College of American Pathologists
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Straight talk from core lab survivors

September 2000
Anne Paxton

Adapt, migrate, or die. Those are the options for the animal world when drastic changes in the environment pose a threat, and they apply equally well to the laboratory world, says Phyllis Mashburn, laboratory director for Baptist Memorial Health Care System, Memphis, Tenn. For her hospital network, and for many others across the country, creating a core laboratory was a way of adapting and migrating simultaneously, in the face of intensifying competition for health care dollars.

But how do core laboratories’ outcomes compare with the projections? Consultant Tom Bingham, who has helped several U.S. organizations form such entities, cautions that the core laboratory may not be the silver bullet the laboratory needs to resolve its financial difficulties. Bingham is a consultant with Bingham and Bingham, Burnstown, Ontario, Canada.

"The lab is an easy target whenever there’s fiscal restraint," he says. "It’s the one area of the hospital where the services don’t really need to be provided in-house. There are a lot of examples of extremely efficient operations from core labs, but also of ones that are not working that well."

Mashburn and Bingham were part of a panel of experts at the June 2000 meeting of the Clinical Laboratory Management Association. The panel members drew on personal experience to relate the trials and rewards of creating a core laboratory with a multihospital system, a large group practice, and a partnership between a hospital and an independent laboratory.

Although all agreed the outcomes validated the move to a core laboratory, the process included the troublesome, the unexpected-and even the horrendous. The core laboratories in their cases can boast of results ranging from the impressive to the stunning:

  • Memphis Pathology Laboratory, the core laboratory for Baptist Memorial’s 16 hospitals, was spun out in 1986 when it had 350 employees and 200 clients. While growing to a $30 million operation with 1,200 clients, it has trimmed its staff to 280 employees.
  • Bon Secours Richmond Health System in Virginia, which is composed of four hospitals, formed a core laboratory 4 1/2 years ago, and its full-time equivalent staff has dropped from 200 to 146, with payroll decreasing 28 percent and cost per billable test declining 40 percent.
  • American Health Network, Indianapolis, a $120 million multispecialty group practice with 169 physicians, formed a core laboratory in 1997. It has increased its average volume per laboratory by 283 percent, decreased its average overall cost by 37 percent, and reduced labor expenses by 37 percent, all while raising its medical technologists’ wages by 23 percent.

Few hospital systems form a core laboratory in isolation, and determining when the savings can be tied directly to the core laboratory can be a challenge. "A lot of things people are expressing as cost savings are legitimate-no question," says Bingham. "But they relate to standardization and consolidation of physical facilities." Creating a core laboratory, in his view, means breaking down the walls between chemistry and hematology, possibly rolling in blood bank and microbiology, integrating specimen accessioning, and cross-training staff.

In Bingham’s experience, the benefits of a core laboratory hinge on the efficiency of an organization’s existing laboratory operations. "If you’re at the 75th percentile of your peer group and you create a core lab, the impact of that will be two to five percent," he says. "If you’re currently running at the mean of your peer group in cost and productivity, it’s more likely your savings will be up to 10 percent, and if you’re at the 25th percentile, or well below the mean of your group, then savings related to the core laboratory will be closer to 15 percent."

Opting to consolidate The institutions represented by the panelists at the CLMA’s core laboratory session took different routes in forming their core laboratories. Billie Vaughn, administrative director for Bon Secours HealthPartners Laboratories, Richmond, remembered that the current CEO of parent company Bon Secours Health System Inc. foresaw several years ago that the system would grow into multiple hospitals. "And when it did, he looked to the laboratory as the first place we consolidate services because of all the redundancies," she says.

Ginger Wooster, laboratory manager for American Health Network, says her core laboratory was formed in stages by Anthem Insurance’s network of primary care physicians in Indianapolis. "A core laboratory wasn’t our initial intent," she explains. "But we had 65 variations of laboratory services, and it doesn’t take rocket science to see that’s not a very efficient way to provide laboratory service to physicians."

For two reasons, the "core" laboratory started as four labs instead of one. "First, we had to make it happen with zero capital investment, so we couldn’t build a physical plant, and there was no one physician office large enough to be a central lab," Wooster says. "The other reason was political. The physician leaders were not ready to part with their lab." By 1998, when the physicians purchased the network, several years of data showed that a single core laboratory would make more sense.

