August 2012
Feature Story

Anne Paxton

Craig Krentz, MT(ASCP), laboratory director at Regional West Medical Center, where the outreach program is going strong. “Outreach makes you a better lab,” Krentz says.

Start with a sluggish economic recovery and volatile world markets. Add the uncertainty of a presidential election year. And top it off with a whopper of a wild card: health care reform, the 2010 Patient Protection and Affordable Care Act. For the health care industry, that sounds like a good basis for a cautious holding pattern.

But experts and laboratory executives in the hospital outreach diagnostics sector are anything but pessimistic about its prospects. Not only do these observers see hospital outreach programs employing diverse strategies to expand their client base, broaden test menus, and reap healthy profits, they see many new players entering the game—even if, at the end of the day, not all of them may still be on the field.

In interviews with leading outreach consultants and directors of successful outreach programs, CAP TODAY finds that despite the many unknowns, the assessments and forecasts are upbeat. Even though worries about reimbursement continue unabated, says Kathy Murphy, PhD, chief executive officer of laboratory consulting firm Chi Solutions in Ann Arbor, Mich., “There is no reason that a hospital lab cannot be competitive in this market from a service standpoint, a pricing standpoint, and a profitability standpoint.”

By some estimates, about 1,000 hospital laboratories have substantial outreach testing, but according to Chi Solutions’ annual surveys, 80 percent of hospital labs fairly consistently report they conduct some form of outreach. How much business is out there? Most laboratory industry consultants believe outreach programs are well positioned to increase revenues. “Around the country in recent years there’s been a decrease in inpatient services, while on the outpatient side—which is where outreach is— there’s been a sizable increase,” says M. Susan Stegall, MBA, MT(ASCP), owner and CEO, M.S. Stegall & Associates in Salem, Ohio. And she thinks that trend will continue.

Prospects for profitability are good, based on Chi Solutions’ 11th Comprehensive National Laboratory Outreach Survey. It shows a substantial increase in outreach net revenue per test over the past 10 years. In 2011 the median net revenue per test had risen to $18.46; the average net revenue per test was $24.34. When asked about their experience with market share, nearly 80 percent of respondents said they are either holding their own or gaining on Quest or LabCorp.

The laboratory at Regional West Medical Center, for example, didn’t necessarily set out five years ago to double its outreach revenues, but despite the strong presence of the national labs, that is what has happened at the Scottsbluff, Neb., facility, says laboratory director Craig Krentz, MT(ASCP). The outreach program at the 184-bed medical center has spread to cover a 500-mile radius across Wyoming, Nebraska, South Dakota, and Kansas. “We have to go a long distance to get the volume. Most labs don’t have to go as far.” Still, since 2006 the outreach program’s billable tests have increased by 40 to 45 percent, its full-time-equivalent staff count has gone up by 15 percent, and its revenues have shot up 100 percent.

The program’s success has led it to pursue larger clients. “Over the last 14 years we have grown our business on small to medium-sized physician clients, and we want to continue to do that, but also we want to boost our capabilities so we can handle more of the very big clients, the ‘whales,’ in coming years—the ones bringing 75 accessions or 150 to 170 tests a day. We’re considering adding that to our marketing strategy.”

For any hospital laboratory, growth has definite benefits, Krentz believes. “Hospitals are always putting cost pressure on labs so when you increase your volume, just because of the leverage you have with vendors, you can decrease your cost per test. You can also offer a wider test menu to inpatients in the hospital if you do outreach—because a lot of the testing we do here we wouldn’t be able to do without the outreach volume to support it,” he says. “HIV probably wouldn’t really be necessary, and if we didn’t have the outreach volume to generate Pap smears, we might not even have a cytology program.”

Another benefit of having an outreach program is that “you are trying to respond to market needs. Whether it’s IT or specimen transport, or some sort of testing people want you to do, outreach makes you a better lab because you are constantly getting feedback from salespeople about clients’ needs,” Krentz says.

