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Anatomy of a lab transition: retaking in-house control.

Anatomy of a lab transition: Retaking in-house control

In 1973, Hahnemann University Hospital became the first university medical center to have a reference lab run its clinical laboratories. Thirteen years later, after a number of other hospitals had followed suit, Hahnemann reversed course again. Our 616-bed tertiary-care hospital bucked the new industry trend and retook direct control of its laboratory.

This article will deal with events leading to the recent takeover decision and with key issues and difficulties addressed during the transition to hospital management of laboratory operations.

By way of brief background: When it signed a management contract with Hahnemann in 1973, Upjohn Laboratory Procedures East created University Laboratory Medicine, Inc., to operate the hospital's clinical laboratories. This arrangement served both organizations well for many years. Then, in 1983, another national reference laboratory chain acquired Upjohn's laboratory division, including the Hahnemann contract.

That change coincided with the introduction of Medicare prospective payment--a development that compelled most of the nation's hospitals to scrutinize their laboratory costs. By March 1985, a new management team at the hospital decided to bring in a consultant, J. Lloyd Johnson Associates of Northbrook, Ill., to perform a total audit of clinical laboratory operations.

The consultant was asked to look at the fiscal resources used to provide laboratory services, review the laboratory's send-outs, and determine whether an alternative arrangement could produce high-quality services at a lower cost to the hospital.

Hahnemann was paying the reference lab on a fee-per-test basis (exclusive of the professional component), with an annually predetermined contract cap. Since total fees always exceeded this upper limit, the lab services were essentially being provided at a fixed price.

The operational analysis required a comparison of the amount that would be paid to the reference lab in a newly renegotiated contract with the estimated capital outlay and operating costs if Hahnemann were to take over the labs. The following points were assumed at the outset:

The quality of in-house laboratory service would be at least as good as the lab service provided by the reference lab.

Tests that were not time-critical would be sent out whenever the cost of performing them in-house exceeded reference lab fees. Allowable turnaround time on such tests was 48 to 72 hours. Low-volume tests would also be sent out.

Stat and routine procedures would be performed on the same instruments.

State-of-the-art computer support would minimize staffing and expedite communication between nursing and the lab.

If the hospital went ahead, it would face great difficulty trying to change instrumention and staffing in all laboratory areas at one time. Therefore, the blood bank, microbiology, and anatomic pathology were excluded from the initial study. They would retain their current technologies and staffing levels.

Microbiology, located elsewhere, would eventually be consolidated into the central laboratory. Several other, smaller labs at isolated locations would also move to the central lab.

On-site instruments and equipment owned by the reference lab that met hospital needs would be bought at net book value.

The consultant created a highly efficient laboratory service that used the latest available technology (in the summer of 1985) to achieve a minimum number of workstations and the most rapid response times. Working closely with directors of the various laboratory divisions or sections, the consultant developed test menus, estimated test volumes, and determined the best instrument configurations to handle the workload. Price quotations were requested from major instrument manufacturers for the cost analysis.

Laboratory information system requirements aimed at minimizing computer response time, operator dependence, and staff time. These requirements included 1) maximum automation with virtually all laboratory instruments interfaced to the LIS; 2) bar-coded specimen labels and high-volume instruments equipped with bar-code readers; 3) an LIS interface with the hospital information system, passing test orders and patient demographics from the HIS to the LIS, and clinical results from the LIS to the HIS; 4) a central processing unit large enough for more than 100 terminals; and 5) the capability for frequent archiving from disk to tape.

The number of full-time equivalents in the lab (excluding M.D.s and Ph.D.s) was compared with projected staffing of our reconfigured lab. Twenty-two fewer FTEs would be needed.

The feasibility study, submitted to senior hospital management in September 1985, concluded that Hahnemann could save approximately $2 million in annual operating expense by running the laboratory itself instead of renewing the reference lab contract. This translated into a 133 per cent return on the approximate $1.5 million capital investment needed to reequip and remodel the laboratory in the first year alone.

Dollar savings were not the only determinant. Other considerations included the impact of direct hospital control on the quality of laboratory services, hospital administration's ability to implement the changes, the laboratory's responsiveness to in-house users, and the impact on the hospital's educational programs.

