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Integrated laboratory networks: ideas that work - and some that don't.

Ideas that work - and some that don't

The future of local and regional healthcare lies in integrated delivery systems (IDS). What role does the clinical laboratory play in this emerging picture? Whether a laboratory system develops as a component of the IDS or as a separate entity, it must lower costs and provide better outreach within the area it serves. Widespread laboratory consolidation isn't coming - it's already here. But its progress has been hampered by thorny issues related to politics, ownership, and information systems. If laboratory consolidation efforts can't provide value in terms of consistently high quality, better (not increased) utilization of testing, and continuity of care, they will fail.

Associated Regional and University Pathologists, a national esoteric testing laboratory based in Salt Lake City, UT, has worked with its clients to consolidate and integrate regional lab systems. Every region and community has unique needs that shape the structure and organization of lab systems; and it is therefore important to develop a model that best provides lab services to each population. Here we assess the challenges posed to the lab by today's healthcare marketplace and offer advice on forging lab organizations that will survive and succeed.

Competing in today's market

Although the term is managed care, managed care organizations and government payers are still primarily managing costs, mostly through reduced utilization and expense. The capitation of outpatient and nonpatient (or outreach) laboratory testing sets a per-person limit on reimbursement. Although this motivates laboratories to minimize unnecessary- testing, test utilization is ultimately determined by the ordering physician. To control utilization, Medicare now requires physicians to indicate a test's medical necessity, and has defined test panels for organ- or disease-specific conditions. Some laboratories have responded by offering fewer test batteries in favor of single-test ordering. Indemnity payer plans are following Medicare's lead, and the transition is happening in the inpatient segment as well.

As a greater proportion of medical care is provided on an outpatient basis, a growing percentage of laboratory testing is being performed in outpatient or nonpatient settings. In ARUP's experience, this shift has resulted in a sicker inpatient population and increased esoteric testing within the hospital. Hospital-based laboratories must extend the scope of their services outside the hospital, or lose volume and its associated efficiencies.

Business models

Reduced inpatient testing and the squeeze from third-party payers aren't the only headaches for hospital labs. These days, some health maintenance organizations separate outpatient laboratory services from contracts with hospital providers, heating up competition from commercial laboratories for outpatient business. Hospital laboratories have responded by adopting variety of business models, with varying track records of success.

Expanded outreach programs. In the past, hospital laboratory outreach efforts have generally been limited to hospital-affiliated physician's offices, and rarely competed with independent laboratories beyond the local vicinity. Today, efficiency-minded hospitals are looking to expand volume aggressively through these outreach programs. A 1995 survey by the Clinical Laboratory Management Association suggested that 25-30% of hospitals were marketing laboratory services to other segments such as physician offices, nursing homes, and home health organizations. We have seen the number of such outreach programs grow significantly in the last two years, with big commercial laboratories losing market share to hospital labs.

Laboratory networks for shared testing. To compete more effectively for managed care contracts, one scenario calls for a network of labs, whose members offer expertise in various specialties, to share testing among themselves. The goal is to increase volume and (theoretically) cut the incremental cost of each test. AS a rule, these networks are not economically aligned - in other words, have no financial arrangement such as a common ownership - and many have formed independently of hospital networks. They are managed by committees made up of representatives of member facilities.

In practice, such networks have run into several obstacles. At the outset, most networks will share only a select group of tests, so cost reduction is not realized on most tests. Because the majority of tests are still performed on-site, there is little reduction in labor, supply, and equipment costs. Transportation costs rise because specimens are shipped to several locations. Labor costs and error rates increase because of duplicate entries and manual transcription. The standardization of laboratory information systems that would be necessary to eliminate such problems among networked hospitals is difficult and costly. Finally, market or political pressures within noneconomically aligned networks threaten their long-term viability. To date, shared testing networks have won few managed care contracts, and there are other models that can accomplish the goals of broad access and competitive pricing.

Community core laboratories. A better route to efficiency and competitiveness may be to form one core laboratory and downsize the other hospital laboratories in the network. Typically, a core laboratory model is an agreement between hospitals, pathology groups, and/or independent laboratories. Equity and assets (e.g., personnel, equipment) are combined either into a new freestanding facility or into an existing hospital or independent laboratory. Participants share both financial risk and profits. Efficiencies include not just economies of scale but also electronic information transfer and the logistics of specimen transfer. In our experience, these regional core laboratories have succeeded in capturing managed care business through hospital contracts.