Eighteen hundred miles away, Hartford HealthCare chose a completely different structure for its outreach program when it formed Clinical Laboratory Partners as an independent lab, says president and CEO James Fantus. “For tax reasons, we are set up as a separate company within Hartford HealthCare; we also manage two of the system’s hospital laboratories.” The laboratory, which covers all of Connecticut as well as patients from Massachusetts and Rhode Island, now has 900 employees and has been successful. “When I came on board in 2006, the revenues were about $20 million a year, and that year it lost $5 million. We’ve been growing 10 to 20 percent each year, and today we’re at about $90 million a year and profitable. The recession didn’t have any impact on us at all.”

While traditional hospital outreach programs might not be able to adopt Clinical Laboratory Partners’ structure, Fantus says, the laboratory’s competitive strengths can be emulated. “We do almost all of our tests right here so we have quicker turnaround time, we take all payers—we’re the only laboratory in the state that does that—and we have a huge IT team and infrastructure so we can rapidly connect to EHR systems and respond immediately to IT issues.”

Among the respondents to Chi Solutions’ 2012 national laboratory outreach survey, most outreach programs (56.3 percent) were single-hospital-lab based and 27.6 percent were multiple-hospital core-lab based. Only a few were hospital-owned independent labs, cooperative agreements with commercial labs, or equity joint venture with a commercial lab or pathology group.

But it may be confirmation of the favorable outlook Dr. Murphy sees that some relatively new companies are showing interest in hospital outreach programs as investment or acquisition targets. As an independent lab, Fantus’ Clinical Laboratory Partners is approached by private equity firms for partnering or acquisition all the time. But what’s happening now, Fantus says, is new: “Venture capital companies as well as the national labs are looking at hospital outreach programs they’ve never looked at before.”

In the laboratory industry there has been considerable buzz about this new interest in outreach by private equity firms and venture capitalists. The formation of Regional Diagnostic Laboratories Inc. (RDL), in partnership with a global private equity firm, was seen as a bellwether by many industry observers. RDL, the company announced in May, aims “to become a national platform of regionally focused clinical laboratories primarily by acquiring or entering into partnerships with hospital-based laboratories.”

Commenting on hospitals’ “strategic options” in today’s environment, RDL chairman and CEO Brian Carr said in a statement: “It’s crucial that health systems have an experienced and well capitalized laboratory partner that can support their mission locally, provide excellent service and quality, and grow with them in their communities.” Existing lab companies can’t meet all of those needs, he said, and RDL has been formed to provide the solution. The company announced it will carry out its plan with $250 million from private equity firm Warburg Pincus.

Farther below the radar has been Accretive Health’s recently formed company, aLabs, which has partnered with two large lab outreach providers—ACL (Aurora Health Care, Milwaukee, Wis., and Advocate Health Care, Chicago) and Sharp HealthCare, San Diego. “What aLabs appears to be doing is mimicking other successful for-profit health care non-laboratory outreach companies using some sort of a partnership model: targeting successful outreach programs as customers and providing full back-office support,” Stegall says.

“This is venture capital dollars. It’s some very sophisticated business people from outside of laboratory medicine—in addition to Quest and LabCorp—going in and talking to the C-suite,” where the CEO, CFO, and CIO reside. “They’re saying let us take over the management of your outreach labs.” BayCare Health System in Tampa, Fla., for one, reports that it has been approached by venture capitalists interested in acquiring or partnering with the outreach program, says outreach laboratory director Donna Lynch, MT(ASCP). “I would say two or three have contacted us in the last year and a half.”

From outreach programs’ standpoint, there could be reason for concern, Stegall believes. “Executives who formed RDL have a record of accomplishment of building up a lab company and then selling it to one of the big global labs operating today. It may eventually turn out to be a big churn of the customer base, and I would think the whole lab industry is concerned about that. Accretive Health [aLabs owner], on the other hand, has a reputation of investing in great companies for the long term. Therefore, the lab industry may be experiencing a new outreach model in the form of aLabs; it will be interesting to watch it unfold.” If past patterns are an indicator, Stegall says, the eventual outcome in some of these new ventures could be the national labs acquiring the new outreach programs.

These investment entities have put pressure on many outreach programs to prove their worth. At a recent conference on outreach sponsored by G2 Intelligence, Stegall and Dr. Murphy chose a common scenario as the framework for their interactive presentation: an outreach lab having to defend its existence to the C-suite. This “Deal or No Deal” case study was based on the experience of Mary Sue Sawyer, director of laboratory services for Palmetto Health Diagnostics Laboratory, Columbia, SC. She has had to analyze and present the laboratory’s case several times to senior leaders.

