Outreach: Forge ahead or accept purchase bid?

Of course, Maine happens to be particularly rural—as Schofield says, there are more moose than people in some parts of the state—and that makes optimizing courier networks trickier for the regional lab. But as evidence of its success, NorDx is often the source of revenue for the MaineHealth system when it needs a large investment in information technology or other technology that many hospitals can’t afford, he points out.

He believes NorDx is somewhat less buffeted by its competitors because the MaineHealth system’s contracts and laboratory contracts are all unified. “We try to avoid carve-outs of the lab, and other patient services like radiology, so we have something called single-signature contracting where one signature is for everyone in the health system. As a result, the tumor markers, molecular assays, advanced microbiology, autoimmune testing, allergy testing—they’re all run in a very cost-effective manner right here on the same lab fee schedules as Quest and LabCorp tests.”

Private insurance, in a way, is health systems’ protection against a certain percentage of Medicare cost-cutting, Schofield points out, since Medicare already does not cover the cost of care. “Hospitals are only able to stay in business because if the hospital bills $20,000 for a private-payer-covered patient’s care, it gets paid 90 cents on the dollar or whatever is the contracted rate. Almost all hospital commercial insurance is well above what Medicare pays; otherwise there wouldn’t be a hospital in business anymore.” Within that framework, the lab piece for non-Medicare hospitalized patients is a big source of revenue—as are radiology and ancillary services—and helps keep hospitals from going in the red, Schofield says.

Despite that, Schofield warns that it’s time for all labs, including his, to get ready for PAMA and not take anything for granted. He plans to bring in his regular advisor, Applied Management Systems of Burlington, Mass., to see if there are areas he can make more cost-effective at NorDx’s 10 hospitals and regional core lab, before PAMA hits. “This is my last chance to batten the hatches down before the storm,” he points out. Benchmarking will be a key part of the process, and he hopes that benchmarks for NorDx’s productivity and quality will show it is still one of the best and most cost-effective labs in the country.

If NorDx were sold off to Quest, he believes, it would reduce the health system’s integration and harm its mission. “Six of the 10 hospitals Quest probably wouldn’t want to run because they’re too small, and Quest isn’t going to do 125 nursing homes. But the health system needs many of those homes to allow for patient discharge and rehab within the state. If their lab work in case of infection or secondary complications isn’t available, people can’t be discharged from the medical centers without them.” That, in turn, detrimentally affects length-of-stay figures.

As he notes, the large national labs got out of the nursing home business in most distant, rural settings years ago. “If a patient service center doesn’t have 25 to 30 patients a day, then LabCorp will close it.” In Maine, NorDx has been filling the nursing home niche. But that niche is now at risk because of cost reductions from the Centers for Medicare and Medicaid Services.

A troubled business model accompanies many of the acquisitions that have occurred in the diagnostics industry in recent years, which start with a promise that the buyer can deliver secret efficiencies. “Say you have 500 doctors and a regional lab and they bill out $30 million in lab tests through that relationship in terms of outreach. Quest or LabCorp will say, ‘I’ll give you $45 million for that business because it’s all going to hell and you’re not going to survive. We’ll manage your lab for five or 10 percent of operating expenses and be your reference lab.’”

The promised savings come from automating, stripping down costs, and overworking the staff with high productivity demands, often motivating the staff to leave, he says. “For four or five years, the buyers do this at cost or below cost, then in the last five years of the contract they have escalators, so they make money by year six or seven.” There really is no secret sauce, Schofield says: “It’s all increasing productivity and adding automation, and just about anybody can do that now.”

Admittedly, what Quest and LabCorp can mainly offer in recent acquisitions like PeaceHealth in Eugene, Ore., or PAML in Spokane, Wash., is savings on labor, Schofield points out. But the price is steep. “For example, in Spokane 400 people are at risk of losing their jobs because the work won’t stay there. It will go to a large national lab in that part of the country, because that’s the formula. In other words, you don’t get the results in six hours anymore. The sample goes on an airplane somewhere overnight and you get the results 16 or 20 hours later. But they’re half the cost to produce.”

An additional factor fueling desperation, in some cases, is that hospital CEOs are getting hammered with costs and hemorrhaging cash for information technology, Schofield says. Cost overruns for some electronic record systems have become routine, leaving many health system executives feeling forced to sell off the lab because it’s not a “core fundamental service.”

Anything can happen these days, he concedes, and if the CMS slashes reimbursements by 20 or 30 percent, then his own laboratory might be at risk. “But if the national labs were to come in and just buy the outreach, say, in two or three of my cities and scrap what’s left because it isn’t cost-effective, that would be a huge disruption. So my health system is not shopping to sell me.”

His core strategy has been to keep the emphasis on growth. “If you’re not growing, you’re in a defensive position, and the only way to stay ahead of a declining reimbursement curve is to add volume.” But “lowballing” by the national labs and the government’s reimbursement cuts have made growth more and more difficult, and he believes the concept of outreach as a profit center for health systems is at high risk. “You can still run at a more limited scope or focus only on tumor markers or cancer medicine testing. But the high profitability in having physician-owned practices refer testing to hospitals as outreach is at risk, because insurance companies aren’t going to pay $125 for the CBC anymore.”