Administrators next interviewed members of the medical staff to determine their level of satisfaction with current laboratory services. The physicians wanted faster turnaround time on Stat and routine tests, more efficient and more frequent specimen collection procedures, and greater input on assessment of laboratory quality and resolution of laboratory problems.

For their part, administrators were concerned about excessive turnaround time, a lack of cost containment creativity, higher than average test costs in comparison with other institutions, and too many State requests.

After senior hospital and medical management carefully analyzed the feasibility study, these steps were taken:

A medical laboratory advisory committee, consisting of the hospital medical director and key clinical chairpersons, was established to critically review the study and comment on the proposed action plan.

The study also went to several noted pathology chairpersons at leading university medical centers. They were asked to comment on the assumptions that guided the study and on the feasibility of implementing the action plan in a university hospital setting.

Senior management at the reference laboratory was asked to comment on the study and invited to submit a counterproposal with the same quality indicators and comparable cost savings.

The reference laboratory replied that it could not provide all of the specified quality indicators at the reduced amount the hospital wanted to pay. At this point, both the advisory committee and the panel of experts recommended negotiations with the reference lab for an orderly transition of laboratory services back to the hospital. Administration submitted the matter to Hahnemann University's board of trustees in January 1986 and won approval to reassume direct hospital control of the clinical laboratories by September 1986.

To develop a strategic plan for effective transition, we had to recognize our strengths and weaknesses, identify available resources, and assess the impact of the change on laboratory employees. The strategic plan focused on four areas: organization, capital equipment acquisition, reference laboratory development, and outpatient laboratory development.

Organization. The new clinical laboratory's structure and organizational placement within the hospital were discussed at length in the early stages of negotiation. The hospital's consultant surveyed 32 U.S. medical schools and their primary teaching hospitals about laboratory structure, test menus, past and future organizational changes, and management roles and responsibilities.

Most of the respondents followed the traditional organizational chart shown in Figure I, as Hahnemann decided to do. This model includes several doctorallevel scientists with highly specialized backgrounds serving as division directors.

The smooth transfer of some 150 full- and part-time lab employees had top priority. Although these employees were not on Hahnemann's payroll, most regarded the hospital as their employer, and many had in fact worked for the hospital before transferring to the Upjohn payroll in 1973. These individuals now faced their fourth organizational change. Hahnemann management made a firm commitment to ease the adjustment.

Toward that end, several corporate and organizational structures were considered. One option was to purchase University Laboratory Medicine, Inc., the subsidiary corporation that managed the hospital laboratory account for the reference lab. As an alternative, ULMI's employees could be absorbed into the existing Hahnemann University corporation.

There was no advantage to acquiring the subsidiary since we were not prepared at that time to create a for-profit laboratory corporation. We were also unable to negotiate adequate corporate indemnification of ULMI liabilities, to protect Hahnemann against the possibility of lawsuits over any prior negligence.

In light of these factors, the hospital decided to dissolve the ULMI subsidiary and absorb the staff. Hahnemann was not obligated to retain any of the employees, but the quality of the work force was such that the majority, including the entire reference lab supervisory staff, were offered positions in the hospital's clinical laboratories. The majority chose to stay.

A new laboratory administrator was hired, and a national search drew an accomplished clinical pathologist to the lab as director.

Much of the nine months of transition focused on the logistics of bringing the reference lab employees into the Hahnemann fold. The two organizations appointed senior human resources personnel to oversee the process. Salary and benefit parity was a key concern: A Fortune article had listed the reference lab among the top 10 American companies to work for in terms of compensation, benefits, and job satisfaction.

After extensive analysis--job by job, salary by salary, and benefit by benefit--we were pleased to find that Hahnemann already compared quite well with the reference lab. All we lacked were the benefits associated with a publicly held, forprofit company. While we couldn't offer stock options, our annuity package was competitive.

Laboratory employees received pension and seniority credit for their years of service with the reference lab. Those who had been stationed at Hahnemann for at least two years were immediately vested in the university pension plan.

We developed orientation materials, held briefings on benefits, and conducted joint Hahnemann-reference lab personnel meetings to demonstrate our high level of mutual commitment to laboratory staff members.