“There’s a need for middle managers to learn how to speak to senior executives in health care systems in defense of their program and their mission,” Stegall says. In Palmetto’s case, “basically the CFO wanted to know what the value of the lab was, the VP of operations wanted to know, if they got rid of lab outreach, how it would affect laboratory expenses, and the chief medical officer wanted to know what effect shutting it down or selling it off would have on the practice of medicine in the geographical area served. After these questions were answered, the CEO has to decide: Does he talk to Quest? To LabCorp? To Sonic? To aLabs? And/or others?”

The transition of companies like Accretive Health—which has specialized in revenue cycle management, or billing and debt collection—into the laboratory business is a fairly recent phenomenon, says Michael J. Armstrong, COO of Pacific Rim Pathology Medical Group in San Diego. Pacific Rim contracts with Sharp HealthCare system to provide pathology services to and medical directorship of Sharp laboratories. Armstrong’s group has seen an average of six percent growth a year, with some years over 10 percent growth. “Companies like Accretive’s aLabs basically look for integrated systems that don’t really have a robust outreach program, or can develop more outreach, and they offer to come in, work with infrastructure, and improve returns on a profit-sharing model.”

Stegall believes laboratory operations are often ripe for management makeovers. “When you go into the lab, you find all these silos, and people who’ve never thought, is there a way to combine workflows to provide better services with less demand on labor? Some people have been using Lean processing and Six Sigma to optimize their processes, but in general there’s a huge opportunity,” she says. “I truly believe venture capital is coming in here and saying, if we can just apply to health care some of the Lean manufacturing philosophy and other proven management solutions used in U.S. companies, look at how much money can be saved and improvement made.”

Other business models are offering competition too, such as pod labs. “These are formed by physician groups themselves. They’re taking business away from pathology groups and they’re popping up everywhere; it’s extremely competitive right now.” In California, Armstrong says, there were predictions that the state legislature would close pod labs on grounds of self-referring business. “But physician groups are lobbying very hard to keep them open.”

The bottom line is that there is vibrant competition making it essential that outreach programs step up their game, Armstrong believes: “If you as an outreach lab are not out there looking for new sources of revenue or looking to differentiate yourselves in the market, you’re sitting still, and you’re going to be rolled over on.”

Louis Tzoumbas, co-founder in 2010 of hospitaloutreach.com, borrows a different metaphor when talking about hospital outreach laboratories: a speedboat tied to a barge. “Outreach programs are not necessarily a fit in hospital systems, especially academic hospital systems, because they’re commercial programs, which in many cases is foreign to hospital management,” says Tzoumbas, who was director of sales and marketing at Stanford University clinical laboratories and pathology outreach until Stanford sold the outreach program to LabCorp in 2008, “even though it had grown from $2 million in net revenue at its inception to more than $36 million in 2008,” Tzoumbas says.

“Can outreach programs survive under a hospital? Absolutely—as long as the hospital sets it up so that the speedboat has some ability to maneuver and keep the business robust,” he says.

He is seeing more hospitals decide outreach is something they should do more of. “Yet there are some, as in the case of Stanford and now UMass Memorial outreach, that have decided it might be better to sell the program,” Tzoumbas says.

When Eric Shipton arrived at Wake Forest Baptist Medical Center in Winston-Salem, NC, in 2010, it was three years after the laboratory had dissolved a joint venture outreach program. “Our main motivation for ending the joint venture was erosion of revenue from the program. It wasn’t growing and we were continuing to lose revenue, which we didn’t expect,” says Shipton, associate administrative director of pathology laboratories at Wake Forest.

It took the Wake Forest program a while to go through the various legal and compliance issues needed to manage on its own, but it had extra capacity and parts of the infrastructure were already in place. The laboratory’s level of success on its own has been phenomenal, Shipton says. Between its first and second year, the program’s revenues increased 232 percent, there was another 43 percent increase the next year, and this year he says revenues will go even higher. “We’ve been in a huge growth phase over the last 12 weeks. We’ve converted a client almost every week. So much that the major competitors are asking to partner with us to edge out other competitors.” But that’s not an option the program is considering now, he says. “We’re doing too well.”

