Why and how Hurley Medical Center chose
  co-ownership

March 2006
Feature Story

Debra Liebler-Rogers

The administrators and managers at Hurley Medical Center, Flint, Mich., were determined to reduce the cost of laboratory services without sacrificing quality. After reviewing the standard options of in-house testing and outsourcing to reference laboratories, they chose a third approach. Instead of buying laboratory services, Hurley bought a piece of the lab. They elected to participate in an agreement with other not-for-profit hospitals to gain access to the assets of an esoteric laboratory, in this case the Michigan Co-Tenancy Laboratory, or MCL.

Like many health care organizations, Hurley Medical Center had to cut expenses without affecting the quality of services it provided. One of southeastern Michigan’s leading health care service providers, Hurley offers acute and tertiary care to a five-county area with a population of about 500,000. As Flint’s only public hospital, Hurley provides more than 66 percent of the community’s uncompensated health care to people with little or no health insurance, at a cost in 2004 of $21 million. Remaining true to the founding mission to serve all citizens regardless of their ability to pay, Hurley Medical Center is unrelenting in its drive to cut operational costs without sacrificing the quality of its services.

For its reference laboratory services, Hurley, as a public institution, was required to issue a request for proposal, or RFP, to a minimum of three reference labs. Having learned about the co-tenancy model from other southeastern Michigan hospitals and the MCL staff, Hurley included MCL in the RFP process and thus issued four RFPs.

Before issuing the RFP, Hurley was already working with reference labs to handle testing outside the scope of the organization’s on-site capabilities. Administrators and pathologists were satisfied with the quality of outsourced services, but the mandate to reduce spending on laboratory services without diminishing quality was clear. Though the mandate was the chief motivation for the RFP, the need to streamline internal operations by consolidating outsourced services was also important. Hurley wanted to move beyond the use of reference laboratory services as a short-term solution to tactical problems. The purpose of the RFP was to develop a strategic approach to comprehensive cost-savings, reduce the number of service providers, and establish a continuing relationship that would accommodate competitively negotiated pricing. At the end of an evaluation process that lasted several months, Hurley chose a new model for the delivery of laboratory services as provided by the Michigan Co-Tenancy Laboratory.

Through MCL, not-for-profit hospitals like Hurley have the opportunity to become tenants-in-common (co-tenants)—that is, to jointly own, use, and govern the assets of an esoteric laboratory. By sharing the resources, each participating nonprofit health care organization can reduce its costs and provide laboratory testing services with greater efficiency and economy of scale. However, you have to change minds before you can change models. Though the MCL model represented a 30 percent savings over the other reference labs, the hospital’s leaders needed time to become comfortable with the co-ownership concept.

MCL addressed the concerns of Hurley’s leaders by demonstrating how participation in the co-tenancy agreement was a risk-free opportunity to obtain esoteric testing at cost. As the administrative director of laboratory services at Hurley, I acted as an internal champion for the MCL model, explaining how a modest capital contribution would secure an ownership position with the authority to share governance of the lab.

Like other hospitals, Hurley grapples with the workforce shortage of qualified laboratory professionals. With an ever-increasing array of medical tests and fewer people trained to perform them, access to lab personnel capable of performing esoteric tests was a big factor in the decision to adopt the co-ownership model.

In the end, the projected annual savings of $300,000—with no compromise in testing or service quality—and enthusiastic third-party testimonials convinced Hurley’s management that laboratory co-tenancy was the way of the future. Hurley signed an agreement with MCL in fall 2004 and began to send work to MCL in January 2005. Actual first-year savings were $240,000.

The MCL model offered Hurley tangible ways to reduce costs as well as other benefits that are more difficult to quantify.

Hospital space is expensive. In-house laboratories rarely get the footage they need to accommodate the staff and equipment necessary to support a large test menu. MCL is located in a beautiful facility, staffed and equipped to offer extensive testing options.

In the past, Hurley had worked with multiple reference labs. The varying requirements for paperwork, packaging, and preparation placed demands on Hurley’s lab staff to monitor and ensure compliance with the different protocols. By consolidating outsourced testing to MCL’s co-ownership model, Hurley streamlined its lab operations and effectiveness with a single point of interface and one standard for the submission of test specimens.

A more intangible benefit of the MCL model is the collective knowledge of its shared owners. Co-owners have access to the knowledge of their peers and to the knowledge of the informed MCL staff. Knowledge of this depth is particularly valuable when physicians have requested a particular test that is not yet widely available. MCL, which is administered by Pathology and Laboratory Management Associates in conjunction with Warde Medical Laboratory, is better positioned to learn about and offer cutting-edge tests.

Here’s how the co-tenancy model works. Each participating organization makes a capital investment to secure an ownership position. Testing on behalf of each co-tenant is done using its share of the equipment, reagents, and staff. Each co-tenant has the autonomy to use the lab assets to meet its own needs, to market the testing under its organizational name, and to bill for all testing performed on its behalf.

The laboratory co-tenancy model is based on a simple equation. The more tests performed on the shared assets, the more money the collective co-tenants save. It’s that simple. Each test performed in the co-tenancy laboratory is assigned a relative value unit, or RVU. Testing is billed monthly using an RVU-based fee schedule. At the end of each quarter, the total cost of testing performed in the laboratory is divided by the same period’s RVUs to arrive at a cost per RVU. Each co-tenant’s total RVUs for the quarter are calculated and multiplied by the cost per RVU. The result is the owner’s allocated cost of testing. If there is a difference between the amount billed monthly and the allocated cost of testing, a rebate is sent to the co-tenant for the difference.

Laboratory co-tenancy is a model worth considering. As health care organizations grapple with rising costs and falling revenues, the time is right for a new way of delivering laboratory testing without sacrificing quality or service. Organizations must ask themselves why they would buy laboratory services for someone else’s profit when they can co-own the laboratory, play a part in its governance, and keep the profit in their own pocket.