Hospital and Commercial Laboratory Partnerships

[Editor’s note: This article takes on a Q&A format, examining the individual challenges and mutual benefits of these partnerships. It features perspectives from several industry professionals — including Tom Hirsch, president of laboratory billing solutions; Thomas Tiffany, CEO of PAML; Noel Maring, vice president of hospital affiliations at Sonic Healthcare; and Karen Hohenstein, managing director of the healthcare team at Navigant Consulting — each of whom will be addressing topics specific to their area of expertise.]

P. Thomas Hirsch, president of laboratory billing solutions
Partnerships can take anywhere from several months to several years to set up. It is highly dependent on the particular circumstances of the hospital and the leadership involved in the process and negotiation. Changes in leadership at the hospital can impede the process, as new executives need to be brought up to speed on the status of discussions. In some circumstances, a change in management can accelerate or initiate a process where new leadership has had a previous positive experience working with a commercial laboratory.

In addition to the motivations and sense of urgency of the participants, the nature of the arrangement can impact the length of discussions. Straight lab management agreements can usually be consummated more quickly than formal joint ventures. While a management agreement would normally include getting buy-in from the pathologists and medical staff, it would required limited Board involvement and input. A joint venture, with a separate legal entity and by-laws, a formal valuation and possible capital investments of both parties, will require a more extended due diligence and approval process, including the hospital’s Board of Directors.

Then primary stakeholders in getting a deal done are executives in the hospital C suite as well as laboratory. In larger health systems, the CEO and CFO may not be involved and the process is managed by the COO or VP overseeing the laboratory. If the proposal involves outreach, Business Development may be involved as well. In some cases, the lab manager and pathologist may be the catalyst for promoting an arrangement internally. In other circumstances, they may be threatened by the prospect of having an outside entity involved in managing the lab operations and are opposed to any type of arrangement.

Given the general resistance to change and aversion to risk of most hospitals, it is preferable to win over all of the stakeholders to support the initiative. Perhaps the most overlooked stakeholder group is the broader medical staff. While they may not be key to getting a deal approved, they are critical in making it work long-term. Sharing your vision of the benefit of a proposed arrangement with the practicing clinicians and seeking their input on the proposed services offering will go along way in ensuring support during the initial transition and term of the agreement.

Noel K. Maring, vice president of hospital affiliations at Sonic Healthcare
1. Top reasons a hospital lab would consider partnering with a commercial lab?
The reasons for a hospital to enter into a partnership with Sonic Healthcare will vary by health system. In fact at Sonic we believe each partnership should at least in part be customized to meet the unique needs of the health system. With that in mind most health systems around the country are evaluating partnerships for three main reasons,

Cost alignment

  • A laboratory partnership can reduce inpatient laboratory testing costs by 8% to 20% through a combination of economies of scale & in Sonic’s case, utilizing our lower global cost. Equipment and supply costs represent the second highest cost category (behind labor) for every hospital lab. There is typically a 12% to 15% savings opportunity in this area.
  • Typically inpatient laboratory costs are rising at a rate of 2% to 4% per year. A lab partnership can reduce the rate of increase in testing cost by around 50%.
  • Additionally a lab partnership enhances the health systems profits by sharing outreach laboratory revenues and profits.
  • Partnerships eliminate a health systems need to make capital and other financial investments in their laboratory operations, as these become the responsibility of the partnership.

Strategic focus

  • Health systems are now employing or acquiring physician practices. There is a significant opportunity to “in-source” the laboratory testing from these physicians to their hospital laboratory. However inpatient lab systems are typically not the best at providing efficient testing services to physicians outside the walls of the hospital. Many health systems are recognizing that outreach lab testing is not a core competency. The time, cost & effort to provide high levels of integrated lab services to their employed and affiliated physicians is impacting focus on other strategically important activities. As such they are seeking out a partner with sophisticated systems and resources to address their outreach lab needs.

Leveraging lab data to reduce downstream healthcare costs.

  • Utilizing laboratory data to reduce overall healthcare expenses may be one of the most important reasons to consider a laboratory partnership. Laboratory testing typically runs 3% to 5% of a health system’s overall budget. However Lab testing impacts up to 70% of clinical decisions. There are numerous studies that have been published that indicate providing the right testing or combination of tests at the right time not only improved patient outcomes, they eliminate unnecessary expensive procedures and reduce a hospital length of stay. Providing the right test at the right time is not as simple as it sounds. This often involves reflex testing, appropriate testing algorithms, and pop up notifications upon testing order entry. Sonic Healthcare has invested in software to integrate these programs into a hospital HIS.

2. What are the potential pitfalls and benefits?

  • Benefits:
    • Improves the ability to cost effectively perform more testing in the hospital laboratory
    • Provide a lower inpatient laboratory cost structure
    • Enhances the Health system’s profits by sharing outreach laboratory profits
    • Provide an outreach laboratory service that is competitive with commercial laboratories
    • Improves integration of inpatient and outreach laboratory testing services, including electronic health records (EHR) integration
    • Provides access to Sonic’s world-wide supply & lab equipment cost structure
    • Eliminates capital investments in the laboratory for the Health System
  • Pitfalls:
    • The biggest pitfall for a health system is that they have to work with another organization, which typically involves greater communication and planning. Most health systems weigh this disadvantage against the benefits outlined above.
    • Health systems also typically are concerned with loss of control over their lab operations. However Sonic Healthcare’s lab partnerships build in control provisions in the LLC documents to assure adequate safeguards for health systems.