Within the laboratory industry, there is no consensus yet on what will be the impact of the Affordable Care Act when its major provisions kick in in 2014. In Chi Solutions’ annual survey, 38.3 percent of respondents said they thought health care reform and accountable care organizations (ACOs) would be beneficial and provide an advantage to hospitals, while 27.7 percent said they would be harmful and 34 percent said there would be no change.

Many experts see the Affordable Care Act as transformative. Says Armstrong: “In 2014 we’ll see changes in health care we’ve never seen before. It will be comparable to when diagnosis-related groups came out in the 1980s.”

At a minimum, there will be plenty of work for labs in this new environment, Stegall predicts. “I don’t know today how labs will get paid for offering outreach lab testing, but the growth rate is going to be phenomenal under the ACA. Thirty million people who were uninsured are going to enter the health care environment, and they will need testing services.” Add to that the 7,000 baby boomers entering Medicare each day, she says, and “we don’t need to worry about volume.”

Dr. Murphy believes the Affordable Care Act will make it much more difficult for national labs to serve the physician office market. “I think physician offices will migrate more toward hospital-based laboratories because accountable care organizations, composed of physicians and hospitals, will do the contracting for laboratory services and insource this testing to their own laboratories, assuming they can provide comparable services. This makes the most sense. Continuity of testing is another increasingly important need that hospitals will have a big advantage in meeting.” Wake Forest’s Shipton agrees: “I think we’ll see the commercial labs shift their model to more esoteric testing and let the bread-and-butter testing go to the ACOs.”

As one who was around when DRGs revolutionized hospital inpatient Medicare reimbursement in the 1980s, Tzoumbas feels that he’s heard about ACOs before, and they are just new wine in old bottles. “To me, ACOs look very much like HMOs, ‘medical homes’ look like IPAs, and ‘global rates’ are capitated rates,” he says.

The Affordable Care Act is designed to transition from a fee-for-service methodology, in which “more is more,” to a global or capitated model, where “more is less,” Tzoumbas says. Outreach programs, if they are structured well, are well positioned for success under health care reform, he believes, especially if laboratories are careful with contracting methodology. In working with clients, he uses a contracting and business development strategic program first developed when he was VP of sales and marketing at Unilab Northern California in the 1990s, at which time he managed up to 21 agreements to help make outreach programs profitable. Everyone needs to work to decrease hospitalization, actively manage chronic conditions, and lower overall costs, he says. Hospital-physician organizations under a global rate will look to pass down risk to vendors, inclusive of labs, to minimize their exposure for the services. “You’ll have to use discretion and an ‘aligned incentives’ contracting approach to manage the patient population,” he says.

There is consensus on the importance of sales and marketing in ensuring hospital outreach programs’ success, and a strong sense that more hospitals will have to find ways to offer incentives to their sales staff. It is rare to find a hospital that will allow an incentive program that is commission-based like those at the national labs, says Dr. Murphy, who calls sales an “enigma” for most hospitals and laboratories. “Very commonly hospital salespeople are just paid a base salary, or maybe base plus some form of bonus. As a result, most outreach programs underperform in terms of growth because they cannot attract the best talent.”

Survey after survey has shown that hospital programs don’t sell; they market, says Paul Knoll, president of outreach consulting firm Ascent Guided Sales and Marketing Expeditions in Park City, Utah. “So the biggest problem they have is they aren’t growing profitably. The human resources department says ‘we don’t pay anyone commissions here. We don’t understand that.’ But the successful programs have to adapt and do it.”

“If you really want to grow,” he recommends, “have sales reps who are hunters. That’s the strategy of Quest and LabCorp, and you need to understand you are competing on the same playing field. What they do is look to grow the business by hiring that skill set, that personality that will help them be most successful in closing. Then for account managers they turn to people with different skills sets—the ones who are more nurturers and harvesters, or problem solvers.”

Outsourcing sales is one way to get around hospitals’ reluctance to offer incentives, says Dr. Murphy. “Go to an expert who can recruit, hire, and train the people for you and make sure they hit their quotas. The results are amazingly different.” She says outsourced sales organizations’ growth rates are twice the average of hospital-based sales.

