Enhancing the Financial Performance of a Health System Laboratory Network Using an Information System

Transcription

1 Enhancing the Financial Performance of a Health System Laboratory Network Using an Information System Ronald D. Workman, MD, 1 Michelle J. Lewis, BS, MT(ASCP), 1 and Bradford T. Hill, DBA 2 Key Words: Computers; Costs and cost analysis; Clinical laboratory information systems; Delivery of health care, integrated; Financial management; Laboratories; Management information systems; Multi-institutional systems; Process innovation; Regionalization of laboratories; Consolidation Abstract We describe the improvements created by successful implementation of a laboratory information system for a multi-institutional integrated delivery system, including an analysis of the financial results. Conditions at the outset of the project, methods of management and project design, selected aspects of services redesign and consolidation, integration of services among the sites and their effects on laboratory staff and productivity are illustrated. A method for and example of measuring the financial outcomes in the sense of quantifiable improvements in operating expenses and new revenue for a whole health system clinical laboratory computer system are discussed. In this health system, the measurable financial improvements facilitated by an information system were the ability to control operating expenses and to grow the hospital laboratory network through the development of an outreach program. With organizational commitment to process innovation and improvement, using team processes and customerdriven decision-making criteria, the financial performance of our consolidated laboratory network was enhanced substantially. A fully implemented laboratory information system is considered the major enabler of positive change when combined with a genuine commitment from all levels of staff and leadership. Over time, this system s financial return is several times that of the information system investment. Improving the performance of an integrated delivery system (IDS) laboratory services network has become increasingly dependent on implementation of a laboratory information system (LIS) across the sites of the system. The LIS is necessary to obtain the data for management to measure its progress, as well as to provide the means for integrating the services for a consolidation or regionalization strategy. 1 Laboratories may be asked to justify the expense of purchasing and installing an LIS but may have limited ability to estimate the financial return on investment or payback. It is difficult to distinguish the contribution of the LIS itself from that of the improvements in laboratory processes that it makes possible. Intuitively, commitment to process improvement is integral to realizing financial gains from an LIS. Observers might differ as to whether given laboratory processes may be affected by an LIS to a greater or lesser degree. We believe, provided all the costs are considered, it is reasonable to include all aspects of changing the IDS laboratory operation to measure the financial return associated with an LIS investment. We present examples of other IDSs that, lacking the ability to successfully implement an integrated LIS, have had to delay or even cancel system laboratory integration. St Francis Health System, Pittsburgh, PA ( is a multihospital IDS that came into being through the affiliation of previously separate acute, ambulatory, and convalescent care facilities. None of these facilities had a dedicated LIS before the implementation of a whole health system LIS beginning in The experience of this health system, the results achieved, and a comparison with other IDSs may provide a worthwhile example for those attempting to assess the potential of a consolidated laboratory network. This method of measuring the potential financial Am J Clin Pathol 2000;114:9-15 9

2 Workman et al / ENHANCING FINANCIAL RETURN USING A LABORATORY INFORMATION SYSTEM improvement of an information system may be of assistance to others seeking to quantify the contribution of an LIS. Materials and Methods In 1995, St Francis Health System had 4 licensed clinical laboratories. Three of these were in hospitals, 2 in community hospitals of about 200 beds and 1 in a tertiary care teaching center of about 650 beds. One was an ambulatory care and surgery center in the process of being converted to a hospital. Together, they encompassed more than 1 million billed tests per year, ranging from 30,000 to 600,000 tests per site. Their staff work groups ranged from 7 to 85 employees. The largest of these, St Francis Medical Center, was intended to become a shared (core) laboratory and the others to become rapid-service laboratories. The facilities housing these laboratories had separate management and differing scopes of services, instrumentation, and methods. They were all located within an hour s drive of the proposed shared laboratory. Some service was provided to physician office practices. Minimal consolidation of testing had been accomplished. In recent years, laboratory test expenses had increased among the St Francis Health System sites about 2% year over year. This trending information was obtained from interviews with administrative colleagues and confirmed by reviewing the operating revenue and usage budget reports from the sites for the years 1994 and In addition, workload and productivity statistics for the laboratories