3. What are the characteristics of hospital systems likely to benefit most from a partnership?

  • a. The health systems that can benefit most are;
    • Health systems with multiple hospitals in a metropolitan area
    • Health Systems with significant potential to “insource” lab testing from employed or affiliated physicians
    • Health systems in need of reducing inpatient testing costs
    • Health Systems in need of recapitalizing their laboratory
    • Health Systems planning on utilizing value based reimbursement models for a portion of their business
    • Health systems involved in ACOs, or have their own health plan.

Thomas Tiffany, PhD, CEO and founder of Adept Clinical Consultants, LLC (AC2T), former CEO of PAML
1. Why are hospitals and commercial laboratories more interested now in partnership?
Major commercial laboratories have found that their same store business has not grown and have achieved growth through acquisition and deals to outsource hospital lab testing. Hospitals face declining reimbursement, and in 2013 hospital revenue growth declined as did margins. With declining laboratory reimbursements as well as new bundled outpatient services impacting lab reimbursements there is a driving force for hospitals to seek ways to reduce cost and potential partnerships with commercial labs to reduce cost. However in a recent poll (Modern Health August 2014) it appears that less than 30% of hospitals polled are seeking such partnerships or outsourcing of lab services while the driving force seems to be coming more from commercial laboratories such as LabCorp and Quest.

2. What are the major steps when starting up a partnership?
Hospital Executives must clearly understand the relationship between clinical laboratory testing, the cost and reimbursement of testing in their system and the impact it has on their physicians and patients and its value to the hospital system. Seventy percent of the information used by physicians in the patient medical record is clinical laboratory results.

The value of a test result is often more than the reimbursement because it can have a positive or negative impact on days stay depending upon the timeliness of the information getting back to the hospitalist or physician. It also has a major impact on physician satisfaction. A typical large to medium size hospital will send out less than 10% of their tests to commercial labs. The first step is to understand “is the cost they may save and or the dollars they receive worth outsourcing their hospital testing. The next step is to determine how much “In reach testing they can bring into their laboratory from employed or contracted physicians in their hospital system if they can provide competitive reference laboratory services”? Finally, having good financial and clinical understanding of their hospital testing services (inpatient, outpatient and in-reach) as well as the strength and limitations of their clinical lab services, they need to seek a commercial partner that can help them reduce cost, improve their laboratory testing services (shorten days stay and reduce readmits), and partner with them on effective in-reach testing services for their physicians.

3. Questions a hospital system contemplating partnership should ask?
The biggest question the hospital C Suite should be asking, from an in-depth question position is “What is in it for me (the hospital, their physicians and patients)”? This is the WIFM principle. Does the commercial laboratory have a good track record as far as hospital commercial lab partnerships? Do these partnerships provide value to both partners or are they mainly for the benefit of the commercial laboratory? What options does the partnership have with regard to hospital laboratory management, formation of mutually beneficial outreach/in-reach laboratory joint venture to include provision of pre and post analytical clinical laboratory support and laboratory revenue cycle management? How can the commercial laboratory partner assist in improvement of utilization of laboratory services to reduce unnecessary testing and to drive the hospital and outreach/in-reach testing to provide the right test at the right time to reduce cost and improve patient outcomes?

Karen Hohenstein, managing director of the healthcare team at Navigant Consulting
1. How are the partnerships structured?
These type of partnerships are structured to take advantage of the skill set of each organization. Hospitals operate high quality lab operations that need to run 24/7 and are close to physicians needing lab services. However hospitals typically lack the pre & post analytical tools (such as EHR connectivity, client services, billing, sales & marketing) required to provide high quality outreach lab services to the physician community. The commercial lab provides these services greater purchasing scale than hospital labs, a knowledge of how to run the lab at a lower cost structure. By bringing the skill sets of both organizations together in one partnership, you can create a more efficient hospital laboratory and a better outreach lab program than either organization could provide on its own. In addition most large commercial laboratories have greater purchasing power than hospital labs, and are able to reduce overall lab costs.

The partnerships are typically structured as a joint venture so that each partner has ownership in the new organization. Ownership percentages are based on a combination of revenues, capital or capital equivalents contributed to the joint venture.

2. When the partnerships work well, why do they work well?
As with any well-functioning collaboration, these partnerships work best when built on a foundation of trust and open communication. Additionally these partnership work particularly well with health systems with multiple hospitals in an urban area, in close proximity to employed physicians and other affiliated physicians. As well as for health systems considering value based reimbursement models. Finally, the partnership will be long term sustainable if both parties are invested in continuous evolution, always driving to the next level of efficiency and innovation.

3. When they fail, why do they fail?
Several factors can contribute to the deterioration of the partnership. In the early years of the partnership poor implementation planning and inconsistent communication can doom an otherwise value heavy relationship. As the partnership matures, the failure to innovate and evolve to continually provide value to both parties can doom a once successful relationship.

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