The same is true for billing, yet fewer than 10 percent of labs outsource their billing. “They may think, well, we can do it ourselves cheaper, and not look at it from a mature business standpoint. Sure, if I outsource, it might cost a little more, but in the end, dramatically improved collections can be a compelling ROI. But that’s assuming that hospitals are going to make rational decisions based on business logic, and they don’t—although they are better at it than 10 years ago,” Dr. Murphy says.

Shipton’s lab outsources billing, and he recommends it. “A lot of times laboratory claims are so small and so numerous you couldn’t hire enough people to do it as cheaply as you could outsource it. You should let people with expertise do the things they’re expert at. If you’re not billing properly and getting the revenue in the door, you’re not going to be successful.”

More generally, he believes any outreach program needs to evaluate its partnerships and its knowledge gaps. “You don’t know what you don’t know. So you need to choose the right partners to garner the knowledge to get your program moving. It’s very easy to think you can do it on your own, but there are people in the market you can partner with who’ve been doing this for years and years and who can make your program jump off the ground.”

One of the leading obstacles in making that happen, however, can be information technology. “IT for outreach is totally different from the acute inpatient setting,” Shipton says. “What you need is an outreach-specific physician connectivity package that’s geared toward lab ordering in the manner the physician is going to do it, a very user-friendly program. We didn’t have a system on campus to do that and we decided to get one.”

“We explored the strategy of actually providing electronic health records to physicians, which is what Quest and LabCorp have done, but we decided that the real competitive focus we were going to have was to interface with our physician connectivity package whether they had adopted an EHR or not. And we designed our system to be nimble enough to work with physicians no matter where they are located.”

Tzoumbas returns to the speedboat tied to a barge when discussing IT. “IT is one of the biggest challenges, and competition is very robust in managing IT issues. But hospital IT departments are not set up that way.” It’s true that an outreach program is a small part of a big organization. “But if you can allow that speedboat some tether to manage and effectively compete, then it can happen.”

Federal incentives under the American Recovery and Reinvestment Act of 2009, for physician offices to install electronic medical records, have had an impact, says Dr. Murphy. “The EMR adoption rate has increased significantly, so the expectations for the lab have increased too. Now it’s no longer sufficient to just have electronic orders and results you can get by clicking an icon on a computer screen; you have to interface to the EMR so that it’s all totally seamless.”

If a lab doesn’t have good IT connectivity and systems, it will start to get the small clients no one else wants, such as the one-doctor office that is still on paper systems and is probably not that profitable a client, says Dr. Murphy. “The big money is with large group practices, and they are all going to demand full electronic connectivity. I would say nowadays three quarters of those practices expect actual interfaces to the EMR. Labs that don’t have that capability will get stuck with the dregs of the business.”

Keeping up with the demand for interfaces is the biggest challenge for hospital-based laboratories, she says. “They are often dependent on hospital IT departments, and lab may not be a high priority.” Unless labs have their own resources to manage interfacing, she notes, they may be at a competitive disadvantage. “It is not uncommon for labs dependent on hospital IT to wait in excess of 12 months for completion of interfaces to some EMR vendors. This puts a significant constraint on growth.”

At Regional West Medical Center, for the past couple of years, IT was the main competitive challenge in outreach, says Craig Krentz. “Our computer vendor didn’t have a good solution for interfacing, and the national labs had a definite edge on us, but we’ve taken steps to hire the right programmers, and I don’t feel Quest and LabCorp have as much of a competitive advantage now.”

Federal incentives on EMRs have made his laboratory extremely busy, especially this year, Krentz adds. “Last year we saw a few requests, but this year it’s been three or four requests a month. Maybe people are just now getting educated about the financial incentives that are available, or they’ve just put it off, but they are really getting serious about wanting to do interfacing.” It’s one more reason he believes that successful outreach programs have to devote resources to upgrading their IT.

As health care moves from “detect and treat” to “predict and prevent” with molecular diagnostics, this testing is going to be a larger component of business across all segments—inpatient, outpatient, and outreach, says Dr. Murphy. “There is an explosion of new tests. They’re growing at double-digit rates, higher than any other component of the laboratory business.” In addition, molecular is far less manual than it used to be. “It used to require highly skilled people, but more and more it’s becoming automated and being done in community hospitals across the country. Molecular testing is gradually being incorporated into the average lab test menu.”

