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Moving a university hospital lab off-site.

Moving a university hospital lab off-site

A common view of TEFRA and other recent Congressional measures is that they imposed further regulation on the health care industry. In reality, they have had a different effect, especially in the way they have been interpreted: They brought about deregulation or creation of free-market opportunities.

Our department of pathology at the University of Utah Medical School responded to the financial challenges of prospective payment by spearheading the formation of a cluster laboratory. The clinical laboratories at the 370-bed University Hospital and neighboring 349-bed St. Mark's Hospital were combined into an off-site, for-profit corporation in 1984.

The department of pathology's association with St. Mark's actually began in 1982. That's when we entered into a contract to provide pathologist coverage at the community hospital, which had decided to recruit a new pathology group. Billing and control of the laboratory remained in St. Mark's hands. The contract enabled us to add pathologists to the department and expand our expertise and teaching capability. It also broadened our specimen mix, which enhanced training program material.

Four pathologists--recruited as full-time university faculty members --were assigned to the community hospital. In addition, a senior professor-level surgical pathologist from the university spent two days a week at St. Mark's, offsetting some of the time spent by the other four pathologists in university activities. All of the pathologists were board-certified in anatomic and clinical pathology, with a minimum of one year of subspecialty training in surgical pathology--a superior complement for a community hospital.

Soon, however, we faced implementation of legislation that would change pathologist reimbursement and also create a free-market environment for hospitals. We considered steps to preserve the department of pathology's financial viability and, at the same time, maintain or improve service to our affiliated hospitals.

Some background on our economic underpinnings is necessary. Less than 3 per cent of the University Hospital's operating budget comes from state funds. As a result, the university's department of pathology is almost entirely dependent on income received from its clinical service to carry out its patient care, educational, and research missions.

Although a small portion of its budget comes from just one state, the University Hospital draws tertiary care referrals from six states. It's a large area--nearly 10 per cent of the land mass of the 48 contiguous states. The next closest medical schools are 385 air miles to the east and 750 air miles to the north.

Providing extensive services with so little public funding calls for economic creativity and innovation. When Part A and Part B Medicare payment changes threatened to decrease revenue, the department of pathology felt it had three available options. Each was closely tied to some action by the medical school and/or the University Hospital.

First, other patient or medical school revenues could subsidize the department of pathology's financial needs. This was undesirable because it would put obvious additional financial pressure on the University Hospital and the school.

Second, the department of pathology could modify its contract with the University Hospital to preserve as much of their previous arrangement as possible. An analysis showed that this approach would have a negative financial impact on the hospital as well as the department.

Third, we could recommend consolidation of the two hospitals' laboratories into a separate cluster laboratory. This new lab would generate revenue for the department of pathology while reducing costs for both hospitals. It would be wholly owned by the department. Both hospitals, with whom we maintained service contracts, would divest themselves of their laboratories.

Political reasons and space requirements favored an off-site location for the consolidated laboratory. For one thing, the medical staff at St. Mark's would feel more comfortable about having their testing done at a neutral site. For another, the for-profit operation would be physically removed from the nonprofit environment of the university.

The department chose the third option. A large central laboratory' offered many advantages, including better service for both hospitals through expanded test variety and timeliness, a broader teaching and research base, and the feasibility of using this base to further develop a major reference laboratory capability. We negotiated with each hospital with the backing of the university and the medical school.

A financial plan was developed. It took into account the mechanics of hospital laboratory divestiture and the total assumption of business and employee responsibilities by a new corporate organization.

We retained a consultant experienced in reference laboratory and hospital-related business matters. He proved very helpful in charting the early course of our venture and briefing the administrations of the two hospitals and the medical school. His regular interaction with those who made health care legislative decisions and interpretations gave us a strategic understanding of what was evolving on the national scene. His credibility gave all of us confidence that the proposed consolidation was not only wise but in the vanguard of laboratory business trends.

