May 2008
Feature Story

Compass Group makes its case for lab’s value

Operational guidance for managers of not-for-profit laboratories linked to large integrated health care systems was at one time scant. There was no place to talk strategy, technology, and best practices, and there were no baseline measures to support benchmarking and long-range planning. That was before The Compass Group came together.

It’s a group composed of laboratory leaders from not-for-profit integrated delivery network, or IDN, health care systems. Laboratory executives and medical directors from six such systems met first in 2002 to talk about shared challenges and brainstorm solutions, and today the group is an association of 18 networks whose laboratory leaders convene twice annually and communicate regularly. The early participants saw that if they wanted a forum in which to create and share strategies to improve quality, save money, and integrate more fully with clinical services, they would have to invent one. So they did.

Many IDN-affiliated laboratories are hybrids whose core, hospital, and outreach programs provide services to physician practices and clinics in the region and compete with commercial labs. These networks have unique needs that were not addressed effectively by associations that serve small group practices, in-hospital laboratories, and for-profit entities, says Stan Schofield, MS, MT(ASCP), president of NorDx, the core laboratory for MaineHealth in Scarborough, Me., and one of the group’s administrators.

“I would distinguish our members from national private for-profits in this way,” Schofield says. “They have shareholders for revenue and we have stakeholders to whom we owe quality of service. We want to run a good business, but not at the expense of profit driving every decision. An IDN is about delivery of service at the highest quality and lowest cost. The idea is that we provide a service and a level of quality, generally at local and regional levels, that would be hard for the national laboratories to provide in a timely, service-focused manner.”

Laboratories owned by not-for-profit IDNs need strategies to standardize clinical and operational practices across multiple sites and optimize information systems serving multiple constituencies and locales. Integrating lab and pathology services involves identifying natural breakpoints of service, reducing duplication, and capturing econo­mies of scale, says Ronald D. Workman, MD, vice president of system laboratory operations for Sutter Health, Sacramento, Calif., and co-administrator with Schofield of The Compass Group.

“We see some advantages to the integrated delivery system as a regional health care option,” Dr. Workman says. “We see it aligned with a transformed, clinically focused pathology profession. There may be other successful models and solutions, but our members do see the integrated delivery network as a successful model that can guide America’s adaption to the crisis of health care access and affordability.”

Laboratory networks with outreach services can generate a comprehensive medical record that will give physicians a snapshot of inpatient, outpatient, and multispecialty care. Fully integrated laboratory and pathology services can result in information sharing across sites and among treating physicians. It should also bring the pathologist, who is best suited to evaluate and coordinate information, more tightly into clinical care decisionmaking.

Members of The Compass Group see the not-for-profit laboratory indust­ry as threatened on several fronts, Dr. Workman says. “One is the lack of recognition of its clinical and operational value by health system leadership, which results in a lack of investment. The second is the commercial laboratory competition. And the third is commoditization and declining reimbursement.”

As The Compass Group has matured, Dr. Workman says, its members have come to recognize the group’s principal functions: “identifying and sharing best practices and strategies to help ensure the survival of the not-for-profit laboratory industry.”

The Compass Group is an invitation-only association; its members expect the group to eventually number 20 to 25 laboratories. When the group’s members met recently at Scripps Health in San Diego, they agreed to answer questions put forth by CAP TODAY publisher Bob McGonnagle. Following is an edited transcript of what they said about the value of labs and how to make that value known. Next month in CAP TODAY: what they said about the laboratory talent shortage and succession planning.

CAP TODAY: Given the news that some health care systems are selling their laboratories for cash, what is the strategic value of owning your laboratory operation and having deeply integrated it into your health care delivery system?

Robert Stallone, vice president, Laboratories, North Shore-Long Island Jewish Health System, Lake Success, NY: We certainly understand the impetus for selling with the capital needs and the lack of available capital in many health systems and the infrastructure that needs to be built when you need a billion dollars to put out over the next two or three years. It has to be decided: How much do you want to invest in your laboratory services? So there’s that growth side of it.