Memphis Pathology Laboratory also developed in phases. In 1984, Baptist Memorial Hospital-at that time the largest hospital in the world under one roof, with 2,000 beds-sought to increase its referral base by purchasing small rural hospitals in Arkansas and Mississippi. "With that, they wanted to consolidate the labs and create a nonprofit core lab to serve the hospital system. So they ran the Baptist Regional Laboratories out of Baptist Memorial Hospital for about a year and a half," Mashburn recounts. "In July 1986, we spun the lab out across the street and down the block, with a pneumatic tube system to the main unit."

At the same time, Baptist purchased a small for-profit laboratory from two local pathologists to get into the for-profit outreach marketplace. But in 1996, the laboratory was forced to reinvent itself. That year, "Medical necessity hit, the laboratory went into a financial tailspin, and we realized we had to get out in the marketplace and educate our clients on medical necessity and focused medical review," says Mashburn. "At the same time, the administration was saying, ’Okay, we’ve got a big lab across the street that used to make money and is now losing it.’"

Baptist considered forming a relationship with a competing commercial laboratory, eventually vetoing the idea. "But we couldn’t survive alone," Mashburn stresses.

That realization motivated Baptist, in 1998, to form a joint venture with MDS Laboratories, the largest laboratory in Canada and a company with several joint laboratory ventures in the United States. "We sought MDS because it is an international diagnostics company with expertise in multihospital integrated laboratory networks," she says.

This year the joint venture was formalized as Memphis Pathology LLC, a for-profit entity. "We brought a broad client base, expertise in diagnostic and esoteric testing, and customer service," explains Mashburn. "What MDS brought was expertise in sales and marketing, information systems, revenue cycle management, automation, and the capital for growth and infrastructure."

Who stands to benefit
Organizations that are best served by a core laboratory meet specific criteria, according to Bingham. One good prospect is "a laboratory that is really a community of independent islands, each functioning independently, with very little collaboration between the various elements," he says. Another would be an organization with a "we-they" syndrome, in which different departments or hospitals are at odds or in which the individual entities are at odds with clients. "If that is the philosophy prevalent within the organization, then a shakeup associated with a core laboratory may be a solution," he adds.

Management structure also plays a role. "Too many chiefs, not enough Indians is the situation where the ratio of management or supervisory to nonsupervisory staff starts to get to one in less than 15," Bingham says. "Then a core laboratory may be a good option."

Physical space is another key factor. "For organizations that are looking at growing their business and lack the space, the traditional lab is a very difficult environment to bring additional work into," he notes. "It’s been demonstrated that moving to a core laboratory gets around the problem of having to add more space."

The main advantage of the core laboratory is the economies of scale it affords-not only in reducing staff but also in negotiating favorable contracts.

At American Health Network, says Wooster, "One practice had a piece of instrumentation and had negotiated a really great reagent rental contract with the company. He thought he was doing really well. But when you take the collective volume of our company, and you’re looking at 262,000 billed tests a year versus 3,000 billed tests that that particular practice did, we were able to renegotiate that contract on that same instrumentation. It was an instant $400,000 annual savings. We were able to do that across the board consistently with all the equipment we have."

The formation of HealthPartners Laboratories led to tighter overall operations as well as negotiating clout, according to Vaughn. "We looked at contracts and found some of them had not been reviewed or revised for appropriateness for quite some time. The picture was pretty grim," she says. "So we immediately began looking at renegotiating contracts with vendors."

Similarly, American Health Network’s core laboratory gave the practice additional leverage in Indiana, enabling it to negotiate with payers to eliminate the carve-out for laboratory testing. "The physicians said if you want us in your network, you let us do our own lab testing, and it worked with all but three out of several hundred payers," notes Wooster. "So that was definitely an advantage that we didn’t see when we didn’t have a core laboratory."

Consequently, the laboratory’s volume per physician has grown by 95 percent since 1997. "You think it’s overutilization. But it really isn’t," she says. "It’s because we’ve been able to bring back those tests that we had to carve out previously."

Laying the groundwork Careful preparation can help core laboratories deal with the often sensitive issue of staff cuts. "We were very fortunate at Bon Secours when we began the consolidation process, because we started planning nine to 12 months before the first hospital was consolidated," Vaughn explains.

"We had teams in place that planned how we were going to address human resource issues, financial issues, communication, education of physician issues," she says. "There were lots of champions in the administration that sat with us throughout the planning process. We were able to consolidate and decrease FTEs without any layoffs."

