College of American Pathologists
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Joint account: Midwest labs team up

July 2000
Anne Paxton

When two urban newspapers announce a joint operating agreement, it invariably signals they want to end a troublesome rivalry. But Aurora Health Care’s and Advocate Health Care’s combination of their laboratories under a joint operating agreement unites two entities that are in separate states and have barely competed at all. Although Aurora is based in Milwaukee and Advocate in Oak Brook, Ill., the inspiration behind their shared laboratory services venture, which was launched May 1, was compatibility and a good fit.

"They filled in holes we had, and we filled in holes they had," says Peter Fine, executive vice president and chief operating officer of Aurora.

With the new entity they formed, called ACL, the two integrated delivery networks, or IDNs, are fully integrating their laboratories, including information systems, lab billing and finance operations, and lab sales and marketing functions. It’s a new business model that other IDNs will increasingly be drawn to, predicts the laboratory industry newsletter The Dark Report. It calls Aurora-Advocate’s venture a perfect example of the new crop of regionalized, consolidated laboratories that are displacing traditional commercial lab-hospital lab joint ventures.

The shared laboratory venture in this case has been created by two industry giants of roughly equal size. Aurora, Wisconsin’s largest private employer with 20,000 personnel at 230 sites, includes 12 acute care hospitals and one psychiatric hospital, plus several long-term care facilities and retirement communities. Advocate, the dominant health system in Chicago, has 21,500 employees at 200 sites, including eight acute-care hospitals and two children’s hospitals. Aurora Medical Group consists of 500 physicians, while Advocate has three affiliated medical groups with 550 physicians.

Both sides expect the combined whole-a $120 million laboratory organization with 1,500 full-time equivalent staff-will be better than the sum of its parts. Advocate already has a 17 or 18 percent share of the Chicago patient services market, increasing at about one percent per year-and expects to own an even larger segment as new hospitals continue to merge with the system. But it has virtually no laboratory outreach program. Aurora, on the other hand, has a well-established outreach program, new hospitals under construction, and a desire to snag some of the managed care market in Chicago.

Jay Schamberg, MD, general manager of ACL and vice president of Aurora, believes the Aurora-Advocate shared laboratory is unique. Although there are other cooperative ventures and mergers, "I don’t know of anyone doing exactly what we’ve done-taking two systems and managing them as one. Our systems aren’t merging; it’s just the laboratories coming together under a single management structure."

Aurora, which integrated laboratory services starting in 1991, knew well the benefits of centralizing laboratory services. Its core laboratory provides services for all Aurora care sites throughout eastern Wisconsin, plus others in the medical community and government in Wisconsin, northern Illinois, and northern Indiana, as well as international industry accounts. Advocate also saw the advantages. "The model of laboratory integration that Aurora had was very similar to the model that Advocate was envisioning," says Cheryl Vance, vice president of ACL in Illinois, corporate vice president of Advocate, and a member of the joint management team. "We were just behind about three or four years."

At Aurora, "We gained significant financial advantages from consolidating, and in thinking through how we could further increase our volume in the core laboratory, we considered working closely with other health care organizations in our community," Fine says. "But we recognized there were some competitive issues that made it difficult to accomplish." Aurora then looked outward for partners that were still geographically accessible.

If all goes as planned, perhaps the greatest impact of the joint operation will be ACL’s presence in the managed care market in Chicago. "We needed to be a little bigger to really compete with Quest, which is our main competition here," Dr. Schamberg says of Aurora. "In Wisconsin we probably have a larger market share than Quest because of the size of our system. But in Chicago we have very little market share. There’s some in drugs-of-abuse testing, some in blood lead testing, but otherwise it’s negligible because we have trouble getting access to managed care contracts. We have a United Healthcare contract in Wisconsin, for example, but we’re not on their contract in Chicago because we don’t have enough clout and we’re not associated with a big provider." The shared laboratory will help remedy that situation, he believes.

Groundwork for a shared venture was laid some time ago as the two systems considered strategic partnering. "We had established a relationship between Aurora and Advocate in the mid-’90s, which was focused on a strategic alliance, but we never found a project to work on of any significance," Fine says. "It became obvious that we had certain services they didn’t, not least of which was a very large outreach program, and they had certain services we didn’t, for example a cytogenetics laboratory." While Advocate is recognized for its expertise in cytogenetics, Aurora is nationally known for blood lead testing and is one of 70 laboratories certified by the Substance Abuse and Mental Health Services Administration for drugs-of-abuse testing.

The eight-member management team for the shared organization is in place, and a financial analysis of volume and expenses is underway. Accessibility has not been a problem. "We can get from our Milwaukee core lab to Advocate’s primary core lab sites in one hour and 15 minutes," Fine says. And, Dr. Schamberg points out, "There are places that take longer than that to reach within Chicago."