Effective consolidation is driven more rapidly when the participating organizations are commonly owned, as by a hospital chain. The testing menu is determined by each hospital's needs, with the balance of testing performed by the core laboratory. Consolidation of volumes reduces reliance on a reference laboratory. All testing not performed in the core laboratory is handled by a reference laboratory until volume justifies establishing an assay within the core facility. Outreach services are provided by the core lab as well as by participating hospitals.

Although core laboratories tend to be more cost-effective in the long run and can compete with commercial laboratories more effectively than the shared testing networks, they present their own challenges. The initial capital required is greater than in a shared testing arrangement, political issues can be difficult, and the necessity to downsize is immediate. They also create a high fixed cost-per-test for those tests that must remain on-site at the hospital to accommodate patient need. Administrative support is critical. Nevertheless, successful laboratory networks, where feasible, will evolve into core laboratory situations, focused on effective local and regional care.

Regional laboratory systems. As consolidation unfolds, we expect regional laboratory systems to evolve to include all types of laboratories: hospital, commercial, academic, and tertiary. Multispecialty groups and physician offices will direct more testing toward regional rather than national labs. Community core laboratories will service local hospitals and other traditional testing sites. Large geographic regions may include more than one core laboratory to accommodate turnaround time requirements. Local testing sites, including hospital laboratories, will perform only those tests necessary for immediate patient care. A core laboratory may be a former independent reference facility, hospital laboratory, or a new facility created when other lab sites merge.

The goal of these regional systems will be to provide continuity of laboratory information for outpatient and inpatient care. Regional laboratory systems will be able to add diagnostic and therapeutic value to the entire healthcare episode. A single information system will make data available for analysis of test utilization and practice guidelines.

Outsourcing laboratory work. From a hospital administrator's perspective, the laboratory is a cost center, devouring 5-10% of the total system's budget. The hospital laboratory is seldom managed as a business, and the pathologist is often all but invisible. Under these circumstances, the laboratory may easily come to be seen as a commodity that can be outsourced.

That strategy is under consideration by hospital administrators seeking to reduce costs rather than to increase revenue through a growing outreach business. If some combination of outreach and inpatient testing is not enough to fully utilize the lab's testing capacity, the laboratory may become a fiscal liability for the hospital. On-site laboratory test mixes can be reduced to as few as 50 to 100 tests, with the balance of testing referred to commercial labs that provide quick results at reasonable cost.

Outsourcing hasn't been a widely successful strategy because of the difficulty of matching the turnaround time of hospital laboratories, and because of physician demands to keep testing on site. However, it remains an option if the plan can yield savings without adversely affecting patient care.

But what if that 5-10% of the hospital system's budget contributes 70% of its diagnostic information, attracts outreach business, reduces the cost of the total episode of care, and forges liaisons between the pathologist and other laboratory professionals? In this picture, the value delivered should establish the laboratory as a core competency for the healthcare system.

Joint ventures with commercial labs. Joint ventures between commercial and hospital-based laboratories are being considered potential win-win situations, achieving economies of scale by combining test volume. The hospital defers all or part of its laboratory expenses to the commercial laboratory in the form of a management agreement. The commercial lab gains the hospital's business, a local facility for performing its regional testing, and an advantage in retaining physician office business. For commercial laboratories, it's an offensive strategy to eliminate hospital-based competition or enhance the profitability of local business. The hospital finds itself in a defensive position: It immediately reduces its laboratory expenses, but forfeits outreach growth and control of its laboratory. Historically, joint ventures have not achieved much long-term success.

Make/buy decisions. Each of the models presented here requires make/buy decisions evaluating which tests to perform in-house and which to refer to an outside laboratory. This evaluation process must be made at every level, whether in a hospital, core, or reference laboratory. The decision rests on service requirements, cost, and technical expertise. When this concept is explored seriously with a capable reference laboratory, the amount of testing referred out of the hospital laboratory tends to increase significantly.

Envisioning the future

Right now, the standard approach to cutting laboratory costs per episode of care is to perform fewer tests. Ultimately, disease management protocols, such as critical pathways and practice guidelines, should optimize the delivery of care through more focused testing to reach reasonable diagnostic certainty and reduced downstream costs of indiscriminate testing.