As we began to formulate the new corporate entity, we also sought expert legal, accounting, financial, insurance, personnel, and other business-related advice. We continue to employ the services of consultants in these areas to help us approach new markets and business arrangements.

Along the way, one consultant told us: "Doctors are the dumbest business people I deal with, but you people are different.' I mention this to emphasize the importance of involving individuals with business experience in any new laboratory venture.

Our organization is controlled and operated by clinical laboratory professionals, and our corporate leadership is made up of pathologists, technologists, and other laboratory scientists and physicians, many of whom have had extensive laboratory business-related experience. We have individuals who have served as reference laboratory directors, as vice president of a large national reference laboratory, as hospital associate administrator and treasurer, as pathology service chief at a military facility, as vice president of a laboratory computer software vendor, and as hospital laboratory directors and managers.

This broad range of business, management, computer, and test-related expertise enabled Associated Regional and University Pathologists to rapidly expand into a full-service reference laboratory that now has clients--mostly other hospitals--in 17 states in the West and Midwest.

ARUP began operations in May 1984, in a leased 26,000-square-foot building. The laboratory is three-quarters of a mile from University Hospital in the University of Utah Research Park, a 4,000-acre enclave leased to commercial enterprises engaged in research-related activities. The building had housed a laboratory in the past, so minimal renovation was required.

Proximity to University Hospital and St. Mark's allows us to do all testing at the cluster lab site with the exception of Stat procedures and blood banking. Even though couriers make the trip between the ARUP building and University Hospital every 20 minutes, we have found that Stat procedures are best handled on site at both hospitals.

Assimilation of lab employees from both hospitals carried with it difficulties relating to size of staff, benefits, and comparable salary levels. We agreed to accept all lab employees from the two hospitals. Through a hiring freeze imposed prior to the consolidation, ARUP was able to open with only two more staff members than we had planned for.

Salaries and benefits differed at the two hospitals, and each institution insisted that its laboratory staff not suffer cuts in basic pay. Salary disparities were overcome by adjustments in raises and in overtime and vacation pay.

Anyone undertaking such a venture should strive to thoroughly understand a host of issues, including rollover of benefits, union matters, threshold volume clauses with participating hospitals, realistic agreements as to the amount of work to be done on site, and competitive pricing in a reference laboratory environment. Experience has served us well, and our increasing ability to document workload and productivity, margins, costs, revenues, market-related financial performance, and other management parameters has sharpened our business acumen.

As planning proceeded, it became apparent that the University Hospital laboratory computer system would no longer suffice. ARUP required a computer system that could manage information for the consolidated laboratory and telecommunicate results throughout a large client area. Reporting had to be in different formats to accommodate the needs of individual clients, and system security had to be created for safe multi-user dial-up. A computer system meeting all these needs has been implemented at ARUP.

In assessing the impact of our laboratory venture, I will concentrate on benefits to the University Hospital. Similar benefits have accrued to St. Mark's Hospital, however. For proprietary reasons, I will not discuss the venture's start-up and capital costs, including financing of the computer system and lab instruments.

Reduced direct laboratory costs saved the University Hospital more than $1 million in the first year of operation. Savings of this magnitude have resulted because ARUP assumed all fixed costs.

Hospital administration is relieved of concern for fixed costs, personnel management, and capital expenditures. The hospital pays a fixed cost per procedure, which in essence provides a variable cost reimbursement base relating only to those services actually used.

Turnaround time for Stat laboratory testing has improved as routine tests were removed to the off-site laboratory. Many assays are performed more frequently, and the menu has expanded, thanks to growing reference test volume.

The influence of the University Hospital as a tertiary care center has expanded as physician faculty members consult on difficult patient care problems brought to them through testing performed in the reference laboratory. Increased hospital referrals have followed the pattern of increased laboratory testing.

Valuable space has been freed in the University Hospital for other purposes. An entire floor once used by the laboratory in a research building has been returned to the medical school.

