: suppliers, customers, partners and competitors. Contradictory as it might seem, these relationships form the foundation of America's laboratory testing industry and are the reasons for that industry' success.

* Reference lab as a supplier

The most common relationship for a reference lab to have with a hospital is as its "supplier" of reference testing services. In this relationship, reference labs provide testing services to the hospital by running tests on specimens that the hospital chooses to send out to the reference lab. No hospital lab is staffed or equipped to perform every conceivable test ordered on its patients; such preparedness would be inefficient and cost-prohibitive. Instead, hospitals rationalize the testing that they will perform in-house. Most hospitals choose to send low-volume of high-complexity genomic and esoteric testing to their reference lab partners, opting to perform testing with a rapid turnaround time, less complex and more automated or routine tests in the on-site lab. This is the most common relationship between hospital labs and reference labs. Using a reference lab for certain tests is a cost-effective way to obtain esoteric tests performed in a timely manner.

* Reference lab as a customer

There are situations when a hospital lab can provide services to a reference lab. In such situations, the reference lab is the customer. A reference lab sometimes has a need to purchase testing and other types of services flora local hospitals when certain conditions exist. For example, a reference lab may pick up a specimen from a doctor's office that requires an immediate, or STAT result, and a local hospital may be in a better position to meet the physician's needed turnaround time. Another example of services that may be appropriate for a reference lab to purchase from a hospital is the collection of its customers' patient specimens when it would be less economical or logistically unfeasible for the reference lab to provide that service. In such simulations, the physician receives better service, and patient care is enhanced.

* Reference lab as a partner

In the context of reference labs and hospitals, partnering includes a wide range of activities and relationships that extend well beyond the simple exchange of tests and services described in a supplier/customer association. It might be helpful to look at partnering in two primary arenas--operational and industry:

Operational partnering involves the activities surrounding the lab itself. Reference labs often partner with hospital labs to help improve the hospital's lab operation. Reference labs may offer a wide range of lab solutions, from basic educational and consultative support to high-end, full-blown joint ventures. In between is a plethora of partnering services that the reference lab can provide the hospital client in areas such as courier support for within-network specimen transport, lab efficiency audits, operational benchmarking, lab management, staffing, hospital outreach testing, quality improvement programs and IT products to improve physician-hospital connectivity--just to name a few. For some or all of these services, the reference lab will need to charge fair market value to remain in compliance with anti-fraud and abuse laws.

Industry, partnering involves the activities surrounding lab industry policy, regulations and strategy. Reference and hospital labs routinely partner with each other through state and federal industry associations to influence legislative or regulatory policy and actions. Reference and hospital lab managers often work together to identify best practices geared toward improving quality and to carry out inspections and other activities required by industry regulation. Many hospitals and reference labs partner along the same lines on a daily basis to achieve similar industry-wide outcomes.

Keep in mind, some of the relationships shared by hospitals and reference labs can implicate federal and/or state fraud, as well as abuse and antitrust laws. Therefore, it is important that legal counsel for both the hospital and reference labs review these relationships before finalizing any agreements.

* Reference lab as a competitor

Whether driven by cost pressures or a simple desire to fill an unmet need in the local marketplace, some U.S. hospitals may see local lab outreach as their best and most rational strategic response--despite the difficulties and additional challenges inherent in such a choice. When hospitals engage in outreach testing, they will compete with others also serving the area's testing needs--including other area hospitals and reference labs. As a result, reference labs can find themselves in a competitive relationship with certain hospitals. In fact, reference labs and hospitals often compete with each other for local physician testing, while engaging in some of the other relationships already described.

Incidentally, many hospital administrators have discovered that running a lab outreach program requires a different business model than an inpatient lab. One speaker recently told an audience at a hospital lab outreach conference that a hospital simply needs five things to succeed in lab outreach: money to invest in the outreach operation,

a conducive local reimbursement environment, the ability to offer better value than competitors, expertise in outreach marketing and a supportive hospital administration. Everyone agrees with what it takes to have a successful outreach program, but actually doing it and doing it well is not easy for any lab.

More about competition

Competition within an industry is a good thing. Competition raises performance standards and benefits the consumer. Simply put, our industry would not be successful without it.

The strongest competitors in any industry are those who have discovered or developed a unique and valued position within their market. They have something more to offer their customers than do their competitors. In our own industry, the rules are exactly the same. All labs compete for local physician business. Hospital-based labs or reference labs have to discover or develop their own unique service or position, which they can bring to the local marker. Otherwise, labs risk becoming indistinguishable from others competing in the same space.

Most hospital outreach programs choose to leverage their relationship with the community, its physicians and the local patients. This position may be effective if local testing customers value the hospital's community relationship compared to that of any competing labs. Some hospitals may have a particular academic or testing knowledge as an advantage over other lab competitors. This position may be effective, where local testing customers actually value such expertise, and/or in the absence of other similar expertise. Labs may, in turn, leverage turnaround time, price, test menu, innovation, customer service, or access to patients and managed care plans. Whatever unique services they develop, the lab that delivers the best overall value will be the one that wins the most testing.

More about competition with cooperation

Medical labs throughout the United States are generally very supportive of each other and good at competing aggressively for business, while, at the same time, cooperating in appropriate circumstances. For example, competing labs within the same city will often share reagents with each other when one lab happens to run short. Personnel from one hospital lab may he asked to participate in a lab inspection for a competing hospital lab, a process that confirms and raises lab quality. Competing reference labs throughout the country often purchase testing services from each other or help each other during national emergencies. Labs help each other in many ways, even when they compete.

This combination of competition and cooperation is the essence of American industry. The automotive, telecom, electronics and pharmaceutical industries provide superb models of competing in some arenas while cooperating in others. Hospital labs and reference labs are no different. We have been very successful at managing both competitive and cooperative relationships simultaneously.

Balance itself is both a requirement and a product of our interdependent system. It is the foundation of our system. The best and most competitive among us have learned to treat every transaction as a unique opportunity, and to remain focused on what is most important--delivering the best possible support to physicians, the best possible care to patients and the hest possible value to customers.

Competition and cooperation are healthy. Why resist?

Not everyone shares the same view of our industry's complex interdependence. Some hospitals that elect to pursue lab outreach may choose to sever any ties with reference labs that compete in the same area, even if that lab is the best supplier for that hospital's reference testing. By using more tangible decision criteria, such as clinical quality, access, customer service, innovation, menu and turnaround time, hospitals may eliminate emotional or commercial bias in choosing clinical partners. The highest decision-making standards, and placing patient care at the top of the decision matrix, can only mean success.

Any lab considering a reference lab proposal that promises limited or no competition for local outreach should consider whether the proposing lab could actually mount a competitive threat to local outreach. If not, it is a hollow promise. If so, this type of strategy raises potentially significant legal issues for both parties to the agreement. It certainly is a simple position to take when trying to win hospital reference work compared to the more complicated and interconnected position of competitive hospital and reference lab relationships--but it can be problematic. Seek legal counsel and proceed cautiously with any proposal that portrays competition as a negative influence in the lab industry.

One big, interdependent system

In the end, the American laboratory testing industry is much like the Internet--a world wide "web" of interconnected interests. It is a system wherein patient specimens come and go from place to place: picked up here, delivered there, analyzed by one entity, interpreted by another, sent off for further analysis, results from here get posted there. Back and forth it goes. Competitors, partners, suppliers and customers all have an enormous challenge to bring about the highest possible quality in clinical testing.

We are fortunate to be in an industry that is not only big, but also growing and essential to the quality healthcare of patients. The future is bright, thanks to rapid advances in technology and population demographics that are more likely to use diagnostics and testing services. There is plenty of opportunity--but only if we collectively focus on what is best for the patient. We all want quality medical lab testing, services and information. Our industry delivers test results upon which millions of patients, their families and their physicians depend to make vital healthcare decisions. It may be complicated, but it is our industry, and we are in it together.

R. Scott LaNeve is vice president, marketing, Quest Diagnostics Hospital Services, and has worked in the medical lab industry for more than 13 years. A retired Army Officer, former paratrooper and combat veteran, he is immediate past president of the Biomedical Marketing Association.