In some cases, reducing the overall cost of care might require more testing. Other factors may boost test utilization as well, such as technological advances, emerging diseases, an aging population, insurance companies' expanding use of screening, and increased demand for testing from more educated patients. Overall, these forces may balance the economic pressures to reduce test volume, causing volume to remain more or less constant - although the location and utilization patterns of testing will definitely change.

The pathologist's role. Pathologists hold the key to integrating laboratory information within the healthcare system. Despite the fact that 70% or more of the information used for medical decision-making comes from the laboratory, many disease management teams fail to include a pathologist. Without pathologist involvement, critical decisions may be left to administrators and physicians who lack laboratory expertise.

Unfortunately, many pathologists have chosen to remain uninvolved, focusing their attention on anatomic rather than clinical pathology. The independent contractor relationship of many pathology groups to hospitals fosters this tendency. Whatever their reasons, many pathologists have allowed themselves to be left out of the decision-making loop.

An active, involved pathologist adds value to the delivery of healthcare in several ways. Clinically, pathologists can promote more effective test utilization and enhanced patient care. As clinical liaisons between the laboratory. and the medical staff, respected pathologists can be proactive members of disease management teams, designing clinical pathways to improve outcomes beyond mere cost reduction. The pathologist committed to guiding a competitive laboratory must do the following:

* take an active leadership role whenever possible and appropriate

* help develop community-based disease management strategies

* contribute to collective medical expertise

* be highly responsive to clinical staff and patient needs.

A consolidation case study

For a glimpse into the evolution of a mature regional laboratory system, take the example of the laboratory services of Intermountain Healthcare, a system of 22 hospitals and three large clinics based in Salt Lake City. IHC, which covers a three-state area with 52% of its market share, has made significant progress toward its mission of enhancing patient care through full integration of healthcare services.

IHC faced managed care head-on by creating a Health Plans division, currently coveting just under 1 million lives through its own managed care plan and other affiliations. In 1993, IHC began integrating its physicians; more than 400 of them are now on IHC's payroll, and 200 of them are providing primary care. The system has also become a pioneer in physician-directed critical pathways.

Laboratory consolidation at IHC began in 1988. IHC laboratory services sought to improve quality through process review, standardization of instrumentation and procedures, and staff empowerment. These improvements allowed IHC to eliminate duplication of work and ensure uniformity of technical procedures. Another goal was to expand beyond inpatient testing to outreach and outpatient work.

First, IHC consolidated esoteric chemistry, immunology, virology, and infectious disease tests at specific hospitals considered centers of excellence. They also standardized equipment and reagents among all testing locations. Subsequently, expenses decreased as follows:

* Standardization among hematology autoanalyzers resulted in savings of $527,000 in capital expenditures during the first year of implementation.

* Standardization of coagulation instruments and reagents produced a $667,000 savings over a 5-year agreement.

* Operational savings in routine chemistry departments (e.g., reagents, FTEs) saved $1.8 million over a 5-year agreement.

* Over the same period, chemistry instrument standardization yielded $2.1 million in savings.

The IHC laboratory services didn't just consolidate tests. They provided automated, rapid-response laboratories at each testing site to handle essential inpatient testing and improve the efficiency of standardized equipment. Outreach testing helps compensate for low-volume periods of inpatient testing. All locations use a common laboratory information system (LIS).

Standardization was phase one of lab integration for IHC. Phase two, the management of test utilization, is now underway. Within IHC, the clinical pathologists have been involved in defining clinical pathways with lab support (the current disease management team is chaired by a pathologist). Systemwide protocols to improve patient care have ultimately resulted in cost reductions. For example, adverse drag reactions were cut by 50% (1991); the cost of total hip replacements decreased by $280,000 in the first year (1994); the length of stay for patients undergoing hip replacement was also trimmed; and post-operative wound infections for all procedures decreased by 80%.

IHC's relationship with ARUP reduces expenses through consolidation of all sendouts and 100% compliance with the ARUP laboratory agreement. Those make-versus-buy decisions described earlier have improved quality and hastened turnaround time while reducing the cost of tests formerly performed in house. Successful outsourcing of tests is facilitated by a direct computer interface between ARUP and all IHC locations.