were determined using the methods of the Laboratory Management Index Program (LMIP; College of American Pathologists, Northfield, IL). Historically, labor cost increases more than offset any savings from materials management or group purchasing initiatives. There was little opportunity for productivity gain because modern instrumentation and workstation consolidation require host computer systems. Outsourcing had limited potential owing to the predominantly acute care nature of the testing services. Laboratory outreach growth was somewhat restricted because the services, reports, and billing capabilities were not very competitive. To address these issues as a consolidated network, the LIS selection process emphasized a system with multiple laboratory site capabilities (Sunquest Information Systems, Tucson, AZ). Decisions were made early on that, to the extent possible, all tests and services would be identical among the sites of the IDS. A single management group with process and task-oriented responsibility for all the sites was selected. 2 Laboratory vendor agreements were pursued to create system-wide uniformity and capture economies of scale. Facility remodeling plans to adapt or create open laboratory spaces, in which employees with appropriate skill mixes and cross-training would work with redesigned processes, were developed, and construction was begun. The final configuration of the LIS and its components was determined based on anticipated successful completion of this laboratory services and facility redesign. Once the financial commitment to the LIS was made by the St Francis Health System, it seemed to drive other changes. The principal features of St Francis whole health system laboratory services redesign are listed in Table 1. Manual laboratory operations continued at the sites of the IDS, while the new management group remodeled facilities, introduced new instrumentation and methods, and trained employees. Simultaneously, building of LIS tables and other elements of system design were undertaken. Because of anticipated reduction in the need for laboratory employees, positions that became open owing to attrition were not filled. Productivity gains owing to workstation consolidation, cross-training, or new technology allowed manual operations and system development to proceed together, but there were substantial management challenges. Test volume, primarily from inpatient sources, continued to grow. The technical specialists of the management group selected uniform methods and reference ranges to allow the St Francis Health System sites to be served by a single LIS. Thus, the changes noticeable to physician and nurse customers could be explained and accommodated before the LIS implementation, allowing everyone to concentrate primarily on learning and adapting to the new system. This coordinated transition allowed the now smaller and busier laboratory staff to survive the hectic period of parallel processing. The actual go-live date that occurred simultaneously at all sites was greeted with relief. The St Francis Health System now was being served by a wide-area laboratory network. The St Francis Medical Center laboratory serves as the core laboratory of the St Francis Health System. The nature of this laboratory has been changed through facility remodeling, automation, process innovation, and workstation consolidation. It now has a spacious, open, central design in which cross-trained laboratory technologists and other workers operate automated instruments. Specimens arrive with bar Table 1 Critical Factors for Successful Redesign and Consolidation of St Francis Health System (Pittsburgh, PA) Laboratory Services Network Unified laboratory network management Customer service culture and mentality Commitment to process and facility redesign Selection of credible LIS vendor Risk-sharing diagnostic vendor partnerships Workstation consolidation and cross-training Development of central core laboratory Customer service and productivity goals LIS, laboratory information system. 10 Am J Clin Pathol 2000;114:9-15

3 code labels to assure specimen identification. Most tests are run as they are received, 24 hours a day, 7 days a week. Processes are controlled by workstation computer systems, and results are reported electronically. Some tests are held during the day, combined with outreach tests arriving in the afternoon or evening, and processed and results reported in the early morning. After the LIS installation, with technical uniformity across the sites of the St Francis Health System, considerable consolidation of the testing workload into the shared laboratory has occurred. This core laboratory performs nonemergency and higher cost assays for the sites. Results are reported instantaneously, when verified, to the St Francis Health System site of origin across a wide-area network. To date, between 20% and 25% of the tests from the St Francis Health System sites have been consolidated into the core laboratory. Expenses for these tests are charged back to the sites at a fixed rate. A considerable volume, estimated to be at least 20% depending, of course, on test complexity mix, of added preaccessioned testing may be accommodated in the central core laboratory without commensurate increases in direct costs or staffing. When additional tests are processed, the operating costs are related primarily to supplies (consumables). Since the added testing cost is mainly incremental, the contribution