Capital equipment acquisition. Under the terms of Hahnemann's contract with the reference lab, laboratory instruments and equipment were either owned or leased by the reference laboratory, which also entered into all maintenance and supply contracts on behalf of the hospital. The hospital was entitled to purchase the laboratory instruments at the current book value when the contract terminated in September 1986. These figures were quite high because of the reference lab's depreciation schedule for most of its instruments.

The hospital eventually purchased about 20 per cent of the assets in the lab for about $200,000 and spent another $250,000 for new instruments. Thus we were able to launch the laboratory with state-of-the-art instrumentation for $450,000 (exclusive of the laboratory information system).

The laboratory had to remain operational throughout the transition, but many of the vendors were unable to guarantee delivery on or before the transition date. In addition, our technologists had to be trained on several new instruments. As a stopgap measure, the reference lab agreed to rent selected equipment to Hahnemann until the new instruments were installed.

Data processing was a major concern. The reference lab had purchased the Med-Lab information system in 1979. In 1984, the hospital installed the Technicon Patient Information System and interfaced it to the lab system for admission, discharge, and transfer data.

We now sought a new laboratory information system that would interface with the hospital system for test-order entry and result reporting. A thorough vendor evaluation, including site surveys for the finalists, led us to choose Sunquest Information Systems.

Reference laboratory development. One strategy mentioned earlier was to send out low-volume tests and tests not requiring rapid turnaround. Shifting these often expensive tests to a reference laboratory setting produced economies of scale, and the savings were passed on to the hospital. Hahnemann was very satisfied with the work performed by the reference laboratory and decided to continue using it as the hospital's primary reference facility.

Hahnemann, in turn, had served the reference lab as a reciprocal satellite reference lab for 10 years. Some reference work for the firm's East Coast clients was performed at the hospital, as were several esoteric tests developed by the university's scientists. A new two-year reciprocal agreement for reference testing was negotiated as part of the transition.

Our associate laboratory manager succeeded in marketing Hahnemann's reference testing capabilities to area hospitals, businesses, health maintenance organizations, and others. Besides a number of physicians' offices, we have more than 30 clients, and the list keeps growing.

Outpatient laboratory development. As long as the management contract was in place, Hahnemann held no commercial stake in outpatient testing. Much of this testing was performed at the hospital, but the reference lab handled all of the billing. It rented a phlebotomy station in our physician office building and negotiated separate contracts with each of the practices.

The reference laboratory turned over its outpatient testing business to Hahnemann as part of the transition. Rather than mandate use of our laboratory, we induced all of the hospital's physicians to give us test work from their offices by promising them competitive prices, improved quality, and rapid turnaround. We anticipate $1.4 million in gross outpatient revenue for the laboratory's first full fiscal year, ending June 30, 1988.

Through better scheduling, improved turnaround time, and education of physicians and nurses, we were able to bring daytime Stat requests down from 56 per cent of all tests to about 30 per cent. This paved the way for merging of the Stat and chemistry laboratories.

Mostly through attrition, we accomplished the reduction of 22 FTEs projected in the consultant's report. There were no dismissals, but a few employees chose not to move over from the reference lab. We have, on the other hand, added several new positions, including phlebotomists to handle draws at a growing number of outpatient client sites.

This month we expect to complete a construction project that will consolidate such separate laboratories as microbiology and histocompatibility into the central lab. We will then be able to achieve economy of scale on the second and third shifts.

At the peak of activity, at least 50 professionals were involved in the transition. In addition to consulting general counsel, both sides turned to specialists in corporate, benefit, and labor law. The human resources teams in both organizations had to be mobilized, and administrators, planners, architects, contractors, materials managers, and laboratorians worked together.

For Hahnemann, the most important factor contributing to success of the project was total institutional commitment, from the board of trustees on down. In addition, the medical staff, its leaders, and laboratory management were progressive enough to see the value of moving forward into uncharted territory.

Photo: Figure 1 The laboratory organizational chart
COPYRIGHT 1988 Nelson Publishing
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Author:Sherrin, Arnold A.; McGoldrick, Meg
Publication:Medical Laboratory Observer
Date:Mar 1, 1988
Previous Article:Another view of the lab of the future.
Next Article:Protocols for bedside testing.

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