The other side of it is, if I can get that three times revenue for selling my lab and turn it around and get $200 million in cash and laboratory is a commodity and I can get more or less an adequate service from the person I sell it to, then that doesn’t sound like a bad deal on the surface.

The truth is that we need to do our homework in defining the laboratory’s value to the system and the hospital in terms of patient care. The laboratory, particularly now with the types of testing we’re doing, is becoming much more integrated. I think about some of the testing we’re doing for MRSA, where we’ve been able to demonstrate savings of several hundred thousand dollars just for one particular type of testing by the proper diagnosis, disposition, and distribution of our patients and triaging properly throughout the hospital, isolating them early, treating them properly with antibiotics.

There are many facets of that, and as laboratories continue to get more integrated with services, that opportunity is there. That’s just the tip of the iceberg, and that value is a lot more than you’re going to get long term by selling your lab one time and then having nothing there.

Financially, laboratories need to take a hard look and run some numbers and understand that the reason folks want to buy our laboratories is that they’re worth more than the cash value.

If we can do projections and the systems understand the value of their laboratories and that attention gets to the managed care table at the system level when we negotiate our large contracts, then we get the contracts, we’ve got the relationships, and we can continue to capture larger market share. And that five, 10 percent margin that we can see from hospital laboratories in core labs and outreach programs can grow, and that gets to be, in large systems, a $10, $20, $30, $40 million a year margin that contributes to the system.

It’s public information that a system like North Shore-LIJ in the New York area, one of the few profitable systems in the state of New York, has a margin of about one percent over $4 billion. And so the laboratory, even today, is probably 20 percent of the margin, and we’re just getting into it. And the opportunity is we could be 50 percent of the margin quite easily in a few years. Once we can make folks know that, they won’t give that up going forward. That’s the value of the lab and those are some ways and paths we need to document it.

Carl Knauer, chief financial officer, ACL Laboratories, and vice president of financial operations, Aurora Health Care, Milwaukee, Wis.: When you take a look at the medical record of a typical hospital, between 60 and 80 percent of the medical record is laced with laboratory testing and laboratory results. In order for the health care system to meet its strategic plan, it needs its core function, its laboratory, to participate in that process. The one thing we can provide our systems that, if they outsource it, they can’t obtain from a LabCorp or a Quest is not only the inpatient laboratory results but also the outpatient and the ambulatory laboratory results. We need to take advantage of that ability. That makes us unique from the commercial outreach labs. It allows our systems to manage the diseases and the processes. It allows us to be a step above and a little different than we would be if they were to outsource us.

Sterling Bennett, MD, urban central region pathology chair and central laboratory medical director, Intermountain Healthcare, Salt Lake City: With the move to individualized or personalized medicine, integrated health care systems will need more, not fewer, laboratory capabilities.

CAP TODAY: Let’s pretend I’m the publisher of a magazine called Hospital Laundry Today, and you are all here as heads of the hospital laundry services for large integrated delivery networks. Let’s say we were talking about whether it made any difference that the laundry service was deeply integrated with the IDN. Outsourcing functions is very easy for anyone to do in any line of work. But a laboratory is much different than a laundry service within an IDN or even a 100-bed hospital.

Are the people who run these health care systems well enough acquainted with the fact that the laboratory is a medical, clinical service to patients, and have we been doing enough to make them believe that? In other words, sometimes you can be your own worst enemy if you treat the lab as if it’s a commodity. If your laboratory is like the laundry service, you’ve got no legs to stand on, it seems to me.

Stan Schofield, president, NorDx, MaineHealth, Scarborough, Me.: The laboratory is not a commodity, and people who talk about putting a test tube of blood in a box and shipping it across the country to be tested are very shortsighted. The hospital laboratories, the regional laboratories, part of IDNs, have three critical missions: We improve the service for the patients, we improve the quality of medical care provided, and we decrease the cost.

And that doesn’t mean a cheap test or a single price. That means we’re responsive to the needs of the clinicians and the patients, we have the compassion to work with the patients and their families and provide access and technology that might not be available otherwise, and at the end of the day, it’s the laboratory that people turn to for most of the information about the patient, in a timely, cost-effective manner. You have to build on and champion that, and you have to have visibility within your organization.

We have always had a laboratory in a hospital, but until we at MaineHealth developed a regional and more complex facility, it didn’t have the visibility and the respect it has now because of the better patient services and better quality than a stand-alone, single hospital unit provided.

So you have to be out there, you have to champion the laboratory, you have to be visible, and you have to be part of the solution that’s challenging everybody in health care today. And that’s how do you improve your service and your quality and decrease your cost? The laboratory is a cost-effective solution. With the right kind of management and leadership, you can get the message across and be respected within the organization.

John Spinosa, MD, PhD, pathologist and chief of staff, Scripps Memorial Hospital, La Jolla, Calif.: The paradox lies in the way it looks like a commodity when it’s well run. When it’s well run it looks effortless and it looks like something anyone can do, and what they don’t appreciate is how much effort goes into making it look that way. When it’s not well run or it’s not serving the needs of the clinicians, then it doesn’t look like a commodity and all of a sudden it rises up into their thoughts. And that’s one of the paradoxes: The better-run labs look much more like commodities because they’re seamless, but there’s a lot of effort behind that.

Priscilla Cherry, president of laboratory services, Fairview Health Services, Minneapolis: Part of my strategy with the higher executives in the organization is to point out that we’re kind of like electricity. ‘We’re all humming along, and the only time we maybe get called upon is when the electricity or the lights go out and you ask, What happened to the laboratory? The lights are out.’ So in a sense, they kind of view us as a commodity. But we are in the business of transmitting information to the clinicians to enable them to take care of their patients. I try to tie that in with the total patient outcome and the amount of dollars we influence when the system takes care of a patient. That is, I tie in the total picture of what we provide, the value, and what may happen to the patient or the length of the patient’s stay if they didn’t have that information.

I recently said to our new CEO, ‘We are your lifeblood.’ And I looked him in the eye and said, ‘You can’t go on without us or run without us.’ Just to tie in the importance of us being there and the service we provide. That is, don’t even think about outsourcing us, because if you outsource your lifeblood, you’re out of business yourself.

Walter H. Henricks, MD, director, Center for Pathology Informatics, staff pathologist, Cleveland Clinic: I agree with Priscilla Cherry about how you show value being actively involved in clinical care. But from an organizational perspective, a couple of other thoughts are, with respect to clinical care, being seen as active and contributing to the success of those programs that are most important to the institution. So there’s a component of recognizing what those programs are.

If you’re opening a new transplant service, for instance, make sure you have made that a priority in your laboratory because that will accrue to your benefit if the overall administration sees you’re on the ball and actively contributing. But there are also other ways. It’s basically the idea that influence and value accrue to those who help the institution meet its goals and objectives.

What are the other institutional goals that the laboratory can be central in participating in, if not leading? Some of the more familiar and common are meeting the requirements of oversight agencies, patient safety, tumor board, tissue committees. But other things, too, like active participation in laboratory information handling in the electronic medical record, electronic test order entry, blood utilization, point-of-care testing—all these things embedded in the culture of the organization, which, to the extent that they become embedded, are that much more difficult to outsource.

Sheryl Wilson, senior executive director of laboratory services, Alegent Health, Omaha, Neb.: What I found successful in my organization is to get our pathologists to champion the laboratory and the laboratory services. That created recognition and acknowledgm­­­ent for our accomplishments. Discussing patient and physician satisfaction/ per­ception surveys and our turnaround times and error rates, and real experiences, added to our credibility.

Historically, we were not well appreciated by the physicians and often felt that the services we delivered were not meeting their needs. In the last couple of years that has changed, and some of that change came about by having the medical directors of the laboratories at each of our hospital sites reporting every month in the medical staff meetings on the lab data: what our turnaround times were and whether we were hitting them as well as our other quality monitors. The pathologists asked for feedback and input and interacted more with the medical staff. Raising the overall stature or visibility of the lab has really made a difference.

And now we hear, not just through our own data but anecdotally, that the lab rocks. When you go to an ED meeting and the head of the ED staff says the lab rocks, we feel like we’ve accomplished something.