Physician office laboratories face unique situations-for instance, they are required to have a physician on-site to operate as a laboratory. "Because our pathologist is doing fine-needle aspirates, and he has other obligations, he’s not on-site the entire operation time. So we have a lot of downtime," says Wooster. "If we had a physician on-site the entire testing time, we could gain efficiencies and reduce FTEs even more." Despite closing laboratories in several physician offices, however, the core laboratory did not have to reduce the total number of FTEs.

"We reduced FTEs through attrition," says Baptist’s Mashburn, "but also increased our workload through automation and handling processes within the laboratory." Increased volume has lowered costs in several ways.

"Memphis Pathology has saved money in the courier department as well as in the billing department through process management, and its affiliation with MDS will permit even more savings," Mashburn predicts. "We are not only integrating within our hospital system, but we’re now going to start integrating and finding cost savings throughout the joint ventures with MDS across the country." For example, the MDS-affiliated laboratories plan to trim billing costs by employing a common system and a collection agency.

The growth in outreach testing reported by these three core laboratories is another quantifiable benefit of efficiency, according to Bingham. The core laboratories Bingham has studied have significantly increased their client base while reducing the number of customer complaints.

HealthPartners Laboratories has had a similar experience. It has a large outreach program, Vaughn says-about 40 percent of its total volume-and plans to grow that volume because it projects inpatient volume will remain flat. Vaughn credits the consistency of service delivery with significantly improving turnaround time in Bon Secours’ emergency rooms as well as for routine testing.

Her laboratory also has seen a significant decrease in the number of mislabeled and improperly labeled specimens coming into the laboratory. But she is particularly pleased with the revenues the laboratory has gained from charge capture. Billing had been in disarray, and capturing charges-though technically not a "savings"-has been part of the core laboratory’s concentrated effort to keep its revenues up. "We discovered that quite a number of tests were not being billed appropriately," says Vaughn. "It was a scary scene."

Spurs to innovation
Improving courier routes has helped Memphis Pathology secure specimens more quickly, according to Mashburn. "Another thing we do is ’mini-log’ the specimens quickly as they come in the door. We do the demographic piece afterwards because we want to get the specimen up into the section as quickly as possible, turned around, and back to the physician’s printer."

Memphis Pathology also is focusing on process improvement in the specimen management area. "We now have the specimen test-ready when it leaves specimen management," explains Mashburn. "Before, we would do some spinning down in specimen management, then you’d send it to the lab and they would aliquot the sample. But now when it leaves specimen management, it goes straight to the instrument."

Improved process management at Memphis Pathology also has increased physicians’ attention to medical necessity requirements. "When the requisition gets back to the maxi-log area for demographics, if it’s missing the diagnosis, the date of birth, or insurance information, we have a missing information test pneumonic format," explains Mashburn. "We order that test, we check off what we need-like date of birth or diagnosis-we release that test, and it prints on the physician’s printer in his office. Then he has 24 hours to return it by fax or courier. If he doesn’t, he gets the bill. They like that," Mashburn adds ironically.

Bon Secours’ laboratory enhanced its efficiency by shifting to bar-code labeling. "It knocks out some of the steps for sample ID when they come into the accessioning department, where you can just bar-code the samples in. That has really helped us gain some time on the front end," Vaughn says. Inpatient phlebotomy was redeployed to nursing several years ago in all four of Bon Secours’ facilities, she notes, and this move has been especially successful in the rapid response laboratories.

Outsourcing courier services is another approach that has paid off for HealthPartners Laboratories. "Of the thousands of runs they do a month, the most I’ve ever seen is three missed pickups," Vaughn says. "We’ve established runs per facility by looking at test volumes hour by hour. And we’re constantly looking at routes and runs; if there are only a couple of specimens at a certain time, we might delete that run."

Exceptions to the rule
While every institution could benefit from efficiencies like these, not everyone has embraced the core laboratory concept. In teaching institutions, for example, different dynamics rule, Bingham points out.

"Because of the education requirements within the university- affiliated hospitals and the sheer size of most of those facilities, the tendency has been in the past not to move to the core lab," he says. "There tends to be a lot more history associated with the individual departments. Plus there’s the argument that moving to the core lab has implications for the number of qualified supervisory people."

