April 2011
Feature Story

Anne Ford

To hear Sterling Bennett, MD, tell it, it took more than 15 years for Intermountain Healthcare to decide to form a core laboratory, and less than a second for many staff members to decide they hated the idea. The 23-hospital health system, based in Salt Lake City, had kicked around the notion of a core lab since the 1980s, but not until the early 2000s, when the system’s hospital laboratories began to run out of space for testing, did the project get underway. And that’s when—metaphorically speaking—the test strips hit the fan.

“There was fear that if we became more efficient, the total number of jobs would decrease and people would be let go,” says Dr. Bennett, who is Intermountain’s central laboratory medical director. “The second fear was that positions would be moved, and so individuals who were living and working in one community might be forced to drive farther to the core lab. At the hospital lab manager level, the objections had to do with perceived loss of prestige and fear of their position being downgraded.” Others didn’t believe the change would occur until they saw it occur. “There was a fair amount of denial that we saw going on,” he says.

In an attempt to address these issues, “we held town-hall meetings and did written communications and a lot of things a long time prior to the core lab’s opening to try to develop a sense of trust in what was going on so nobody was taken by surprise,” Dr. Bennett continues. Did that work? “To some degree, with some people.” The thing that really helped, he says, was time: “No matter how well you plan, no matter how well you prepare, no matter how hard you try to bring people along, there’s still going to be an adjustment phase—and it ­isn’t days or weeks. You’re looking at years.”

Now that that initial adjustment phase is over, how is the Intermountain core laboratory and other core labs formed within the past decade or so doing? Have laboratory staff truly bought into their new workplace reality? Have financial and other predictions been on the mark? What has consolidation done to testing volumes and revenues—not to mention to the perceived value of pathology services within the institution? In short, are the benefits of consolidation worth all that preliminary pain?

Michael R. O’Leary, MD, thinks so. As director of laboratories and (since 2007) chief executive officer, he has overseen the creation of Laboratory Alliance of Central New York, Syracuse, an independent, for-profit core laboratory jointly owned by three Syracuse hospitals (Community General, Crouse, and St. Joseph’s). “The birth of Laboratory Alliance [in 1998] was a difficult one,” Dr. O’Leary says. “We struggled. Our business plan was to grow outreach so that we could then offer lab services to our owner hospitals at significantly reduced prices, significantly below the Medicare lab fee schedule. It really took a number of years to ramp up. But since then, we have done very well.”

In the early years, about 20 percent of the laboratory’s business was outreach, and 80 percent was from the three owner hospitals. “Now it’s nearly 50-50,” he says. “We’ve really cornered the market in outreach work here in central New York.” Revenues are now just under $50 million. That’s a big step up from the nearly $30 million the laboratory generated in gross revenue in 2001.

Like Intermountain, Laboratory Alliance discovered early on that staff attitude would be a major challenge. In the latter’s case, much of that came down to physician acceptance, particularly among certain specialties. “We moved everything other than Gram stains out to our core laboratory,” Dr. O’Leary explains. “This was not met with a great deal of enthusiasm by the infectious disease practitioners. They were used to going down to the laboratory and seeing the plates and talking to ‘Betty,’ the technologist they’re used to. So we brought them out to our core lab to see that it’s the same people they were talking to before; it’s just that now they have to call. If they want to look at a plate, we’ll take digital photos from a camera mounted on the microscope and e-mail it to them and put ‘Betty’ on the phone.”

The nephrologists, too, were uneasy. “One of the things we did is, we assured them they’d be able to go in the lab and look at a urine sediment if they wanted to.” As with the ID physicians, “it really took a lot of work to garner their acceptance, but it’s much better now.”