Thomas Tiffany, PhD, president, Pathology Associates Medical Laboratories, Providence Health and Services, Spokane, Wash.: As far as the value of the laboratory within the system and particularly to the highest levels of the system, Providence Health and Services was form­ed Jan. 1, 2006, coming together with Providence Services and Providence Health System. And prior to that there was a meeting of some system leaders to look at what the top priorities should be when you bring two systems together, forming a large health system of about 46,000 employees. What should be the strategies?

Somehow I ended up at a table where we put down ‘laboratory’ and somehow that got up there with things like harmonization of benefits and a variety of other key strategies. Right out of the gate, it became one of the top strategies to look at.

But across our four regions, there wasn’t a consistent lab strategy throughout the system. So what we ended up doing was convincing senior leadership that this was extremely important. They were looking at, perhaps over five years, the different challenges in the system, maybe a potential drop of net operating income.

The laboratory was seen as a possible contributor to help offset some of that drop. So we launched into something called Lab Futures and spent a year looking at that from all aspects. Lab Futures was a task team composed of administrative and lab leaders from all four PH&S regions focused on laboratory as a system and region initiative. Essentially, that has now become a major strategy and initiative in the system, and regions now recognize the value of the integrated laboratory.

Patrick O’Sullivan, laboratory administrative director, Florida Hospital, Orlando: We create value in the community. What we offer that nobody else offers is that continuum of care we’ve been talk­ing about. We can pro­vide input into our hospital information systems, lab results from outside the laboratory. So you create a larger medical record.

And then we create a lot of efficiencies in that we do both inpatient work and outreach work, often within the same laboratory of the system, because if you did only inpatient work you’d have excess capacity. And we’re able to fill that excess capacity with our outreach work. We’re able to get larger machines that are more efficient because of that volume. We’re able to better use our staff levels, again because of that volume.

We’re able to keep tests in-house. If you look at IDNs as a collective, we probably send out fewer tests to other reference labs than other health facilities, because we’re able to bring the volume in from our large client base and do it in-house. Again, creating better service for those we serve. We do create a tremendous amount of value, and it’s up to us to continually tout that and not let people forget.

CAP TODAY: In some ways, all of health care is undergoing a kind of nuclear arms race of consolidation. The systems consolidate, the hospitals consolidate, the vendors consolidate. The one piece of consolidation that it seems to me should be welcome news to laboratories is the managed care companies.

When it was a fragmented business, the medical insurers didn’t care about what was going to happen to me in five years because they knew I’d probably be out of their plan. Today when you have only a few insurance carriers, they really have to worry because I will not be leaving for a long time. So the strategic value of holding both the inpatient and the outpatient medical data, which you can do in your labs, becomes one of the most important strategic pieces of a health care system. Can you share your thoughts on this?

Terrence Dolan, MD, president, Regional Medical Lab­oratory, St. John Health System, Tulsa, Okla.: If you look at health care costs, laboratory tests make up four to five percent of overall health care costs. From a Medicare standpoint, lab costs are only about two to three percent of overall costs. Yet laboratory results drive 60 to 70 percent of all health care spending. Many years ago I recognized that we as a laboratory were in the information business. Even though we did testing, in fact it was the information we were generating that the physician was interested in, not how we did the test. Today phy­si­cians are being overwhelmed by the tre­mendous amount of information generated in health care. They are looking for actionable information in this sea of information.

Specifically, they’re looking for a summary report that provides the crucial pieces of information—actionable information—needed to optimally manage the care of their patient. They also want all outreach, outpatient, and inpatient laboratory data integrated and included in this actionable report.

Let me give you an example. As we all know, if OB/GYN physicians deliver an injured child, they virtually can’t defend themselves from a medical malpractice standpoint, no matter what the issue is. These specialists are very interested in us, at RML, giving them laboratory exception reporting. What this amounts to is, we give them the usual laboratory information, then we go through another pass of the information and extract key pieces of information that are crucial to the outcome of that patient as determined by the physician. On a periodic basis we give the physician a list of this information that is critical so that the physician has not missed it, which minimizes the chance of errors and improves outcomes.