to margin of consolidated testing from the sites and the outreach program is substantial. Results The laboratory management group of the St Francis Health System embarked on an aggressive plan of process and facility redesign, workstation consolidation, and workforce attrition meant to avoid personnel layoffs after LIS implementation. Although services levels and quality were maintained, the stress level for staff was sometimes substantial. Some of management s actions would be considered imprudent apart from this context. We believe this explains why many of the improvements preceded the actual LIS golive date. The redesign and consolidation of services have allowed the laboratory network to accommodate growth, with continuously increasing efficiency. The test volume and revenue growth are illustrated in Figure 1 and Figure 2, which illustrate improvements occurring before and after LIS implementation in early Since 1996, the laboratory testing of the St Francis Health System has increased about 22%. However, true inpatient laboratory revenue (and, increasingly, outpatient hospital laboratory revenue) is almost impossible to separate from facility reimbursement. Except for an outreach program, laboratory revenue changes have more to do with facility Figure 1 Revenue (black area) and expenses (white area) of St Francis Health System (Pittsburgh, PA) laboratory services. Aggressive management and process redesign allowed improvements to be realized even before system implementation in early Growth has occurred without increasing expenses. Compared with 1995, laboratory contribution to revenue has increased 30%. No. of Tests 270, , , , , , , , Quarterly Data From April 1996 Through December 1998 Figure 2 The growth of the number of laboratory tests encompassing all sites of St Francis Health System (Pittsburgh, PA), throughout the transition to a consolidated network. Information system implementation occurred early in 1998, the eighth quarter of the period. The growth reflects mainly inpatient testing, with some increased outpatient and outreach testing. Solid line, test volume; dashed line, goals. utilization than laboratory management initiatives. Therefore, inpatient and hospital outpatient revenue growth is not considered in our process for measurement of the potential financial improvement related to LIS implementation. In preparing for, then carrying out its whole health system LIS implementation project, the laboratories of St Francis Health System began to gain control of their operating expenses (Figure 1). As modern LIS systems are introduced, a permissive effect occurs. 3 Increased workload may be assimilated without proportionate increase in production costs, owing to the host LIS and automated data Am J Clin Pathol 2000;114:

4 Workman et al / ENHANCING FINANCIAL RETURN USING A LABORATORY INFORMATION SYSTEM handling capabilities. The experience at St Francis Health System validates the existence of this effect in clinical laboratories. During this period, staff full-time equivalents decreased about 25%. Laboratory staff was reduced through attrition, retraining, and outplacement within the St Francis Health System. Actual labor cost per test decreased 17%. The direct and supply costs were reduced, without capital investment, through risk-sharing cost per reportable test vendor partnerships. When direct expenses are considered, an additional 14% cost per test reduction was achieved. The breakdown of current testing expenses is given in Figure 3. The laboratory management pursued an aggressive plan of redesign preceding and throughout LIS implementation. There were staff productivity goals for each stage of the transition process Figure 4. Because of workload growth and staff reduction, the productivity for the St Francis Medical Center shared laboratory (core laboratory) has doubled. The shared laboratory now operates at the 90th percentile for productivity compared with its Northeast Region LMIP peer group. Laboratory standardization and sharing of services began to produce expense savings even before the actual LIS implementation, which occurred in early The LIS implementation drove other process improvements. Partially offsetting these improvements were remodeling expenses totaling $890,000. The total laboratory expenses we report for each year include all management and staff compensation, capital equipment and remodeling depreciation, and direct and indirect operating costs, including the LIS and installation costs, and reflect any efficiencies gained Table 2. As mentioned, laboratory test expenses had increased among the sites about 2% year over year. Total laboratory expenses across the St Francis Health System are less than expected had that trend continued. In Table 2, the actual total laboratory expenses are compared with total expenses expected by extrapolating baseline conditions, and cumulative expense savings over 3 years is calculated. Including 1996, cumulative laboratory expense reduction is $2,374,000 compared with the historic period. Before 1996, laboratory outreach contributed about 25,000 tests per year. More recently, St Francis Health System s laboratory services have become more attractive, and outreach referrals have increased. To estimate the actual outreach revenue, payments for the common procedure codes were obtained for payers in the region, and an average reimbursement (adjusted for test and payer mix) was calculated. Similarly, an average incremental