By Noel Maring
10/09/07

What Works and What Doesn’t: A Hospital/Independent Lab Group Perspective on Outreach Models

Over the past 10 years, Pathology Associated Medical Laboratory (PAML) has developed four laboratory outreach partnerships with 15 hospitals. The partnerships utilize multiple outreach models based on individual partner needs. Through these partnerships, PAML has learned how to combine in-patient and outpatient testing in a cost-effective, efficient, high-service environment. This article will highlight those models and systems that can achieve high quality, profitable laboratory outreach programs.

Sizing Up the Competition

PAML (Spokane, WA) is owned by a large not-for-profit hospital system, operating largely in the Northwest. “We started as a small independent laboratory and are still technically an independent laboratory even though we are owned by a hospital. Our success at being one of the largest hospital-based outreach lab systems in the country stems from having our feet in both worlds,” explains Noel Maring, Senior Vice President, PAML.

“In 2006, just one of our partnerships (PacLab) billed about $60 million in net revenues, competing head-to-head with Quest and LabCorp. PAML and its partnerships together billed about $164 million in net revenues and all the partnerships combined billed approximately $89 million. PAML also offers one of the most comprehensive esoteric test menus in the Northwest,” he says.

According to Maring, hospitals have four key competitive advantages in the outreach market:

1. Closer relationships with physician staff. “A good hospital-run lab program should be able to leverage these relationships,” he notes.

2. Reduced turnaround time. Most commercial labs continue to batch tests in the evenings, while most hospitals are continuous-flow allowing the hospital lab to routinely perform same-day testing for many assays.

3. Key relationships with third-party payors. The relationship between hospitals and third-party payor insurers is more important to both players,” Maring says. “The insurer wants to have the hospital in place on their system so they can show their employers that they have all the key hospitals. As a result, the hospital can leverage this relationship to assure it participates in key laboratory contracts.”

4. Combined inpatient/outpatient testing, which serves as “one-stop shopping,” which allows physicians to receive lab results from one source, with the same reference ranges.
In addition, Maring notes that hospital strengths include a reputation for quality testing; local pathology; proximity to the client; convenient patient service centers; occasionally higher reimbursement rates; and, in many markets, they keep healthcare dollars local.

Conversely, he acknowledges that there are a few outreach weaknesses for hospitals. They include:

1. Lack of knowledge about outpatient lab profitability. “I put this as number one because you will never get a hospital to buy into your outreach program unless you can show them what it is going to do for the bottom line,” Maring emphasizes.

2. Ineffective billing and collections. “The recent Chi Solutions study showed that 74 percent of hospitals do their own outpatient billing,” Maring recounts. “In our experience, hospitals are not designed to do high-volume laboratory testing that is frequently less than $100—they tend to write those items off. In fact, the Chi report notes that hospital lab day’s sales outstandings (DSOs) are significantly higher than for most outreach labs.” According to Maring, the essentials of billing and collections should include compliance checks; recordkeeping of net revenue by account, payor, monthly, and year-to-date; collections and aging by account; and the ability to calculate profitability by assay and account, and fully loaded contribution margin.

3. Lack of a dedicated sales force. “I think this is one of the more undervalued aspects of hospital laboratory outreach programs,” Maring says. “In many hospitals, the sales representative may have other duties and sell otherservices, such as imaging, or may actually be a lab staff person. Building a good hospital outreach program with great service won’t necessarily be enough to compete in the marketplace. Sales representatives need to be professionally managed and focused entirely on sales and retention. It requires a lot of oversight and very strict objectives. If sales is not a core competency for your lab, I would recommend hiring a third party to do it for you. It is important to the growth of your program.”

4. Physician connectivity. “The national labs have invested millions in this area,” Maring says. “In fact, this is one of their key strategies to compete with the growth of hospital outreach programs. You need flexible, Web-based ordering and reporting capabilities. Additionally, if you do not have the core competency to integrate your results with electronic health records (EHRs) into physician practice management systems, then I recommend that you find an outside vendor to do it for you. The economic incentives to physicians to automate are very high and your business is at risk if you do not have physician connectivity in your outreach program.”