All of us have seen the unnecessary duplication of testing because the physician seeing a patient may not have all the results needed to make a decision. Even if his office ordered the test, they don’t remember what it is, so it’s important that we give them a fully integrated picture to avoid a reorder of the test and expedite the evaluation and treatment of the patient.

There is a significant amount of error in health care because we’re trying to deliver a very complex health care system. In fact, it’s the most complex business known to man, with management systems that are inadequate to deliver quality health care efficiently. We have to change how we deliver that care. What do we mean by that? We are great believers in process improvement such as Six Sigma, Lean management, total quality improvement, and other strategies. The problem with all of these strategies is that they require a great deal of data analysis, and in many instances these data must be obtained manually, which makes it costly and inefficient.

In our view, the only way to collect this information in a sustained way and to continually fine-tune processes is to extract the data from multiple sources—that is, the laboratory information system, the enterprise resource planning systems, like a Lawson system, revenue cycle system, and hospital information systems. All of the data need to be brought into a consolidated database and optimized for analysis so we can focus on measuring processes throughout the health care system. The most effective method of doing this is the use of a data warehouse information system. It is the only practical way to measure and improve the millions of health care processes.

Insurance companies are intermediaries. They market products, receive a premium payment, and then pay health care providers. They haven’t been successful for any sustained period in reducing health care costs, and the failure of the managed care era proved this. They get 15 percent or so of the money that comes to them in premium payments, so the more overall spending grows, the more profit to the insurance company. The people who are truly concerned about health care costs are the actual payers, that is, the companies paying for worker health care and the federal and state governments.

In the UAW labor contract that was signed with General Motors, both agreed to push for a national health program. If you look back historically, the people who have fought against the national health system have been the providers, the unions, because they had such wonderful plans they didn’t want to lose them, and the employers, in a way, went along with this. I believe this thinking has changed. U.S.-based companies are competing in a global market, and their competitors domiciled in other countries have their health care cost covered by the other country. Also, those competing companies, when they develop manufacturing plants in the United States, do not have the heavy load of retired workers that the U.S. based companies have. Virtually all the companies domiciled in the United States have a greater health care cost they desperately want to eliminate so they can compete more effectively with other international companies. For the first time in my career, there is a very good chance we are going to see some type of national health program, since virtually everyone involved has come to the conclusion that the present system doesn’t work.

Let me give you an example of what we can do for the companies. Since 60 to 70 percent of health care spending is driven by the result of a lab test, the laboratory can make a difference. We say to a company: ‘If we had all of the laboratory data on your employees, we could decrease the number of lab tests being used in the care of your employees.’ And there are various strategies one can use to do that, and they are all based on data warehouse technology.

So we go to the payer and say, ‘We can reduce X amount of your health care expenditure and, in the process, show evidence of improved outcomes.’ Eighty percent of the data entered into the Apache outcome system used in intensive care units are lab data. So we know laboratory data are a significant driver of medical outcomes. How we are proposing to do this is in development.

A laboratory can add value another way: by making its reference ranges more appropriate for the age and sex of the patient. In an effort to avoid false-negatives, our reference ranges have built in large numbers of false-positives. If laboratory results are driving 60 to 70 percent of health care spending, how many radiology studies are we generating because of abnormal laboratory tests due to false-positives? By developing probabilities, by the analysis of multiple test results, we will be able to give the physician more actionable information and thus make a better determination of how extensively an abnormal result should be evaluated. The data warehouse is ideal in implementing this.

Look at what’s happening in health care in the United States. The primary care physician is being replaced by nurse practitioners. The general internist is disappearing and the internists are being trained to be subspecialists. We are all seeing, as an example, that when a gastroenterologist has an endocrine problem, they’re not confident in how to work it up. If there are no general internists or endocrinologists, who are also disappearing, the knowledgeable pathologist has the opportunity to direct the workup of the patient’s endocrine problem and thus a greater opportunity in the future to add value to the patient’s care. Analyzing test results using the data warehouse technology gives us this opportunity to optimize the workup.

To summarize, then, by using sophisticated IT tools such as data warehousing, we have an opportunity to change health care processes to improve outcomes, decrease unnecessary cost, and minimize errors in health care.