It’s been an important part of BayCare’s success in outreach, says Maura Pieretti, PhD, scientific director, BayCare Laboratories. “Molecular is occupying a growing segment of our outreach testing, and our plan for the next couple of years is to keep developing the menu. And part of that is getting a personal relationship especially with oncology offices. We’ll be trying to gear into what their demands are, and what do they really want to see.” BayCare recently added a sales support specialist just for its esoteric lab. “We felt we needed somebody dedicated to that specialized testing area who could not only talk to oncologists but get their business and maintain their business,” she says.

Wake Forest will soon launch a medical genetics strategy, Shipton says. “We have been doing medical genetic testing here for a long time, but we’re now incorporating it into our outreach program and revamping the marketing to advertise that.” One advantage of an academic program: “Our geneticists will physically go with our sales reps to meet with physicians to explain what a test means and how to interpret results. At the end of the day, it’s about patient care and physician support.”

A more traditional way that outreach programs can step up quality is by being able to react quickly to fill customer needs, successful outreach directors say. The philosophy at Wake Forest’s outreach program is to deliver not only a swift and reliable turnaround time but extra responsiveness to physician requests. “A client told us he wanted to have their patient reports on colored paper to help them quickly identify them in their charts—pathologies on purple, biopsies on yellow. We implemented the request immediately,” says Shipton. “It’s those kinds of differentiating factors that set you apart.”

“Inbound marketing” is another strategy that outreach programs need to consider, Stegall says. “It means providing value on your Web site and pulling people in to look at the great services you provide, so they can say ‘Wow, this is so much better than the reference lab I’m using today.’” Unfortunately, most health care Web sites make lab services hard to find. “Sometimes pathology isn’t even listed. But that needs to change if you’re going to service the outreach marketplace.”

Beyond service, the second most common issue for outreach programs is hospital pricing, says Dr. Murphy, and it can lead to serious problems. Patients can get hit with the difference between what a hospital charges and what one of the national labs charge, and it can add up to a significant amount of out-of-pocket expense until the deductible is reached. “Unhappy patients with billing problems are one of the major reasons physicians switch labs,” she notes. “At least for exclusive contracts like United Healthcare and Cigna, typically we recommend that the hospital bill based on the independent lab fee schedule, not the hospital fee schedule, so that patients won’t be punished. That’s a strategy that a lot of our outreach programs use, because it’s just a drag on their business otherwise; it makes them user-unfriendly.”

Physicians often don’t understand exclusive contracts and tend to be persuaded that they mean there’s a requirement to send certain specimens to national labs. “There really is no exclusive contract,” Dr. Murphy says. In reality, hospitals have almost all the managed care contracts they need to service those patients. “The real issue is fees. Testing can be done by the hospital as long as the hospital charges the same fee that the national lab would have billed.” Most providers have figured out a way to get around exclusivity on the managed care side, but sometimes physicians are uninformed on this or they hear conflicting stories from national labs. So a constant re-education process is needed, she adds.

Consultant Paul Knoll says most hospital managed care contracting departments think they can’t compete or operate a profitable lab at the rates they will have to accept. But history has shown, and will continue to show, he adds, that hospital outreach labs can operate a successful program despite lower reimbursement. “Ironically those managed care pressures will continue to make it highly desirable for hospital laboratories to conduct outreach. The key is to grow your volume and keep your lab at peak capacity. But with inpatient volume going down and outpatient going up, managed care is going to steer those patients to low-cost providers, then outpatient volume will drop drastically and hospitals will be caught with higher costs in the lab.” For this reason, in his view, hospitals that say they’re just choosing not to do an outreach program are making a risky choice.

Fantus of Clinical Laboratory Partners agrees that being perceived as the most expensive laboratory in town is not a good path. “Payers are starting to profile providers against each other, and you don’t want to get categorized as uncompetitive in that way.” In this new environment, outreach programs should keep this fact in mind when focusing on essentials, he says. “Reducing your costs, beefing up IT, and dramatically improving quality will be key. And developing good payer relationships will be really important in moving forward.”