Although the consolidation of laboratory services is moving along fairly aggressively, much developmental work remains. "We have not been moving our laboratory volume around yet, although both organizations’ laboratories have been shipping some testing out to external organizations, and now we’ll be keeping various esoteric tests within ACL." But it will probably take "the better part of this year to complete" the logistics of combined operations, Fine estimates. Marie Cato, vice president of operations for ACL in Wisconsin, has been with West Allis Memorial Hospital, now part of Aurora, since 1978, and has been directly involved in Aurora’s formation and growth during the last several years.

She notes that increased "insourcing" of tests is another major benefit of combined volume. "We can afford to set up lines of testing we will now do in house-such as some of the more esoteric testing we currently send out to independent labs," Cato says.

ACL will eliminate redundancies in cytogenetics and molecular diagnostics, Dr. Schamberg says. "We’re looking at the appropriate menu for each site, and when we figure out what it is, then we’ll determine which tests are not time-dependent and don’t have to be on-site. The next cut is whether they have to be done in the same state. We’ll probably stop doing some molecular diagnostics in some places, but we haven’t decided where yet."

From Advocate’s perspective, Aurora offered the capital and infrastructure it needed to develop an outreach program in Illinois. The initial capital outlay required to set up an outreach program was always the obstacle, says Imad Almanaseer, MD, medical director of the laboratory at Advocate and president of an ad hoc group that is trying to form a single professional group for the 30 Illinois pathologists whom he represents as a member of ACL’s joint management team. "We hadn’t been able to secure the capital to set up an outreach program," Vance agrees. Although there was a business plan for outreach and Advocate for moving forward tentatively, "It’s very difficult in today’s environment, and Advocate had other projects for a return on investment in a shorter time frame," she says.

But Cato stresses that vendor leverage, the ability to negotiate better terms with instrument manufacturers, is one of the primary ways the joint venture plans to achieve cost savings. Aurora has been consolidating and standardizing for the last three years, and now has hematology testing on Sysmex instruments, chemistry on Johnson & Johnson instruments, and immunology on Bayer. "We’re quite a ways down that pathway, so we don’t have a lot of cost savings that can still be gained there," Cato says. Advocate has much further to go in consolidating, but members of the joint management team believe the two entities united should receive preferential pricing.

Although a capital plan has not been formally assembled yet for expedited replacement of instruments, a single management team will coordinate the effort to standardize equipment with the various leases and agreements that already exist. "We’ll be buying both supplies and equipment through this one team," Fine says. "There won’t be separate purchasing processes."

"What we’re focusing on right now is ’inreach,’" says Vance. "Advocate has employed physician groups, clinics, and occupational health locations we haven’t been able to provide laboratory services for because we had no couriers-and no mentality to provide outreach-equivalent services." Once those affiliates have been taken care of, she says, "The pure outreach will come later."

At this stage, Advocate does not have an equity interest in the outreach program, Dr. Schamberg notes. The reason: The two systems did not want to get bogged down in negotiations. "The agreement says Advocate will become an equity partner in the outreach operation in the near future," he says. Some outreach is already being shifted to Advocate hospitals, but not all of it can be moved until October, when a reference laboratory interface will link the systems.

Aurora and Advocate are not-for-profit organizations, but outreach testing at Aurora has been marketed and sold by a for-profit subsidiary that will continue under the shared laboratory. "The subsidiary has no employees and no assets," Dr. Schamberg points out. "It merely ensures that we pay appropriate taxes on anything we don’t sell to ourselves." The intention is to have Advocate co-own the subsidiary by the end of next year.

The laboratory information systems will be joined progressively over the next two to five years. "We both have Sunquest, but there are two totally separate databases," Cato says. "By fall we intend to have the two systems talking to each other, but we won’t have open access to each other’s databases. We won’t be able to order into their system yet." Fine adds, "We were lucky both organizations use the same LIS, so we don’t have some of the startup problems of swapping out and changing computer systems. All we have to do is build a telecommunications link, which is easily done."

Billing is not expected to pose a problem. "Basically the laboratory sells procedures at cost back to all the owning hospitals. They do all the billing. The only billing by ACL is for outreach, the for-profit arm-and it’s through the Wisconsin side of the equation," Cato says.

Unlike many laboratory reorganizations, the Aurora-Advocate agreement does not include plans to reduce staff. Since the strategy of the shared laboratory is to increase volume through outreach, "I don’t anticipate any workforce changes that will necessitate layoffs," Dr. Schamberg says. "We did this [consolidation] in Wisconsin three years ago, and we thought we would lay off 60 people but we never laid off anybody. We still have 60 open positions because of the tight labor market." "This wasn’t done to effect layoffs," Cato emphasizes. Once the combined management structure is in place, job descriptions will change, and since staffing shortages already exist, people will be shifted to fill the gaps.

However, "standardizing the instrument line is easier than standardizing human resources," Cato says. The management team has been making the rounds at Advocate sites to answer employees’ questions because Advocate staff will face more changes. Aurora and Advocate have different personnel policies and different pension plans, which will continue as before, but ACL wants to make it easier for employees to transfer between the two operations. "If someone is hired in Illinois, can they be an Advocate employee at an Aurora office? We’re trying to figure out how [the two lab operations] will fit together, and how to make the changes fair and equitable," she says.

The pathology groups in Wisconsin and Illinois plan to remain separate and to retain different organizations and incentive structures. Dr. Almanaseer points out that the Wisconsin group has been together for two or three years, while the Illinois pathologists will be forming a group soon. "We’re trying to organize ourselves in Illinois so that staffing issues remain with the local hospital-not dictated by the board of directors of the new group," he says.

That makes the Illinois pathology group model different from the Milwaukee pathology group, which tracks productivity and makes staffing decisions at a central level. There have been historic disparities in practice patterns among Illinois pathologists and especially between inner-city practitioners and suburban pathologists, Dr. Almanaseer says. But the Illinois group will also seek more uniformity. "We’re trying to eliminate the demographics penalty. Where someone in the inner city has poorer demographics but is doing the same work as suburban pathologists, they should receive the same reimbursement."

As the joint operations solidify, "There will be one company, but each pathologist group will be a sub-business unit of the parent company. Their productivity will be traced, and they’ll be reimbursed based on a unified dollar per relative value unit of work," Dr. Almanaseer explains. "Then when they get that money back, they can decide how to staff themselves to maximize their income."

He is optimistic about the agreement’s implications for pathology. In exchange for moving from traditional small group practices to larger groups, they hope to see longer-term contracts, a significant share in the outreach market, and economies of scale that will bring favorable rates on liability and health insurance. From the standpoint of Illinois pathologists, "We’re looking at a win-win situation," he says.

Do the health care systems’ locations-with head- quarters in different states-pose difficulties? "I don’t think so," Vance says. "We’re doing the same thing commercial laboratories have done for years and years, and we’ll continue to have a large pathology group in each state supporting each system, so there’s no issue with state licensing requirements."

Vance points out that Aurora and Advocate have maintained cultures of improving patient satisfaction, and both have projects in place to monitor physician satisfaction. Nevertheless, the epidemiology physicians in Advocate have expressed concerns. "At Aurora they have one microbiology laboratory where all the testing is performed, and within Advocate’s eight hospitals we have seven. We don’t have a preformulated model for what will happen with our integration, so we’ll continue to work with the medical staff and hospital executives to see if we’re meeting their needs," Vance says.

There are risks inherent in any consolidation, key managers agree. "My main concern is we may get too big and too bureaucratic, and decision-making will be a slow process," Dr. Almanaseer says. For example, "If we want a piece of equipment and the central committee takes six months to reach a decision on it, people may get disappointed and pursue their own routes for resolving issues. That would remove the reason why we’re together."

Fine concurs that size can jeopardize any organization’s attention to detail. "Understanding your cost structure and maintaining your focus on service and quality are critically important. In fact, from our perspective in the laboratory world, successful organizations spend most of their time on service and quality. Anytime you bring two partners together from two different cultures and two different decision-making processes, compatibility is always an issue," Fine points out. "There’s a risk, but we believe it’s limited, because we have a partner with an approach to doing business that is very similar to ours."

Point-of-care testing is another issue the shared laboratory will have to monitor. "You still need to have the testing on site that meets the physicians’ and patients’ needs, and we will be watching what happens with point-of-care," Vance says. "Over the next few years there will be a lot wider selection of point-of-care testing, and potentially it could pose a big challenge." That possibility has not yet been factored into the shared laboratory’s plans. "But we’re making sure we have someone focused clinically on new technologies and equipment so we can recognize and strategize when it’s appropriate to bring it in."

How far the benefits of consolidation can be plumbed remains unknown, and some members of ACL’s management team say caution is necessary. "I think as long as everybody involved keeps quality of care foremost, there’s going to come a point where logistically you can’t continue to consolidate and not affect patient care negatively," Cato warns.

There is no doubt that the Aurora-Advocate shared laboratory will face complex logistics. Fine, who worked in Chicago for nine years, points out that it is an entirely different marketplace from the one Aurora has known. "Wisconsin has a much more rural flavor outside of Milwaukee. Chicago is large and intense and a giant metropolitan area, so it presents different issues." But Advocate’s experience, he believes, will help ACL devise strategies for growing there. If those difficulties can be handled, ACL could prove to be a useful model for other hospital laboratories faced with the perennial need to find cost savings while maintaining quality of care.

Anne Paxton is a freelance writer in Seattle.