IHC laboratory services has taken elements of a shared testing network and forged a standardized and consolidated laboratory structure. IHC's hospitals are wholly owned, and the laboratory effort has had corporate support. The system's Health Plans division establishes a patient base that uses IHC's laboratories. It has truly developed into a regional laboratory system within its own integrated delivery system.

Consolidation: What it takes

Hospital laboratory networking has been a hot topic in the search for competitive strategies, but networking doesn't automatically promote practices that cut costs. And without cost reductions, it is safe to say that laboratory networking will be a short-lived flower. Networks unwilling to make major sacrifices for success will soon wither, ultimately spending more on consulting than they ever saved in costs. You need to consider the following points when planning consolidation strategies.

Economies of scale. Networks formed to share only a few tests will fail to make a significant dent in costs, if only because national reference laboratories can beat their prices. Significant volumes will be necessary to offset the associated costs of management, logistics, and data communications. Consolidation through test sharing will only succeed if the network participants either plan for extensive test-sharing immediately or use test-sharing as a step toward the core laboratory model.

Common goals. Successful long-term consolidation requires a commitment to growth, not just reducing the cost of inpatient testing. Growth happens when participants work together to move beyond inpatient business and compete successfully with commercial laboratories for the outreach segment.

Hospital administration support. Consolidation demands strong support from hospital administration, and it takes time and money to achieve long-term efficiencies. Administrators who are unwilling or unable to invest will force the failure of lab consolidation. Return on investment cannot be expected in a single year. In some cases, such as when a core laboratory is planned and implemented, positive returns will take much longer.

Leadership. Laboratory consolidation efforts must have strong leadership that lasts beyond the talking stage. Our company's experience with alliance partnerships and local hospitals has demonstrated the complexities of integrating services in two or more organizations. Most laboratory systems today are trying to integrate four to six facilities and cultures, and sometimes numerous community hospitals. For consolidated laboratories to perform as one entity, they require a decision-making body with appropriate representation and authority to make and enforce policy and procedure.

Politics. Political challenges to successful laboratory consolidation abound. Participants naturally defend their own operations, especially in laboratories that have achieved their own improvements in quality and efficiency. All parties must air these issues and find solutions, or energies will be wasted. Everyone must be willing to give up something good - whether it be jobs, facility, testing, or computers - to obtain something better. Be prepared to wrestle with seemingly simple issues such as phlebotomy coverage, personnel (salaries and benefits), education, point-of-care support within each hospital, and the experience of staff and couriers.

Resources. Laboratory systems must allocate significant resources in finances, time, and leadership to reduce costs and become more competitive.

Managed care requirements. To compete for managed care contracts, laboratory systems must demonstrate that they can function as one unified entity. This includes common billing systems, utilization reporting, test methodologies, specimen collection guidelines, and turnaround times.

Information systems. Members must be willing to invest time and money in information systems that are capable of facilitating consolidation. Integrating information systems and standardizing databases are major parts of the infrastructure that allow multiple laboratory sites to function as a single entity.

When testing is consolidated into a core laboratory system, a common LIS is the most economical option. The justification for this is that if members really support the core lab, the decrease in local testing may dictate downsizing their local LIS configurations (licensing, hardware, maintenance, and staffing) in proportion to current volume.

A single LIS is a boon when expanding laboratory services and competing for managed care contracts, physician office business, and other outreach markets. A single LIS capable of outreach support will go a long way in providing integrated services such as utilization reporting. One system must seamlessly provide requisition forms, billing/accounts receivable, and the like, and a common LIS is the only way to provide such service easily and cost-effectively.

The technology of installing and supporting one LIS for a network of hospitals, which emerged in the past 5 years, is maturing rapidly and can now be provided by most major LIS vendors. Hospitals that retain their existing LISs must interface to the LIS in the core lab to pass test orders and results back and forth.

Generally, LIS vendors prefer not to develop custom interfaces, and when requested, usually do so reluctantly and at considerable time and cost. When a network has only one or two stand-alone LISs (separate from the information system in the core laboratory), the most economical option is to develop the required interfaces in a point-to-point fashion with the core lab LIS. If a network has numerous freestanding systems, however, the services of an interface engine may be the best way to complete the system.

