Joint account: Midwest labs team up
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
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
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,
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
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,"
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,"
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
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.