A question of capital: Will lab purchasing take a U-turn?

Anne Paxton

June 2014—If they made disaster movies about the laboratory industry, you could cue the voice talent right now, because all the plot elements seem ready at hand. In a world where an economy haltingly recovers from the blows of recession, a series of double-digit reimbursement cuts for laboratory services looms. New financial accounting standards lurk in the background, threatening to roil traditional equipment rental arrangements. A mammoth national health insurance program rolls out, generating fears of one set of dictates to rule them all. Meanwhile, hospitals bent on mergers and acquisitions relentlessly starve their own departments—especially laboratories—of capital budgets, making the No. 1 priority simple survival.

But the plotline for laboratory executives trying to steer through these hazards isn’t at all predictable. There are alarming signs, certainly, but also reasons for optimism, and a host of unknowns. Will all of these factors lead to rumblings, tremors, or seismic shifts for the laboratory industry? And what are the implications for laboratory purchasing of instruments and other equipment in 2014 and beyond?

When CAP TODAY talked with directors of several of the largest laboratory operations in the country about their own purchasing plans, their forecasts were decidedly mixed. Opinions differ as to whether circumstances call for a buying binge, just procurement as usual, or a batten-down-the-hatches response.

From Stan Schofield’s perspective, for example, the Medicare/Medicaid reimbursement cuts in store for laboratories due to the Protecting Access to Medicare Act of 2014, signed April 1, are casting a big shadow over the industry. “It will be challenging. We’re moving from difficult to dire,” says Schofield, president of NorDx and senior vice president of MaineHealth in Scarborough, Me.

As co-founder and managing principal of the Compass Group, a trade association representing 23 laboratory corporations associated with large integrated health care delivery networks, Schofield conducts product evaluations and negotiates purchases on behalf of hundreds of hospital laboratories. Based on reimbursement cuts, unwelcome new accounting standards, and other pressures on hospitals, what he sees shaping up is an unprecedented financial crisis for the laboratory industry that is sure to shrink purchasing.

Some other Compass members echo that outlook—but not necessarily with the same perspective. Dan R. Brown, PhD, is system director of laboratories for the newly merged $8 billion Baylor Scott & White Health, formed in late 2013 and now the largest not-for-profit health care system in Texas. He agrees the nation’s health care system is experiencing the biggest and fastest changes in decades, but he doesn’t see a financial crisis if systems are prepared appropriately. For his own network, new cost controls are in place, but so are integration and harmonization of labs that are leading to the purchase of many new platforms. “We’re not downsizing,” Dr. Brown says, “but more in a rightsizing mode to adequately serve our patient needs. We’re in a period of transformational change.”

Similarly, at the large academic medical center of New York University, where there has been an aggressive building and expansion campaign in recent years, the laboratory also is rebuilding and enlarging and will need new instruments, says Mark S. Lifshitz, MD, director of clinical laboratories for the NYU Langone Medical Center. Hurricane Sandy is no small factor in the laboratory’s rebuilding plans, since the flooding from that catastrophic 2012 weather event took out the medical center’s ground-level blood bank. That loss accelerated the renovation and rebuilding project that was already underway for the entire clinical laboratory. “We have plans to buy a lot of new equipment,” Dr. Lifshitz says. And, he notes, NYU, like several other New York City major medical centers, is expanding its network and laboratory capabilities.

In North Carolina, on the other hand, Ritu W. Ward, MS, MT(ASCP), assistant vice president for the laboratory network at Carolinas Healthcare System, which includes 41 hospitals, sees laboratories retrenching. “Our vendors have traditionally provided us breakpoints in materials and costs according to utilization, based on our ability in the lab to drive more testing. But for growth, we are in the opposite paradigm now. Labs are not betting on the fact of large volume; we are controlling our cost per unit for producing that test. So when vendors come to the table and say, we have a price break if your volume increases, because that will take you to tier two, I have to tell them that’s no longer on the table.” Previous volumes can no longer drive the vendors’ price structure, she says. That’s a bygone era.

One area where her laboratory network is pushing back is on charges for preventive maintenance, which have verged on the exorbitant, she says. “We’re trying to negotiate on that and say we do require 24/7 availability but not an average of $17,000 per year for maintenance on one piece of equipment.” To help keep costs down, her integrated delivery network is also driving hard to have preventive maintenance done on a regular basis, just like a car.

Giving physicians more guidelines about test ordering is another piece of the puzzle. “In our world we are looking at care plans that allow a standard approach for a predictive diagnosis. In the past, it was just a gunshot approach of ordering a panel. Now we’re educating our physicians to be very specific and order just what tests they need. So our physicians are not involved in what kinds of equipment we use or reagents we purchase to provide them what they need, but they are partnering with us to do the right test at the right time.”