Legal issues. The organizational structure of a laboratory network has important implications for legal, billing, and other functions. Networks may have two distinct organizational structures: economically aligned under common ownership, or noneconomically aligned. In the latter case, nonrelated systems join together in a nonfinancial structure to reduce costs and deal with managed care. Economically aligned labs can bid for managed care contracts through their corporate management structure. The hospital laboratories should demand these contracts of their corporate management as part of the inpatient agreement otherwise the laboratory work may be contracted separately with a commercial lab.

For noneconomically aligned laboratories, the messenger model offers a way to bid collectively while avoiding antitrust issues. In this model, an independent third party, such as an accounting firm, is hired to collect price data and develop a fee schedule for all participating laboratories. The third party then negotiates an agreement between the payers and providers. The Federal Trade Commission has ruled in favor of two such networks on the basis that they offer the likelihood of producing significant efficiencies if pricing agreements are allowed among the member laboratories.

Billing functions. Lab systems that win managed care contracts usually need a central billing system. Alternatives for baling functions include hiring an outside billing service or consolidating the data and performing the billing in-house. Existing billing resources within a hospital setting may be most cost-effective, but only if the system can collect all appropriate data for network-wide laboratory billing.

Utilization reporting. Most managed care organizations require utilization reporting, which presents similar challenges to those of billing. Data for test orders and results, patient demographics, and physician information must be consolidated for all laboratories involved in the managed care contract. Again, a single LIS is the best bet.

Using consultants. Getting the members of a laboratory group to identify their region's unique opportunities can be tricky, and consultants can be useful facilitators. Members may be reluctant to openly discuss territorial, political, economic, or other issues without the help of a neutral party. Consultants can also share experiences of other laboratory consolidations to pinpoint strategies that are most likely to succeed or fail. They must work with pathologists, lab management, and hospital administration.

With or without consultants help, every laboratory system must be able to achieve its goals based on the local community's needs. Traditionally, responsibility for implementing consolidation lies with laboratory members. Although "consultant implementors" (those hired to implement the consultant's recommendations) may become more common in the future, consolidation works best when the laboratories themselves shoulder the burden of planning and implementing their own changes.

Putting it together

The laboratory market continues to change and mature. The past decade saw widespread consolidation of departments within hospital labs. Now consolidation is underway at the community level, with many of the same problems and territory struggles. The motivators are also the same: to reduce costs and ultimately improve patient care. Hospital labs are standardizing and centralizing, en route to meshing the laboratory function into integrated delivery systems. For many hospital lab groups, the core laboratory concept has become the goal.

As we analyze successful laboratory consolidation and integration, six common themes emerge:

1. A commitment from each partner to provide capital to the network venture is critical because economics drive consolidation.

2. Consolidation occurs more quickly when driven by common ownership of the hospitals involved.

3. The laboratory entity must have a hospital affiliation to gain access to patients.

4. Organizational leadership at the laboratory level (pathologists) and hospital level (administrators) is essential to form a centralized management structure.

5. A common LIS best achieves standardization of services including information for management and billing purposes.

6. In the long run, proper disease management and appropriate use of laboratory data will result in much greater savings than cost reduction strategies.

The unique needs of local communities and the individual cultures of each healthcare entity make it crucial for laboratory systems to control their own destiny. As the industry evolves from managed costs to true managed care, laboratorians must communicate the real value of their services. When that happens, the laboratory will be correctly viewed as a core competency of healthcare.

Business models for hospital laboratories

* Expand outreach to fill excess capacity.

* Form laboratory networks for shared testing.

* Establish community core laboratories.

* Develop regional laboratory systems.

* Outsource laboratory work.

* Form joint ventures with commercial laboratories.

Consolidation and competition: The pathologist's role

* Take an active leadership role whenever possible and appropriate.

* Help develop community-based disease management strategies.

* Contribute to collective medical expertise.

* Be highly responsive to clinical staff and patient needs.

Christine Schumm is assistant vice president of strategic planning and business research, William H. Thurston is senior vice president of strategic planning and information systems, and Ronald L. Weiss is senior vice president/director of laboratories and associate professor of pathology at ARUP Laboratories, Salt Lake City, UT.
COPYRIGHT 1999 Nelson Publishing
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Copyright 1999 Gale, Cengage Learning. All rights reserved.

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Author:Schumm, Christine; Thurston, William H.; Weiss, Ronald L.
Publication:Medical Laboratory Observer
Article Type:Cover Story
Date:Feb 1, 1999
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