Another potential barrier to success: The early rumors that the rapid-response laboratories at Laboratory Alliance’s owner hospitals would offer only very limited testing. “I gave them the assurance that if a test does become available that they really need, we’re going to give that to them,” Dr. O’Leary says. In the past few years, he’s made good on that promise by allowing a number of tests, such as rapid vaginitis and BNP, to gravitate back to the rapid-response labs from the core laboratory. “The reason they’ve gone back to the rapid-response labs is triaging,” he explains. “The hospitals’ mantra now is ‘get ’em in, get ’em out.’ The hospitals are paid for discharges, not for admissions. So they’re really pressing us to bring in testing that can easily triage patients in the ED. I’m not particularly happy with that, but they are, and that’s important. I always try to look for a win-win, and if that means compromising to a small extent, I do that.”

Two significant challenges remain. First, “we have to pay rent for our rapid-response labs. Each one is close to 5,000 square feet. And I keep telling our owner hospitals that they’re charging midtown Manhattan rates,” Dr. O’Leary says. “They’re really gouging us, I think.”

Second, as they have from the beginning, each of Laboratory Alliance’s three owner hospitals uses a different EMR system, making it difficult to display laboratory results properly. “If you talk to a number of laboratorians, they would say that probably one of the biggest headaches of interfacing with the EMRs is how the lab data is displayed,” Dr. O’Leary says. Over the years, as the hospitals have upgraded their EMRs, “some of that has been rectified.” Still, recently “we found that one hospital EMR was wrapping the words in the pathology reports. That makes it difficult for the physicians to interpret.”

Five years after its opening, Intermountain’s core laboratory has seen “things really settling down from a culture perspective,” says David Gardiner, chief operations officer. In fact, “There’s a lot of pride associated with having gone through the trenches and felt the pain of opening the core lab and coming up with processes and identifying what worked and what didn’t work and changing it and configuring it.”

That said, there was a heck of a lot of changing and configuring that had to be done—specifically, to the billing system. Unfortunately, the billing system overhaul took place only a short time after the core laboratory itself had begun operating. “We just rolled up our sleeves and fixed a very broken process,” Gardiner recalls. “It was very painful. Our hospital-based billing system really wasn’t designed or equipped to handle laboratory billing processes that were appropriate for outreach”—work that Intermountain felt strongly about building in order to maintain the economies of scale that drive efficiency.

He explains: “At LabCorp or Quest, they’ll take the work that comes from their outreach and just sit on it till midnight and run everything in a batch. In our outreach program, when they [outreach specimens] come to our lab, they come through our automation just like any other hospital test. We don’t differentiate outreach specimens from inpatient specimens, and because we don’t, our turnaround times and service levels for our outreach clients blow any competitor out of the water. That’s a big selling point, so frankly we’ve been able to demand a premium from payers in the market because our service is so much better. Therefore, we can keep our costs to our internal customers, our hospitals and clinics, as low as possible.”

What the core laboratory needed, Gardiner says, was a “really robust billing system that could handle large volumes of claims at low dollar amounts.” Instead, they started out with a hospital-oriented legacy system designed to write off small balances, since “most hospital bills will be in the thousands or tens of thousands of dollars,” as Gardiner points out. “Whereas 85 percent of the claims that come out of a lab are $50 or less. You can’t have a system that’s going to write off 85 percent of your claim volume. It’s a whole different mindset.”

Happily, that has now been ironed out, though it took a few years. “When I started, our accounts receivable had about $20 million outstanding, and I think there was not one successfully submitted and paid Medicare claim after nine months of operations,” says Gardiner. “It was the biggest mess you could ever imagine. And now we’re running at about 40 A/R days or less, which is pretty great. The majority of our claims are getting paid automatically without anyone touching them or having to do followup on denials. I’m happy to say that we’re way out of the woods on that.”