In PAMA’s first year, Schofield expects a 10 percent cut in Medicare reimbursement. “If the insurance companies are able to match that, then it will be painful.” Further cuts of 10 to 15 percent per year are going to be disastrous, he says. “We’re one of the most cost-effective labs in the country. I can probably make it to a third year of cuts, but then who knows?”

At rapidly growing TriCore Reference Laboratories, Albuquerque, NM, management has decided to adapt its business model to the new era. “Our theory is that selling an outreach program to the national labs is a disastrous decision long term,” says TriCore CEO Khosrow Shotorbani, MBA, MT(ASCP). “Laboratory data is actionable and has predictive value. To sell the laboratory may be a short-term gain of capital but a long-term loss of major information that is critical as we move toward population health management and a value-based health care system.”

Instead, TriCore is following a three-part plan: optimization, diversification, and transformation. “We have to do more than just traditional organic growth,” he says.

The first step involves “eliminating waste, increasing volume, and ideally adding margin to the bottom line, and that includes rationalizing our relationships with payers and all our constituents.” The second step, diversification, will further extend TriCore into the space of research and development and the management of private hospital labs. That will provide TriCore with volume with a margin, and longitudinal patient data to put into its patient information database (EMPI).

‘Our theory is that selling an outreach program to the national labs is a disastrous decision long term.’ — Khosrow Shotorbani, MBA, MT(ASCP)

The third step, Shotorbani says, is to “transform our business model to leverage interpretive or prescriptive lab data to risk-stratify populations, address care gaps based on established guidelines of disease management, identify patients at risk, and facilitate targeted intervention.”

In line with Uber’s model, which connects a passenger and destination to a car and a geocode, Shotorbani envisions the lab as “connecting actionable patient data to a patient to a geography to a physician and care manager.” The shift he is seeking, however, would be to use lab data to intervene before the person is admitted to the ER or requires hospitalization. “Our focus is now moving toward the pre-disease state, as opposed to the disease state. We are moving away from reactive medicine focusing on sick care to proactive medicine focusing on health care and wellness.”

With the longitudinal data TriCore can now access within its data repository, it has a unique view of trend lines that will link the laboratory to patients’ pre-disease states. Employing this data, for example, “We will know in advance which diabetic in a particular zip code will potentially develop renal failure and we can facilitate an intervention.” Payment for these laboratory services would be through a risk-sharing model and ultimately a gain-sharing model, “but we’re starting the conversation with a per-member-per-month plan. Our new value proposition is a new product to serve to that population.”

The CPT codes for this informatics business model, called “Clinical Lab 2.0,” unfortunately don’t exist yet, so Shotorbani hopes TriCore can package Clinical Lab 2.0 as data analytics backed by the profession of pathology. He plans to have New Mexico, where TriCore now has an 85 percent market share, function as a pilot test of the business model. (See “Laboratory 2.0: changing the conversation,” CAP TODAY, July 2016.)

He calls on hospital labs to resist selling their outreach testing because it is a shortsighted decision on behalf of their health system, since hospitals have patient-centric data and commercial labs are striving to become part of the patient-centric payment model. But he predicts there will be more purchases. “Commercial labs are going to push the trend because they have a future vulnerability if they don’t. They are losing business because physicians are becoming employed; they have to acquire the hospital labs to combat that trend,” Shotorbani says.

For their part, hospitals find outsourcing attractive because of the capital that the commercial labs can offer. “The hospitals don’t want to tap into their reserves because that has an impact on their bond rating—and health systems want to hold on to their bond rating; it affects the entire interest charged on their financing.”

New Mexico may be five to seven years ahead of other states because of its landscape and economics, Shotorbani says, but he believes the Clinical Lab 2.0 model will translate well to other states, especially urban states that have access to rural data. Meanwhile, as health care systems struggle to plan amid such a large number of unknowns, and opportunities to shed their outreach programs, TriCore is “in it to win it.”

“We’re moving to become more of an agile organization, as opposed to doing long-term planning, because change is happening too frequently. We have to be more like IT companies: agile and innovative.”

Some fear that the reimbursement declines around the corner are so serious that in five years, nobody will be left standing except Quest and LabCorp. Analysts interviewed by CAP TODAY don’t expect that to occur (see part two in the August issue), but they advise labs to take action to make sure it doesn’t.

Laboratory professionals must change the way they manage and oversee lab operations if they are going to stay current with new understandings about human resources, finance, communications, and business strategy, Newmark says. “How do we ensure development of future leaders of the lab and health care in general? It’s not good enough to be just a strong laboratorian anymore. If you can’t prove your value and show the metrics of that value, you’re going to be overlooked, and one of the large labs will come in and will be doing lab services for you.”

People are being a little cautious as they wait for clarity on what kind of Medicare, Medicaid, and private insurance policies lie ahead, says consultant Paul Camara, a principal of Applied Management Systems. “They’re all understanding that whatever happens, they will be paid less to do more. Controlling costs, from a system perspective, is an imperative you can’t ignore.” Nevertheless, he adds, “No matter what happens, if you continue to look for opportunities to partner or be more efficient through internal resources to be more cost-competitive, in the long run you’ll be ahead of the game.”
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Anne Paxton is a writer and attorney in Seattle. Next month: Paul Camara of Applied Management Systems and Patrick Allen of Kaufman, Hall & Associates.