"Many education centers argue that they have a teaching responsibility, and a core lab would dilute the expertise they have built up over the years. So there has been a traditional reluctance of teaching facilities to move to core labs," he continues. "There are certainly lots that have, but there is an argument made by many to stall that process."

But even the largest institutions have successfully made the switch, he points out. Bingham recently concluded a project with the New York Health and Hospitals Corporation, where Bellevue Hospital became the core laboratory, providing services to all hospitals in the network, including Harlem, Lincoln, and Metropolitan hospitals. "These were large facilities, and now they operate as stat labs. There’s a significant amount of savings associated with that particular move," he says. Bingham urges teaching hospitals to consider moving to core laboratories. "I don’t think the arguments that have been used for a long time necessarily hold in today’s environment," he adds.

The tendency, particularly in joint venture arrangements, is to gravitate toward the for-profit core laboratory, away from not-for-profit models, Bingham notes. But what happens when core laboratories try to combine not-for-profit entities into a for-profit one? Mashburn says the change has been positive at her institution.

"Before we became one laboratory, [when] we ran a for-profit and not-for-profit out of the same building and referred work back and forth to one another, we had to keep separate human resources departments, separate supplies, and separate fiscal years-it was somewhat of a nightmare," she says. "Now that we’re one laboratory, that’s all gone away."

Morale: intangible but essential
The benefits of restaffing as a core laboratory are clear and quantifiable, particularly with regard to responding to emergencies and on backshifts, says Bingham. "[The benefits] are directly the result of the fact that the staff is cross-trained and there is no longer a problem with backups, with overwork in one area and too much staff standing around doing nothing in another," he says. But as questions from the audience at the CLMA session indicated, staff morale is an ongoing concern for core laboratories and would-be core laboratories.

In hindsight, Vaughn says, her laboratory would have addressed staff morale differently. "We came to the conclusion that we spent so much time on the rapid response laboratory personnel-trying to educate them and get them on board and alleviate their fears of job loss-that we didn’t spend as much time with the core lab personnel, and that was a mistake," she says. "We thought in the back of our minds they would not feel they would be sacrificed, they would always have a place, and they weren’t going to lose their jobs. And I think we neglected to really think about other impacts to core laboratory personnel."

Equity issues remain, she adds. Bon Secours’ four facilities had separate human resources departments at the time of consolidation. The laboratory is now under a division called "shared services," for which there is one human resources department. "HealthPartners Laboratories has 17 different cost centers within the regional laboratory and they remain hospital-based," Vaughn says. "Even though all laboratory staff now recieve the same benefits, and job positions fall into the same pay grades, equity issues remain. The issue is really tough. It takes a lot of dollars to equilibrate, and we’re still working on that."

Wooster’s core laboratory also tried to sustain morale from the start. "When we first decided that a core lab made the most sense in the physician office setting, we went to the existing laboratory staff and we really made them part of the decision process," she explains. "We couldn’t eliminate all the stress, because anytime there’s uncertainty, they’re always thinking, ’How will it impact me?’ But it helped ease the uncertainty."

"I wish we could say we were able to keep all the staff," she continues, "but as we closed the labs, that was the hardest part, to have to let a lot of very qualified people go. We tried to offer them a spot at the other lab, but logistically that wasn’t possible, so we did lose a lot of people." Her laboratory continues to foster a team effort-which, she concedes, is much easier to accomplish with 6.3 FTEs than with several hundred.

Mashburn adds that, "When we were first spun out, we had a very difficult time because our pay scales and benefits were not quite as good as the hospitals’. So we had a problem with people leaving the core lab and going to the hospital across the street or five miles down the road." The disparities have been partially resolved, but the hospital still offers somewhat better benefits.

Bingham found that, in many hospitals, the move to a core laboratory significantly strained staff members’ morale. "Where cross-training was occurring, many of the veteran, long-serving employees were stressed out," he says. "Several had opportunities to leave and left. The more senior people who had always worked days or always worked chemistry did not want to work in a cross-trained environment after 20 years of work."

Despite that turmoil, newer employees saw the move as a challenge, Bingham says. They liked the idea of being cross-trained because they believed it would allow them to provide added benefit to employers and expand their future job options.

The logistics of handling cross-trained staff, however, are not simple. Resolving scheduling issues is still a "work in progress," Vaughn says. "We are purchasing a software package that will be competency-based, so we can centralize scheduling based on competency."