Another smart fiscal move, he adds: changing the laboratory’s financial model so that it would become a service center rather than a cost center—meaning that “any margin made on outreach business or cost improvements goes back to the hospitals and clinics across the system in a proportionate way. Think of it like a dividend.” By way of example, he offers, “Last year the central laboratory made $2 million over our net operating income budget, which we try to budget at zero. So we essentially paid $2 million back in a cost offset to the hospitals and the clinics, which helped them meet their cost goals operationally. There’s an incentive for them to work with us, because any improvements we make, we pass those back to the system. If you change the financial model appropriately, then people want to partner much closer with the core lab.”

As if changing the billing system weren’t enough, the core laboratory also found itself implementing a new version of Sunquest for its LIS—again, at the same time it was just beginning to gear up operations. “We had indicated that we wanted to do that far in advance so that things were stable when we arrived here [at the new facility],” explains Intermountain clinical laboratory manager Kim Sanderson, “and our LIS people kind of pushed back. We ended up going live with that at the same time we moved into this building, and that caused some pretty significant problems.” To others in similar positions, he cautions, “Make sure your lab system is stable. Don’t make a lot of changes when you first move in. That caused us a lot of grief.”

The result of all this changing and configuring? “As a system, we’ve been able to grow outreach at about 16 to 18 percent per year,” Gardiner says. “Cost per test has been decreasing as a system around 10 to 15 percent per year, not adjusting for inflation. Our model is working.”

As well as Intermountain’s core lab is doing on that front, Sanderson would like to see it do a little bit better. “We’re here to serve Intermountain Healthcare System, and I would like to see us pick up enough work so that the work we do for our own system is really inexpensive,” he says. “We give them a really good price now, but my goal would be to give it to them for free.”

As the experiences of Intermountain and Laboratory Alliance demonstrate, it’s difficult to overstate the role of information technology when making the shift to a core-laboratory model. Phillip Chen, MD, PhD, director of informatics for the Department of Pathology at the University of Miami, knows something about streamlining IT operations. The teaching facility for the university’s Leonard M. Miller School of Medicine—the county-owned Jackson Memorial Hospital—has a core laboratory that serves the larger Jackson Health System. But the three hospitals owned by the university (University of Miami Hospital, Sylvester Comprehensive Cancer Center, and Bascom Palmer Eye Institute) “haven’t achieved true core lab operations,” Dr. Chen says. “Each of the university’s hospitals has its own laboratory with different IT needs. My responsibilities include trying to unify them in terms of IT operations.”

Dr. Chen suggests that institutions that are considering making the move to a core laboratory focus not just on how IT can help them maximize efficiency and safety within the lab, but also on how IT can help the core laboratory demonstrate its value to the institution as a whole. For example, he recommends that institutions implement an automatic flagging system, whereby when critical or significant pathology results are issued, those results are flagged, and the flags are interfaced into the institution’s EMR. “In many laboratories, those flags are just alerting the laboratory personnel to try to reach the physician,” he says. “What we are doing is, those flags open up a so-called critical patient encounter, like an appointment, in the clinical system, and somebody has to close it. The only way they can close it is for the physician to document that they have talked to the patient. It obviously improves patient safety. That eliminates potential medical liability issues from lack of followup, and that’s part of how we’re demonstrating how we fit in the overall clinical care delivery system.”

At Miami, Dr. Chen says, he is helping to develop an IT feature that allows a clinician to request that a pathologist select the laboratory tests to be run on a particular patient. “Instead of having the clinicians pick multiple checkboxes either electronically or on paper, the system allows them to select an evidence-based test ‘algorithm’ based on the patient’s clinical presentation and suspected disease workup,” he says. “They essentially tell us about the patient’s clinical condition and we’ll order the appropriate screening or diagnostic test, and we’ll reflex to do other tests when necessary. These are some of the ways in which we’re starting to inject ourselves into the clinician care delivery system. Rather than just being a passive ancillary service, where we’re just sitting there waiting for an order to show up and spit the number back out, we really become an active participant in the patient care team. That will be the strongest sales pitch that a laboratory”—core or otherwise—“can make to a health system to demonstrate value.”