5. Exclusive managed-care contracts. “In the recent Chi report, this was one of the key impediments to hospital outreach programs,” Maring points out. “It is a significant challenge in many markets because of competitive pricing and market share. However, there are several key strategies for competing effectively. Most significant, you need to leverage your hospital’s existing third-party relationships. Go to the contracts manager at the hospital and make sure he or she realizes that you have an active outreach program and how important it is to include the lab in any contracting that is done. In capitated managed-care outreach markets, this is harder to do—however, you can succeed if you have a niche strategy. While you may not become a major player, you can have a very effective outreach program using this strategy.”

6. Lack of customer service focus. “Many hospitals view customer service as one of their significant strengths for in-patient testing. However, in an outpatient setting, they are not as experienced with it. Hospitals do have the potential for personalized service and you need to have that customer focus,” he notes.

7. Lack of support from hospital administration. “If you cannot provide a business approach and show the hospital bottom-line implications, they are not going to be vested in an outreach program,” Maring says. “They have too many other high-revenue, high-margin business lines that they can go to. We send a check to our hospital partners every quarter for a quarterly share of the profits and, of course, the CFO is aware of this. We also send a letter to the CEO of the hospital system that outlines exactly how much they are getting—they know that value, all the time.” In short, it is much easier to compete when the hospital sees the profit from outpatient testing.

Model of Success

“We do not, in most cases, manage the hospital laboratories,” Maring emphasizes.
“Rather, we partner with the hospital for the outreach. The laboratory staff remain employees of the lab and they work for the hospital. We work together jointly to grow outreach volume.”

From a partnership perspective, each partner brings certain things to the table—i.e., core competencies. “Hospital labs do a very good job of high-quality testing and have good turnaround times,” Maring explains. “They also typically have good pathology relationships. We like to keep the pathology local in our ventures—in fact, it is a side benefit that as we grow the outreach on the clinical side, the hospital’s pathology business also tends to grow.”

In addition, while hospitals have the facilities and a large fixed cost in their infrastructure, equipment, and testing, there typically is quite a bit of unused capacity. You can leverage that capacity with outreach testing. Finally, the partner brings the marketplace and the location.

What does PAML bring to the relationship? Two key components to a successful lab outreach program with the first being management. “Our management team includes individuals with both hospital in-patient and lab outreach experience,” Maring explains. “We also bring professional sales and marketing to the table to grow that business, as well as run finance. We know our cost per test, on individual tests, on every test we do, and we know the cost it takes to do business with each and every account. In short, we run our ventures like a business.”

The second is the physician connectivity solutions. PAML essentially integrates its physician connectivity solutions with the hospital’s library information system (LIS) to provide Web-based ordering and reporting and timely, cost-effective connectivity to EHRs in physician offices. There is no need for the hospital to duplicate the very expensive investment in outreach IT products that PAML has already developed.

He also notes that the lab’s billing system is very competitive with those of outpatient centers. “In our ventures, the DSO is typically in the high 30s to low 40s, which is very competitive,” he says.
“When you bring these core competencies together and you wrap outpatient lab and information technology around it, you end up with a fairly synergistic relationship,” Maring notes. We have found that we can compete head-to-head with national labs when we combine the core strengths of each partner and put it out in the marketplace.”

To accomplish this, partner duties are separated by core competencies. “The hospital maintains its personnel in the testing facility,” Maring explains. “PAML adds its outreach personnel to focus on pre-analytical functions—which PAML performs and provides. The benefit is that hospitals don’t want to add full-time employees to handle labor-intensive outreach duties such as phlebotomy and specimen processing. PAML also manages the post-analytical functions—i.e., the physician connectivity, finance, result reporting, and billing.”

Maring notes that he literally bolts his system onto the hospital’s system. “Through a series of bi-directional interfaces we bring our systems in. From a client’s perspective, it is really very fluid—everything flows very smoothly in an organized manner,” he points out. “From an operational standpoint, you can look at specimen flow. Blood is collected in either patient service centers or, in some markets, in the physician’s office. We collect the specimens through our couriers or at the patient service centers. The specimens then go into a processing center, which is located very close to the hospital’s lab, and PAML employees enter the data into our LIS. The specimens are labeled and machine-ready for testing to be performed in the hospital’s laboratory. Approximately 85 to 90 percent of the testing is performed at the local hospital. The other 10 to 15 percent is sent to PAML’s esoteric testing center. The hospital performs these tests, which are then sent to PAML through bi-directional interfaces to our LIS system. We then report the results to physicians in any manner they want—paper reports, interfaces with their EHRs, or Web-based reporting or ordering systems. All these systems are tied into this process.”

Client relationship management software is one of the newest tools that PAML has added. “This allows us to track every interaction with our clients,” Maring points out. “Account reps use the information before visiting clients so they know what has been going on with the account. We’ve done trend reports down to the client level and general lab trend reports to see what’s going on. This knowledge is a value-add.”

Maring does note that there were some issues early on in its partnerships with service levels, which varied by the hospital’s LIS and leadership. “In short, we weren’t putting out as consistent a service product as we would have liked to. As a result, we began measuring performance metrics in specific areas to check service levels. This has helped as we can go back to our partners and present objective data; it helps us work as a team to provide high levels of service.”

From a sales perspective, Maring notes that the lab’s programs are designed to compete with those of the national competitors. “Our sales staff are professionally managed and they have quotas, competitive commission plans, and ongoing training. We also have an active recruiting program. Approximately 70 percent of the sales management team come from national laboratories and a little over 50 percent of the sales force have national lab experience.” In addition, PAML’s couriers have moved to an automated tracking system that’s designed to provide data from the physician’s office and integrates with PAML’s other IT solutions, including Web-based reporting and electronic medical records.

Measuring Results

“We started our first partnership venture, PACLAB, about 10 years ago,” Maring relates. “We started with approximately $14 million in revenue and in 2006 we reached $62 million in net revenues, with about a third of the market share.” Nationally according to a Chi survey, hospital outreach testing accounts for approximately 16 percent of total lab volume at a typical hospital. The remaining testing volume comes from registered outpatients and in-patient testing. At hospitals involved in a joint venture with PAML, outreach testing accounts for 54 percent of total testing volume and registered outpatient and in-patient testing is 46 percent. As a result, 54 percent of testing volume at these hospitals is revenue- and profit-generating, turning the laboratory into a profit center for the hospital.

There are obvious impacts on economies of scale and testing costs because of these partnerships. The following chart illustrates the change in volume growth versus full-time employees for PACLAB.

“When we started PACLAB in late 1996-1997, at one of our hospital partners there were about 200,000 tests per year in the outreach business and about 500,000 tests per year on the in-patient side, for a total of 700,000,” he explains. “The chart illustrates that the tests have grown to where the outpatient volume has exceeded in-patient volume. The total number of tests is about 1.5 million, but the number of full-time employees increased by about 10. The theory of economies of scale fit this environment very well.”

Overall, Maring notes that all of PAML’s ventures are profitable with outreach margins running from the mid-teens to the low 20s.

Opportunities and Benefits

“In summary, outreach programs provide increased testing volumes that lower in-patient and outpatient laboratory costs on a per-unit basis. They improve laboratory productivity and most of our partners maintain a higher testing acumen than similar hospitals of their size because of the volume of testing that they do,” Maring says. “It encourages full utilization of capital investment and it enhances revenue for the partners. Another side benefit is the hospital’s relationship with the physicians—when you provide a high-level service, it gives them the courage to try other hospital services.”

According to Maring, hospital labs can compete very effectively in the outreach market. “Hospitals have some significant competitive advantages, provided they can overcome those disadvantages that were outlined earlier,” he says. “The best strategy is to put everything into a multi-year business plan for your administration, making sure that you can demonstrate a bottom-line impact and that you have created some very specific goals. In addition, if you don’t have a core competency in key areas, outsource the function.

“The opportunity is yours,” Maring concludes. “A hospital laboratory by nature has relatively high fixed costs and relatively low marginal costs. Lab managers have the ability to leverage the low marginal testing costs by increasing outreach testing volumes. It’s been validated that hospital outreach programs are profitable across the United States. It’s up to you to seize the opportunity.”

What Works and What Doesn’t: A Hospital/Independent Lab Group Perspective on Outreach Models