After five years as a regional laboratory, "We still have not accomplished scheduling such that our medical technologists can rotate from hospital to hospital as needed," she says. "Rather, we’ve had to concentrate on those long-term employees in the core laboratory. It’s been a painful experience just getting chemists retrained in hematology."

Baptist has engaged one of its bigger clients, the University of Tennessee, to "come in and lecture and bring some of the technologists up to speed on different areas in the laboratory,"says Mashburn. But Baptist does not maintain expertise at each site. "For our model, the med techs’ competencies are standard, so you expect them to be competent at difficult tasks. But if there’s something out of the ordinary, that requires more expertise or a consult, they typically are sent over to the core laboratory."

The core lab of the future
HealthPartners Laboratories expects to continue re-engineering its core laboratory, with a potential goal of becoming a nonhospital-based entity in Richmond. "We are currently implementing a preanalytical redesign, which addresses accessioning, distribution, referral lab, and client service areas," says Vaughn. "This implementation is being facilitated through a new position, our support services coordinator. A big thrust of her job is to establish rapport across various depatments, and this is especially of benefit in working with our nursing departments."

"Furthermore," she continues, "we have consolidated histology, cytology, and microbiology, and we’re now starting to look at remote crossmatching, so that the majority of blood banking will eventually be done in the core laboratory."

"We’ve redesigned without automation," she adds, "which is a real challenge, because we don’t have a lot of capital for automation. But we now have our own billing department in the laboratory for outreach, and we’re continuing our effort to show the administration that we’re a revenue-producing center. As we’re able to prove that, we find they are more prone to give us capital dollars to move forward with our strategic plan in the upcoming three years."

Memphis Pathology’s immediate plans include moving to a new 34,000-square-foot building in December. "We are through process management, consolidating testing, moving instrumentation, and cross-training in order to create that footprint, because when we get into our new site, we will come up on new LIS software as well as new billing software," Mashburn explains. "We’ve already come up on new purchasing software, and we will have automation in our specimen management area. And that will position us to move to the next phase of the project, which is basically to focus on our marketing and sales so we can increase our business."

In retrospect
If she had to create a core laboratory over again, Wooster says her first action would be to upgrade the computer system. "I would start off with the computer system I have now rather than the one we initially had," she says. "Although it was horrendous to go through the changeover, our new system reduced our calls for misplaced reports by 80 percent. We were spending too much time on the phone with physician practices who had not received our laboratory report-and yet our system said it was sent."

But a more common theme is the importance of constantly focusing on human factors. "The one thing we could do better is talking to employees and medical staff, especially employees, because it’s been an uphill climb," says Vaughn. When they are asked where they work, employees now say "HealthPartners" instead of the name of their individual facility. "But that’s been a long time coming," she adds.

Vaughn also would change how the laboratory interacted with the pathologists who subcontract to HealthPartners-they are the ones who could not reach an agreement on a merger, which resulted in two separate groups. "If you can get the pathologists to make one group from the outset, you’re light-years ahead," she says.

Some organizations do not succeed in their core laboratory approach. In Bingham’s view, this often occurs because they go for "the gain without any pain" at an organizational level. They might have moved quickly to downsize the supervisory and management group and start cross-training personnel. However, they may have failed to move forward on actions that require investment, such as remodeling the laboratory, putting in front-end automation, and allowing time to train staff.

Bingham points to organizational structure as a key element in core laboratories’ success. In the early planning stages, such factors as jealousy and turf often tend to be downplayed, but they can lead directly to failure.

"In many cases, one organization is made a winner and the other a loser," he says. "In that environment, you’re doomed, because too many people feel they’ve lost. A lot of performance-related issues used as reasons for unbundling a merger really are the inability of that organization to meet the needs of both organizations. It has nothing to do with the physical fact that you have a core laboratory."

The most successful core laboratories, he notes, are produced when two parties say, "Let’s create something new that we jointly own,’’ rather than pitting Hospital A against Hospital B. Addressing human resources issues early and at a senior level in the organization will help ensure they don’t scuttle the core laboratory before it’s had a chance to succeed.

Still, a core laboratory may not be the best option, Bingham says. "Some mergers have started to push the outer limits on size, because when something becomes too big you start to lose some efficiency," he explains. "If you have two large organizations running very high levels of productivity, the cost of packing up specimens in one site and sending them over to the other may in fact save minimal or no dollars. So there are some facilities where I’ve said I really don’t think it would work."

Anne Paxton is a freelance writer in Seattle.