Maintaining outreach volumes within a competitive market is a challenge but essential for her network because outreach is the revenue producer. “But we’re also looking at lower volume there, because physicians may choose not to use as many tests or may not order them as frequently.”

Reimbursement is also unpredictable at best, Ward says. “We have certain estimates of how much total revenue is going to be lost for us, but every day in the literature there are some new changes coming into place.” It’s not only the Medicare cuts, which will be deep, but the fact that non-Medicare private payers will follow the same logic, she says.

As to the Affordable Care Act, she believes its impact is difficult to predict but that it may be more about insurance reform rather than laboratory or payment reform. “Obamacare will provide care for individuals who weren’t able to get it before, but when they get to the EDs they may be pretty sick, not just the average patient coming in for a workup. So that drives up acuity and utilization, and at the end of the day, the payment for all of that is going to be the same.”

But there are many unknowns, she agrees. “We’ve all heard in previous years that we need to do more with less, but that used to be something between the administrators and the analysts. Now we have more physician involvement, we have more educated consumers asking questions about charges, and there is just more awareness and much more need for transparency.”

Amid the uncertainty, she confirms that instrument acquisitions are still part of the game plan at her network. “We’re looking for more automated technology in areas where there are lots of manual processes, such as automation in microbiology.” For other instruments, however, “we’re looking at an extended lifespan. The purchasing environment is very competitive. More mergers are taking place among vendors, and we as consumers can take advantage of that by asking for multifaceted contracts, versus one expert area at a time.”

“For instance, if we are looking for instruments in cytogenetics and a vendor there has been purchased by a larger vendor, it’s in our best interests to talk about the entire line of their products we are utilizing, versus negotiating one separate contract at a time. As large a footprint as we have, if we’re in silos the vendors are in silos too. And we can have better price points if we deal on the basis of a package contract.”

At least in health care, the application of Lean principles to hospital and laboratory processes brings improvement, but it also tends to highlight the waste that’s already in the system, Ward points out. “So it can be used as a lever to drive costs down.” That’s one reason why she takes the newest round of cuts and restructuring differently from cyclical ebbs and flows of the past: “Whatever changes we make now, no matter where our journey in the laboratory takes us, will be permanent. They won’t just be containments for a year or two.”

Making instruments last longer is part of the laboratory order set at Alegent Creighton Health, says Sheryl Wilson, MHA, MT, DLM (ASCP), senior director in charge of laboratory services for the Alegent Creighton system, which has six acute-care hospitals, four critical-access hospitals, and an on-site reference lab in the southwest Iowa and Omaha, Neb., areas. About a year and a half ago, Alegent was acquired by the national 78-hospital chain Catholic Health Initiatives, one of the largest chains in the country. “We are now part of a much bigger network and have the opportunity for growth,” Wilson says.

“Alegent Creighton system used to operate pretty independently of CHI, but Nebraska and southwest Iowa are under a single board of directors. The laboratory will likely become a service line across the state, and laboratory services will come under a uniform system approach.” More crucially, capital for acquiring equipment is in short supply. “Just recently, our depreciation schedules were revised. So if we thought we were going to replace something in five or seven years, the message is you might want to rethink that.”

In the past, expectations for depreciation might have been five to seven years for most instruments, maybe 10 or 15 years for refrigerators. “Now, even if the expectation is five years, seven may be used.”

For areas where innovation is less frequent, even a longer time frame is probably in store. “We happen to have Siemens Vista analyzers for chemistry, which is a very robust new platform, and some of our sites have already been on that platform for more than five years. Normally we upgrade or replace in a seven-year time frame, but now it will probably be more like 10. I don’t see anything right now in that arena that is new emerging technology, so those instruments will probably be extended as long as they can be.”

Molecular testing is much more active with a number of different approaches, new tests, and new menus being offered. But for technologies like MALDI-TOF that haven’t been widely adopted yet and are not quite 100 percent proven, Wilson says, new equipment requests won’t necessarily see smooth sailing.

In the past, proposals for new instruments had to go to the hospital president, then the system president, and their fate varied depending on how many hundreds of thousands of dollars were involved. Now the levels of review for different purchase levels have multiplied. “If we were just proposing insourcing and the return-on-investment analysis showed it would be much more efficient and economical to bring it in-house, those were pretty easy. But even those are less frequent these days,” she adds. “You’re competing against other technologies or programs, so even if it’s a positive for the system overall, there’s no capital.”

The immediate result for her laboratory has been a surge in reagent rentals, says Wilson, noting that that has been the approach for the latest PCR technology and possible new microbiology automation. “In the last six months, we’ve done more reagent rentals than in the last six years. It’s not that management is encouraging it; it’s just that if you don’t have capital, it’s the only thing that makes sense.”