Clinical laboratory professionals now have full management control over staffing and produtivity of the clinical laboratory service. Prior to ARUP, hospital administration oversaw these areas.

Direct communication and interaction between laboratory technologist and physician users of the laboratory service has diminished because of the off-site location. While some perceive this as better control of productivity, I think most laboratorians would agree that it is an undersirable result.

At St. Mark's, the administration is developing plans with ARUP to expand outpatient business from the office practices of physicians on the hospital staff. Not only will this further aid St. Mark's financially, but it will also emphasize the hospital's role as the fulcrum for health care in its sector of the metropolitan area. St. Mark's patients and physicians benefit from competitively priced, quality testing off a large menu. Inpatient and outpatient tests are identical, and outpatient results are readily available for those admitted as inpatients.

St. Mark's Hospital has also benefited significantly by having access to the full spectrum of the university's pathology service. On the other hand, the university has gained from having the community hospital as a resource. Of added interest is the regular interaction that has developed between university pathologists and other pathologists from community hospitals in the metropolitan area through the South Salt Lake Pathology Club, a group that meets regularly to review interesting and difficult surgical pathology cases.

The picture would not be complete without mention of the negatives of a laboratory consolidation. ARUP's need to support the university department of pathology has put added financial pressure on the new business venture. Because ARUP competes in the commercial sector, it is necessarily legally separate from the university and cannot use university services or purchasing capability for corporate purposes.

We are in direct competition with other reference laboratories, and that can be quite challenging. For example, a national chain recently offered hospitals in our region a 68 per cent discount off list price for reference work.

Involvement of pathology faculty in a business enterprise requires added effort and responsibility on their part to protect the medical school's academic mission. The balance is a fine line, but in our case we feel that the results are positive and that the department's academic endeavors have not been compromised. Last year, our 44-member faculty produced more than 180 academic and professional publications.

In conclusion, hospitals contemplating a similar venture should consider the following:

Individual hospital circumstances determine the feasibility of consolidating laboratories and whether a laboratory divestiture is necessary.

Start-up costs of a consolidated off-site venture are substantial. The financial plan will require a careful analysis of all facets of the integration, including employee salary and benefits comparability, facility costs and location, the test menu, the range of on-site Stat testing, logistics of specimen transport and result reporting. computer capacity, and business and administrative functions.

Although the array of test offerings in a consolidated laboratory may exceed the offerings of the individual participating laboratories, what testing is done should ideally be determined by patient care requirements balanced by cost analysis data. Not a great many cluster labs can become full-service reference laboratories, as we have. In fact, smaller cluster laboratories should continue to contract many tests with reference labs, for cost and quality-related reasons.

Tapping the physicians' office market may be very important in enhancing the position of the hospitals involved in a consolidated venture. Recent study data indicate that the volume of laboratory testing emanting from physicians' offices will increase by 13 to 19 per cent annually over the next five years.

Well planned laboratory consolidations can result in substantial savings for the participating hospitals. For example, if three 100-bed hospitals consolidate their laboratories, they will achieve greater savings by placing the consolidated lab on site at one of the institutions. Larger laboratory consolidations may warrant a stand-alone facility.

Finally, if clinical laboratory professionals hope to do a good job of managing a consolidated laboratory, they will need the help of appropriate consultants and capable, experienced personnel. Perhaps we should also institute training programs combining pathology/technology certification with an MBA.

Photo: ARUP's consolidated off-site laboratory (top) serves 370-bed University Hospital (above) and 349-bed St. Mark's Hospital (left).

Photo: ARUP microbiologist at an anaerobic glove box. The lab's broad range of tests serves reference clients in 17 western states.
COPYRIGHT 1986 Nelson Publishing
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1986 Gale, Cengage Learning. All rights reserved.

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Author:Matsen, John M.
Publication:Medical Laboratory Observer
Date:Apr 1, 1986
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