expense (primarily supplies and courier and clerical costs [Figure 3]) was calculated, and billing costs were estimated. The outreach contribution, which is the net of incremental expenses and Supplies 32% Indirect Costs 2% Labor 36% Billing 11% Direct Costs 19% Figure 3 The distribution of costs per test for laboratory services at St Francis Health System (Pittsburgh, PA). The total cost per test is $9.40. The supplies portion is about $3.00, and the labor portion is more than $3.00. No. of Tests 3,000 2,500 2,000 1, Quarterly Data From April 1996 Through December 1998 Figure 4 The growth of productivity in billed tests per paid full-time equivalent (solid line) in the shared laboratory at the St Francis Medical Center (Pittsburgh, PA) for 11 quarters compared with established goals (dashed line). Results reflect redesign of processes and services, leading to system implementation in early 1998, the eighth quarter of the transition. Improvement accelerated thereafter, with synergistic interaction of information systems and automated testing equipment. estimated billing costs, also is given in Table 2. The cumulative increase in profit of outreach testing is $1,221,000. The measurable financial improvements related to an LIS reside in the control of operating expenses and the contribution of outreach testing, in this environment. The combined economic benefit of laboratory operations improvements (summing expense savings and outreach 12 Am J Clin Pathol 2000;114:9-15

5 Table 2 Cumulative Return on Investment During 3 Years Through Implementation of a Multisite LIS * Cumulative Expense, expected 9,773,741 10,677,104 11,188,898 31,639,743 Expense, observed 9,540,979 9,699,735 10,024,985 29,265,699 Expense savings 232, ,369 1,163,913 2,374,044 Outreach increase 58, , ,395 1,220,999 LIS expense 136, , ,492 Investment return 291,262 1,361,427 1,412,862 3,065,551 LIS, laboratory information system. * The total laboratory operating expenses expected, by extrapolating baseline conditions within the health system, are compared with expenses actually observed. Increased contribution from outreach testing, net of incremental expenses, and estimated billing costs is also given. LIS expenses include amortization and system maintenance. The LIS live date was early in Expenses are given in US dollars. increase), from 1996 through 1998, was $3,595,000. The purchase price of the St Francis Health System s LIS, $1,360,000, was amortized over 5 years. The cumulative investment through 1998, representing the straight-line depreciation amount, together with all maintenance and support fees, is $529,500. These amounts also are given in Table 2. The amounts for operating expense savings and outreach contribution provide the basis for measuring financial return (payback) for investment in the LIS, considering all equipment and facility costs relative to the redesign of laboratory services. The ratio of economic benefit to system expenses over the 3-year period is more than 6:1 ($3,595,000:$529,500). The net investment return ($3,595,000 $529,500) is $3,065,500. Looking forward, these investments will pay for themselves many times over and allow the laboratory network to continue improving its productivity as its services grow. Discussion Underlying the improvement in performance of its laboratories is the implementation of an LIS across the St Francis Health System s sites. Although it might be possible to isolate the contribution to margin of some of the individual process changes that occurred, considering their combined effect on the laboratories expenses and profitability may be the most attainable and easily understood measure of financial return. The impetus to create uniform processes for its LIS implementation drove the whole health system laboratory integration project. Indeed, many of the financial improvements preceded the actual system go-live date. One might argue that the value of the improvements before the go-live date could reduce the net effect of the LIS. However, whether the laboratory management of separate facilities could cooperate to this extent without being integrated into a single team, and without the discipline imposed by the LIS decisions and timelines, is uncertain. A strong argument for the enabling value of an LIS implementation also can be made in the negative. That is, if an LIS solution cannot be implemented for whatever reason, what are the savings and new revenue potential left on that table and unrealized? High-level data from 3 other actual IDS laboratory consolidations, all of which are recent with 2 still ongoing, demonstrate that value. All 3 of these projects were approached from a similar redesign and consolidation perspective, with productivity goals similar to ours. In Case A, a 10-hospital midwestern IDS with a large academic medical center as the anchor and core laboratory, full integration indicated a savings opportunity of $4,300,000. Only approximately 30% of those savings have been realized to date primarily owing to delay in interfacing the 2 principal but disparate LISs (and, subsequently, the hospital information systems at several of the institutions). This leaves approximately $3 million still to be realized. Because the outreach program is relatively more mature and better developed than that of the St Francis Health System, outreach growth was not considered in the net positive potential of the LIS implementation. Case B is an 8-hospital northeastern IDS to be anchored by a core laboratory that will be the result of the consolidation of 2 major academic medical centers. The consolidation of the 2 academic medical centers has a savings opportunity of $3,100,000 enabled by the implementation of a single, and in this case, proprietary, hospital information system and LIS. The full IDS integration among the 2 academic medical centers and the rest of the institutions has a total savings opportunity of $6 million. Realization of the additional $2,900,000 in savings from the full integration has been delayed up to 18 months as a result of challenges, issues, and competing priorities around interfacing the proprietary system serving the academic medical centers with the rest of the institutions. Am J Clin Pathol 2000;114:

6 Workman et al / ENHANCING FINANCIAL RETURN USING A LABORATORY INFORMATION SYSTEM Because of a very high proportion of capitated managed care dominating the area and the saturation of the outreach market by 2 large national reference laboratories, estimation of outreach potential has been deferred until the full system integration is complete. Case C is that of 4 mid-atlantic hospitals with no formal or informal ties that created a free-standing legal entity to explore networking opportunities. Laboratory consolidation came to the top of a list of potential ventures, and, in the spirit of needing a first win for the network, a study of the feasibility and potential options for laboratory integration was commissioned. Savings opportunities were discovered to be approximately $2,600,000. Commitment of the leadership to real integration was tested when LIS costs, and, to a much lesser extent, courier costs, were discovered to drive the return to just below a preset hurdle for internal rate of return. A new outreach business plan did not indicate profitability until approximately 20 months into the endeavor, although revenue and profitability ramped up quickly for the following 3 years. In the final analysis, LIS costs were seen as the deal breaker, rather than a sound investment. In reality, a deep-seated if unspoken fear of further consolidation may have been the cause of the eventual dissolution of the network. The project was abandoned. In just these 3 examples, the combined annual savings of $8,500,000 are yet to be realized. The primary enabler (or in these cases the stumbling block) remains the LIS. Willingness to take organizational risks, making substantial investments in necessary tools, and remaining committed to integration may be the keys for future success in these instances. St Francis Health System succeeded, whereas these 3 IDSs have yet to realize their potential savings. The rapidity of change in American medicine is affecting operations of clinical laboratories and is driving the type of organizational changes described in this article. Opportunities and challenges exist for those willing to take advantage of the major forces changing health care. 4 The clinical laboratories may be at the vortex of the maelstrom that is derived from cost and reimbursement pressures. 5 The leaders of IDSs and laboratory networks have been attempting to respond to these pressures, and there are some excellent examples of shared services and regionalization. 6,7 In response to the changes in medicine, many of which have to do with the shift to managed care, there is a continuing evolution of the computer networks that serve health systems. The integration of laboratory services of an IDS may be shifting away from a physically centralized laboratory paradigm. 8 There is increasing emphasis on the capability of LIS systems to manage a consolidated laboratory network allowing for a virtual centralization. Consideration of purpose, desired outcomes, and reasons for breakdown of laboratory services also is driving quality improvement efforts. Laboratory management staff of some health systems are therefore engaging in a fundamental redesign of their services using team processes, customer expectations, and decision-making criteria. 9 A focus on customer needs in which the laboratory strives to assist all caregivers in creating health care value by providing timely information, which will lead to quicker, more accurate diagnoses and shorter length of stay, may be the basis of the new metrics of success for laboratory medicine. 10 These networking and process improvement concepts were the key elements, leading to enhanced financial performance, of the LIS implementation project in the St Francis Health System. Projecting the financial impact of an LIS installation and services redesign is complicated by the present nature of reimbursement for laboratory services. The revenue attributable to laboratory services for inpatients and many outpatients is no longer meaningful to health system administrators who have to approve and prioritize capital projects. However, administrators do understand budget and expense reports, as well as workload and productivity measurements, that provide quantitative information about aggregate costs per laboratory test. These expense and workload data may be used to identify trends affecting the laboratories cost of operations. Anticipated changes in laboratory test volume, together with identified trends of cost per test, allow laboratory management to project operating expenses. In preparing for an LIS acquisition, laboratory management should quantify improvements owing to increased efficiency, using its peer group (benchmarking) reports to identify realistic goals and timelines. Sufficient allowance must be made for maintaining current operations while development is under way. Justification of an LIS project is facilitated by analysis of anticipated expenses, including an estimate of the effect on staffing and other expenses throughout the project. Expense savings compared with baseline trends legitimately form part of the justification and approval process. In addition to control of costs and greater efficiency in providing laboratory services, an LIS system may contribute greatly to the laboratories marketing plan for outreach services. It is difficult to be competitive without certain elemental capabilities to format and report laboratory information to customers and then bill them accurately and clearly for that service. Increased revenue attributable to management-led marketing efforts also may be included in the project proposal to administration. To estimate the net contribution of a targeted outreach customer list, each laboratory service needs information about local payer s reimbursement of common outpatient procedures and some 14 Am J Clin Pathol 2000;114:9-15

7 system to provide information about costs related to specific laboratory tests. 11,12 This revenue and cost analysis system must use a method for expense allocation that is understandable and credible to those who will approve the analysis. It is preferable to agree on an approach with the health system s financial services department before preparing an administrative proposal. Once a format is accepted, financially dissimilar projects may be compared by administrators using techniques such as analysis of net present value. 13 Some day, health system administrators may make decisions about information system acquisition based on anticipated improvements in patient outcomes or other customer or purchaser mandates. 14 For the foreseeable future, however, it is prudent and realistic to expect that laboratories will compete for limited capital resources based on measurable financial improvement. Conclusions The St Francis Health System s experience demonstrates that the pathway to enhancing financial performance of a laboratory network, including the potential financial improvement attributable to an information system implementation, is through redesign and consolidation of laboratory services. The organization s performance improvement goals should define the implementation plans. Change may be dramatic when leadership supports the vision, management is accountable across the sites of the network, staff are engaged in process improvement, and customer needs drive the decisions. The amount of improvement and LIS investment return is proportional to organizational change. When accompanied by optimal network integration, the financial improvements can be several times that of an information system investment. The role of the LIS is to provide management with quantitative information to guide its progress and to facilitate its network integration initiatives. From this perspective, the installation of an LIS in a consolidated laboratory network is not merely a deployment it is an organizational commitment to process improvement that brings a discipline of its own and substantial reward. References 1. Covvey HD. IT capabilities for the realization of the laboratory without walls. Proc AMIA Annu Fall Symp. 1996: Workman RD, Darmanian CM, Weilert M, et al. Shared governance empowers laboratorians. Lab Med. 1995;26: Hendricks EJ, Langhofer LA. A community hospital laboratory computer system: an eight-year longitudinal study of economic impact. Am J Clin Pathol. 1982;77: Allawi SJ, Hill BT, Shah NR. New frontiers for diagnostic testing: taking advantage of forces changing health care. Clin Lab Manage Rev. 1998;12: Conn RB, Snyder JW. Changes in the American health care system: crisis in the clinical laboratory. Clin Chim Acta. 1997;267: Fattal GA, Frost Y, Winkelman JW. Operational and financial outcomes of shared laboratory services in a consolidated hospital system. JAMA. 1985;253: Matsen JM. The regionalization of laboratory services at the University of Utah Medical Center. Arch Pathol Lab Med. 1988;112: Friedman BA. The challenge of managing laboratory information in a managed care environment. Am J Clin Pathol. 1996;105(4 suppl 1):S3-S9. 9. Kelly DL. Reframing beliefs about work and change processes in redesigning laboratory services. Jt Comm J Qual Improv. 1998;24: Hill BT. The new metrics of quality and performance in the laboratory. Paper presented at: Integrated Health Care Strategies for Health System and Hospital Laboratories. Health Technology Assessment of the American Hospital Association and the University of Nebraska Medical Center; March 10, 1997; Las Vegas, NV. 11. Krieg AF, Israel M, Fink R, et al. An approach to cost analysis of clinical laboratory services. Am J Clin Pathol. 1978;69: Mayer M. Laboratory cost control and financial management software. Clin Chim Acta. 1998;270: Westlake GE. Cost analysis and cost justification of automated data processing in the clinical laboratory. Clin Lab Med. 1983;3: Collen MF. A vision of health care and informatics in J Am Med Inform Assoc. 1999;6:1-5. From the 1 St Francis Health System, Pittsburgh, PA, and 2 GroupHill, Aurora, CO. Address reprint requests to Dr Workman: Dept of Pathology and Laboratory Medicine, St Francis Health System, th St, Pittsburgh, PA Am J Clin Pathol 2000;114: