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CALIFORNIA STATE UNIVERSITY, NORTHRIDGE
COST EFFECTIVENESS OF THE
HOSPITAL CONSOLIDATED CLINICAL
LABORATORY MODEL
A project submitted in partial satisfaction
of the requirements for the degree of
Master of Sciepce in
Health Services Administration
by
Ronald Ralph Barkley
June 1976 ;
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The project of Ronald Ralph Barkley is approved:
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Y{
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Committee Chairman
California State University, Northridge
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May, 1976
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DEDICATION
This project is dedicated to Andrea:
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"Behind every successful man is a woman w·ho doesn't
expect him home for dinner every night."
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Ronald Ralph Barkley
May 1976
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TABLE OF CONTENTS
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Approval Page
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Dedication
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iii-iv
Table of Contents
v
List of Tables
vi-viii
Abstract
I I.
Introduction
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Background
II.
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1-3
IV.
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VI.
4-11
A.
Design of the Model
B.
Consolidated Effectiveness: Reasons
12-14
C.
Benefits to Participant Hospitals
15-17
D.
Opposition to Laboratory Consolidation
18-19
E.
Setting of the Study
20-21
F.
Participants in the Study
22-34
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. M
....e t-'h
'""'" ......o._o
_ogy
35-36
A.
Statement of the Problem
B.
Data
37
C.
Limitations of the Study
38
D.
Analysis of the Data
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39-59
Results
60-61
Summary
62-63
Concluding Remarks
64-67
Appendices
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Page
Appendix A:
Feasibility Study Data
• Feasibility Study Data:
based laboratory.
Hospital
• Feasibility Study Data: Private
laboratory organization
ApJ2endix B:
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68,-71
72" 74
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Laboratory Performance Analysis
• Hospital A: Laboratory Peformance (1975)
75-76
• Hospital B: Laboratory Performance (1975)
77
• Hospital C: Laboratory Performance (1975)
78
• Private Laboratories: Laboratory
Performance (1975)
AJ2pendix C:
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Proposed Pathologist Income
83 ... 85
References
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LIST OF
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Table
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1.
The Consolidated Laboratory Network
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2.
Monthly Average Utilization Determination
42
3.
Consolidated Test Totals
44
4.
Payroll Summary
46
5.
Total Payroll, All Labs.
47
6.
Fringe Benefit Summary
48
7.
Equipment Consolidation
50
8.
Projected First Year Revenues
53
9.
Estimated Pro-Forma Income Statement (1976)
58
10.
Independent Laboratory Performance Compared to
Consolidated Performance
61
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ABSTRACT
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COST EFFECTIVENESS OF THE
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HOSPITAL CONSOLIDATED CLINICAL
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LABORATORY MODEL
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by
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Ronald Ralph Barkley
June 1976
The changing environment in hospital financial manage-:
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ment has added a·new dimension to the delivery of qualit::;y ,
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health care, this being quality care at a reasonable cost.!
Aggregating to produce cost savings resulting from inI
creased volume efficiencies is one answer to this chal.:.
lenge.
The purpose of this study was to demonstrate that the
regionalized consolidation of hospital clinical
laborato~
ries would create substantial direct cost savings for
participating insti tu.tions, and that participating in the
formulation and operation of the consolidated clinical
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laboratory would be investor-attractive.
A thorough literature review of the topic was con·
I 'ducted through the use of the "MEDLINE" Bibliographic
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l_:e_a:~~-s ervice o~ f ere ~by t~~~-~ver sit~-~~-~ a li~orn~a:_:__j
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Los Angeles Biomedical Library.
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Recent Journal articles
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served as the primary source of information.
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The research verified that direct cost savings of
fifteen to twenty percent had been experienced in several
cases of consolidations.
II
The literature sources were
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used to develop the design of the regionalized consolidated
network.
In order to verify the findings, an appropriate
setting in which to test the concept was sought and
located.
The study was conducted in a rural setting in
Western Montana.
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basis for the application of the consolidation model
to demonstrate cost savings through alignment.
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Three acute general hospitals provided
Three categories of data upon which the feasibility
of consolidation could be assessed were obtained from the
hospitals.
This included all direct cost data, all reve-
nue data, and a detail of test utilizations..
This same
information was collected from several private laboratories
who had also expressed a desire to participate in the con-
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solidation project.
Cost and revenue data was used to develop a schedule
of current performance of each laboratory.
l_and
~oSt
Utilization
data were combined to project the performance of
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The study demonstrated that a total savings of
$132,000 could be achieved in the first year as the result of a consolidation.
hospital savings, the
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In addition to the combined
con~olidated
laboratory could be
expected to recognize a $312,000 after tax income from
operations, representing a 16% after tax net profit.
Total costs to structure the model would be approxif
mately $676,700.
Based on these calculations, the parties!
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designing and financing the consolidation for the hospital~
could expect a payback period on their initial investment
of slightly greater than two (2) years.
The study was significant because it demonstrated
that direct cost savings could be recognized through
consolidating individual laboratories, and that committing_
funds to this endeavor would be a reasonable investment.
As health planning, ·cost reporting, and jurisdictional rate setting become meaningful concepts in the
health care environment, the three participating hospitals
w.ill be in the enviable position of being able to demonstrate one approach to.responsible cost control- their
consolidated clinical laboratory program.
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hospitals will:
• be integrated into regional networks of health
care services,
• participate in the provision of more comprehensive
health care,
• be dependent upon interaction with other health
care institutions for highly complex, expensive
and specialized services, and
• be subject to external constraints on the total
amount of resources available.
These issues might be summarized by saying that
"those institutions that start structuring themse,lves
with other institutions now will be the ones to survive
in the future; those who do not aggregate will not last".
(1)
Efficiently managed and profitable services, such
as the clinical laboratory, are essential to the financial
survival of the hospital.
The surplus generated through
the operation of revenue-producing departments is needed
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for reinvestment in new or expanded services for patients.
The successful institution is one that can demonstrate
·a long history of adding to the comprehensiveness of
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Historically, the clinical laboratory has generated
the greatest operating surplus in the hospital.
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However,
this situation is changing in today's complex environment
of consumerism, inflation, and government regulation.
The
new National Health Planning and Resources Development Act
of 1974 (P.L. 93-641) and its oft-considered predecessor,
the California Hospital Disclosure Act of 1971, mandates
specific cost identification with the purpose of determining the total cost of operating the revenue-producing
centers of the hospital.
The principal stated objectives
of the California Health Facilities Commission (created
as a result of the 1971 Hospital Disclosure Act) include
"to stabilize hospital costs through public scrutiny of
cost factors; to have hospital cost data available for
use by the commission for comparing the performance of
particular hospitals or groups of hospitals."
(3)
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These legislative dicta act as a bAsis for inevitable
, third party reimbursement changes such as departmental,
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prospective, and incentive reimbursement based on
ed costs.
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identif~
The system of departmental cross-subsidization
is being closely scrutinized, and may be disallowed in
the future.
The impact of the April 1975 report to Congress by
Comptroller General of the U.S.
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(entitled A Proposal for
Disclosure of Contractual and Financial Arrangements
l_Arrangements Between Hospitals and Members of Their
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'' Medical Specialists) is now being felt in the propose:d
Talm2.dge A.'11endments
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to the Social Security Act.
(4)
These Amendments would disallow any public reimbursement
to health care institutions for services (such as clinical
laboratory) based on percentage of gross contracts with
hospital-based professionals (pathologists).
It is in this changing political, social, and economic
climate that new means must be sought for effectively pro-;
viding hospital services.
The economies and efficicies of
consolidated clinical laboratory services are proposed as
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one means.
"American Hospitals: A Look Ahead". '
50: 73-81. 1 January 1976.
(1)
Philips, Donald.
Hospitals, JAHA.
(2)
Damon Corp. "Symbiosis: A Partnership in Hospital
Laboratory Medicine".
1975
(3)
California Health F~cilities Commission. Accounting
and Reporting Manual for California Hospitals.
1974
(4)
Report by the Comptroller General of the U.S. Dept.
HEW. 30 April 1975.
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II. Background
A search for current literature pertinent to the
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topic of hospital shared or consolidated services,
especially clinical laboratory services, was conducted
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through use of the '·'MEDLINE" (MEDLARS on-line) bibliogra- '
phic search service at the Biomedical Library of the
University of California, Los Angele-s,
A limited number
of related articles have actually been published, but
those available were found to be helpful in the development of the consolidated model.
These references are
cited throughout the following discussion of the design
of the model.
A.
Design of the Model
The major management considerations to be reviewed
in an evaluation of the feasibility of the consolidated
design can be grouped into seven functions:
_(1)
1)
Organizational structure and control.
2)
Political considerations.
3)
Manpower needs.
4)
Service-level requirements.
5)
Facilities and equipment.
6)
Transportation and communication systems.
7)
Legal considerations and reimbursement effects.
The question of organizational structure and control
must include regard for the financing of the organi1
za ti.Q:t:h_IDC!nagi.pg __of the __ enti ty; ___ es tab lj..shing__a, __ syst~ernJ
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of accountability to insure responsiveness to the
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needs of participating institutions; price setting;
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organizing and reimbursing of the pathologists in-
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volved.
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Several forms of organization have been demonstrated
to be viable.
The joint laboratory venture of North-
western Memorial Hospital (the merged Passavant
Memorial Hospital and Chicago Wesley Memorial Hospital) and Northwestern University Medical Center which
involves basically the "sharing" of equipment and
staff with each institution responsible for certain
non-routine procedures is one form of collective
endeavor.
(5)
The establishment of a separate centralized labora.
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tory out of the hospital, directed by a joint commit:tee of hospital administrators and pathologists and
responsible for non-routine and automated procedures
has been highly successful as demonstrated by the
Hospital-Pathologist Central Laboratory of Orange
County (California).
(6)
The pooled concept under the direction of member
pathologists has also proven .cost-effective as
exhibited in the Central Pathology Medical Group
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(Los Angeles, California), and with the laboratory
L______ delivery
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system of the Health Insurance Plan of
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New York (HIP).
(7)
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The total consolidated management concept for labora-
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tories is fo1,1nd in the Damon Corporation (Needham
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Heights, Mass.) nationwide network of regional
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laboratories.
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In this form, a management contract
is drawn between the institutions and the professional laboratory firm under which the lab group is responsible for total laboratory production within the
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participant community.
(8)
The ownership of the consolidated entity is irrelevant, however, ultimate ownership of the organization by an experienced laboratory management company
has proven to be the most effective and collectively
beneficial arrangement from the standpoint of cost
containment, continuity, accountability and marketability.
(2)
Political considerations involve the triumvirate of
interests represented by staff physicians, administration, and trustees.
The attending physicians
need for rapid, dependable lab service must be
the administrator's criteria for cost containment,
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producing adequate surplus revenues from operation,
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and maintaining a favorable working environment
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for employees.
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effort is designed to improve patient care at a
Trustees must be assured that the
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reasonable cost, and organizational structure must
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such that the trustees are still ultimately account-
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able.
The successful consolidation implies the interaction
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of a neutral catalyst - often the outside laboratory
management firm - with these representatives of
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special interests.
(3)
~1anpower
requirements include a definition of numbers
and types of personnel necessary to meet objectives.
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Additional categories of specialized personnel may
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be needed; administrative and support staff will
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usually need to be obtained.
Hhat orientation and
training programs might be required?
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(4)
Laboratory service requirements differ from community.
to community; they are inherently case specific.
The
service level requirements of the participants must
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be specifically identified, keeping in mind that the
duty of the laboratory begins and ends at the
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patient's bedside.
Key issues in the determination of service-level
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location, and acceptable turn-around times for each
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procedure.
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Facilities and equipment requirements imply capital
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financing and/or asset redistribution.
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The pro-
fessional laboratory management firm is usually ami-
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able to meeting the capital requirements for start-
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-· up.
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Floor space needs, expansion capabilities,
location of satellite facilities, must be reviewed.
The current equipment inventory must be considered
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in view of projected performance; what additional
equipment will be needed; what might be done with
excess duplicated equipment after consolidation?
Preventive maintenance programs, computer interfaces,
and back-up systems need be considered,
(6)
Specimen transportation issues must be resolved for
intra-hospital exigencies and for inter-facility
needs.
Which communication mechanisms are most ap-
propriate: teletype, telephone, messenger, computer?
The communication and transportation system must
meet the needs for accuracy, speed, consistency,
reliability, and credibility.
Is the chosen system
. easy for personnel to use?
· (7)
The tax status of the consolidated entity, the
licensing, proficiency, and other legal requirements
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of the jurisdiction, and the liability coverage of
all participants are legal considerations.
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Health
Planning (HSA) and Certificate of Need (C.O.N.)
authorities must be acknowledged;
Does the consoli-
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dated arrangement meet third-party payor requ1rements:I
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for participation; what is the overall effect of the
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consolidation on reimbursement structure?
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The operational model consists of a functional network of:
a.
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primary care laboratories, located in the
participant hospitals.
b.
intermediate facilities functioning as the
local service center performing automated and
hatchable procedures for the participating
service catchment.
c.
the regional laboratory, providing the management expertise, data systems, professional and_
technical staffing pool, continuing education
programs, quality control
monitoring~
preven-
tive maintenance programming, esoteric testing
capabilities, central purchasing, capital funding, transportation, communications and overall
definition of the system.
(Please refer to Page
1~
for diagram)
Test volumes are achieved in part through a program
designed to attract the outpatient test market.
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, - - ,- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - C . -..._c _ _ _ _ _ _ _ _ _
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No firm guidelines have been established that limit
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service areas to a maximum distance between facili-
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ties or to an optimal number of hospital participants
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The capabilities of the delivery system are limited
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only to the extent of the ingenuity of its designers.
(5)
Cooney, J.P. et al. "Consolidation of Clinical
Laboratory Facilities: An Evaluation Parts 1
and 2."
(6)
Dahlgren, T.
"Six Hosp,itals Share a Central
Laboratory and Save Money.". Modern Hospitals.
112(4): 92-3. April 1969
(7)
Daily, Bellin, Scardino, "Centralized Laboratory
Service Benefits Affiliated Medical Groups".
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Hospitals, JAHA.
43: 61-4. 16 April ,1969.
(8)
Damon Corporation- "Symbiosis", 1975
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TABLE 1
THE CONSOLIDATED LABORATORY NETWORK
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Primary Care Laboratory
(in-hospital)
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Local
Outpatient
Test Market
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Consolidated
Regional Lab
- Hospital
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B.
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Reasons
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The cost effectiveness of the consolidated entity
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Consolidated Effectiveness:
can be traced to one major factor -· volume.
The consoli-
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: dated efforts of the currently non-aligned laboratories
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staff to operate them.
By breaching the "duplication gap"'
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and pooling total numbers of a test procedure onto one
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piece of equipment, down-time is reduced substantially.
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Non-productive technologist time is reduced; lower
fixed salary expense and lowered depreciation expense per
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procedure is achieved.
Additional test volume (up to 25%);
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is available through effective marketing of outpatient
test referrals from staff physicians at competitive rates.·
(9)
The excess equipment resultant of a consolidation can
be sold at book value to the contracting management
organ~
zation or sub-leased to interested parties.
Increased hours of central laboratory operation are
necessitated by these more effective volume allocations.
Flexible staffing patterns through the larger lab entity
are more readily achieved than is possible at individualhospital laboratories.
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The consolidated whole can demonstrate the test
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volume and revenues necessary to support doctoral level
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\ specialists in other bio-medical disciplines - micro-
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biology, immunology, biochemistry, hematology.
Volume purchasing arrangements reduce costs, as does
the manufacturing of the reagents within the consolidated
organization.
Finally, the cost of esoteric testing referrals is
reduced due to the natural triage system involving the
regional laboratory center as part of the total delivery
'system.
Studies of operating centralizations and examination
of several feasibility studies for such consolidations
have demonstrated a net real cost savings in the hospital
laboratory operation of 15% to 20%.
(10)
The real cost savings is attributed to reductions in
the following areas:
Direct Labor
5% - 6.5%
Volume Purchasing/Manufacture
Reagents
3%
Professional/Supervisory Expense
2% - 4%
Clerical Expense
2%
Esoteric Testing Expense
3% - 4. 5%
Approximate Total Savings
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15% - 20%
The greater the number of available participants,
~sually · the
greater the total savings, even beyond- 20%. ·
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In a consolidation involving the St. Joseph Infirmary!
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in Louisville, Kentucky, the savings in direct expense
was much higher than 20%.
A yet unpublished feasibility
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study describing a laboratory consolidation for the
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County of Los Angeles Health Department demonstrates a
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I 50% reduction in direct lab costs, reducing this County
expense from $40 million to $20 million annually.
(9)
(11)
Gal, Hanok.
"Savings Through Centralization".
Hospitals, JAHA.
44(23): 60-5. 1 December 1975.
(10) Ibid
(11) Tsumpes, Wm. J. Logistics Systems, Dept. of Health
Services, Los Angeles County.
2 March 1975
Personal interview.
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C.
BeneJ..~~ts
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to Participant Hospitals
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Several distinct benefits have been identified as
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accruing to hospitals participating in a successful
i laboratory consolidation design, not the least of which
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the effect on revenues and cash 'flow.
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1.
Net lab revenue (surplus) accruing to the participant
hospital is increased and maintained at that level by
contract with the management organization.
This
improved profitability is inferred by the project
design.
2.
Cash flow is improved:
Payment for laboratory per-
formance occurs subsequent to service, rather than
as an on-going expense for payroll and supplies.
An immediate cash gain is available through a sale of
laboratory equipment to the consolidated system.
Capital reserve funds for future laboratory needs
are eliminated, as maintenance of the state-of-theart technologies becomes the responsibility of the
consolidated management organization.
3.
The hospital administrative burden of responsibility
for total laboratory operation is lightened:
A pro-
fessional laboratory management team is responsible
for standardization of reporting and procedures,
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quality control, licensure, proficiency testing, other
L _ considerations.
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The cost of running an efficient laboratory "comes
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out of the consolidated entity's pocket 1 ' :
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to the consolidated whole comes only after expenses
of operation have been met.
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The income
The hospital revenue from.
operation is fixed, regardless of expense.
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Proper
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procedures and controls for submitting lab charges
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to the business office are assured:
The laboratory
organization stands to suffer should good receivables
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management be lacking in the business office.
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Effective intra-facility communication between parties;
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is built into the "users committee" concept: Technical
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and professional consultation is effectively achieved
through the "team" lab.
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Hospital
l~boratory
staffing at all levels is coordi-
nated through flexible staffing patterns and personnel
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policies of the centralized organization.
4.
payroll) are borne by the regional center group.
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Future increases in direct operating costs (supplies,
The
cost of professional contracts is assumed by the
regional management group.
5.
More direct control over the cost and availability
of esoteric reference testing is afforded.
Intra-system continuing technical education for
laboratory personnel is provided for by the regional
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7.
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center.
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Additional physical space is saved or created, even
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under planned expansion, due to effective assignment
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of testing procedures to the appropriate laboratory.
8.
The potential exists for reducing patient length-ofstay due to the more frequent processing of esoteric
batchable tests and routine admission panels.
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9.
Quality and scope of testing is generally found to be
improved through the consolidated program.
Technolo-
gists in the hospital laboratory tend to be generalists
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whereas they now become departmentalized specialists
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in specific test areas or procedures, thus maintaining·
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a higher degree of proficiency in their individual
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responsibilities.
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Opposition to Laboratory Consolidation
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Many expressions of opposition to a laboratory consolidation can be overcome initially by realizing that
there is no fixed formula for the consolidated design,
and arrangements are flexible enough to meet specific
institutional demands in most cases.
Loss of control of personnel is often of concern to
administration.
The legal contract with the laboratory
entity is the hospital's protection of control over personnel performance.
The hospital rules and regulations
apply to all lab personnel.
The lab entity must provide
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good people in order to properly fulfill its obligation-,
this is more assurance than the hospital personnel office·
would get in hiring a lab employee "off the street".
Doesn't the hospital lose control of prices?
No.
Hospital control of lab prices is insured through mutual
agreement and periodic review of fee structures.
The
hospital still sets and maintains a fee schedule, and
bills for its laboratory services.
What about the fear of an impersonal, peripatetic
pathologist being assigned to the hospital?
Generally,
the current pathologist of record remains under the new
form.
Should a pathologist change occur, the consolidated
group pathologist is approved by the hospital credentials
committee, serves on the staff, and is assigned solely to;
------------~
-------·
19
~--·--------------------------·---------··------------------------------·----------·--l
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that institution.
I1
How about the longevity of existing employees?
l
general, current employees must be retained because they
i
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are necessary for a smooth transition and are adapted
to play new roles in an expanded organization.
Experience
has shown that natural attrition over a period of 12 to
i
18 months is approximately 10%.
Isn't the expense of the feasibility study and startup prohibitive?
These costs are real, and can be sub-
stantial, but are generally borne by the laboratory
management firm.
The consolidation of clinical laboratory services
a long considered concept that has come of age.
It meets
the demands of the "prudent buyer" by offering to re·duce
unit test costs through effective management, planning,
volume cost efficiencies, and minimized duplication of
effort.
It is a rare case when the hospital is afforded an
.
.
option which implies improved productivity and profitability in an important revenue center.
The consolidated
laboratory model is proposed as ju.st such an ·option.
20
,--------··----·· ----------·-----·--··-----..--..-----.--·-----------..------------l
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E.
Setting of
t~e
I
Study
The consolidated laboratory concept was applied to
'
an appropriate catchment in Western Montana.
Demographically, this University town of 48,000
total population has experienced a growth rate of 30.5%
during the 1960-70 decade (U.S. Bureau of the Census).
This figure is over double that of the National average
of 13.3%.
Chamber of Commerce projections indicate that
I
this growth pattern has not changed since the 1970 study.'
Medical manpower is plentiful:
practicing physicians.
the town has 130
Many of these are Board Special-
ists who have left the large cities for a more relaxed
atmosphere.
The area claims to be second only to Boston
in physicians per population (48,000
~
130 M.D.'s = 370
I
persons per M.D.).
This astonishingly high doctor-
patient ratio does not seem to affect the income of the
professionals, with most of the practitioners earning
figures around $50,000/year.
Professional fee schedules
are generally high, for a non-urban setting.
Three acute care hospitals serve the town, with bed
capacities as follows:
Hospital A
237 beds
Hospital B
105 beds
Hospital
c
57 beds
399 beds, total
21
,---------,---------------,
I
----,·---~----·-------·-l
The hospitals have historically been quite competi-
1
tive and often hostile toward each other.
1
,,
at cooperative efforts have failed due to institutional
I
jealou~ies
I
principals expressed their hopes that a neutral third
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and self-serving interests.
Past attempts
The hospital
party, capable of involving the hospitals in a shared
laboratory entity, may serve as a first step toward co-
Il,
i
'
operation and health planning inthe community.
Initial contact was effected in September, 1975, with
the local Health Consortium in order to solicit potential
interest in a consolidated laboratory project in the area'
The Consortium membership includes hospital administrators, key staff physicians, County Health Authorities,
several Hospital Board of Director members, and the areawide Health Planning Council director.
As a result of the preliminary meetings, it was
agreed by the participants - the hospitals, the pathologists, several private laboratories, the laboratory
management group - that the concept was feasible and
did merit further investigation.
22
~--~-~- Pa~tici.pants- in the--~-~ud~~------------------------~~~
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1
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1)
!lospital A
Ownership - Catholic Order
!
Non-Profit
!
Community Acute
General Hospital
'Ii
I
237 Beds
Current occupancy:
I
I
56%
Annual Gross lab billings (1975):
I
!
$920,000
Less direct expense:
(553.370)
Surplus (revenue/expense):
$274,752
(Please refer to Appendix B
(Page 75)
(33/~)
for financial
details)
I
I
I
A summary of services follows:
Post-Op Recovery
9 beds
ccu
1 unit, 4 beds
2.1 avg. daily census
cu
9 beds
4.7 avg. daily census
Surgery
8 rooms
No. ops., 1974- 4,396
DB/Nursery
10 beds
3.6 avg. daily census
Deliveries, 1974 - 389
Pediatrics
30 beds
14.7 avg. daily census
Medical beds
69 beds
53.3 avg. daily census
j
23
r-------------·------------------------·---·------------------·--------------------------,
)
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1
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.
Surgical
Dialysis
I
95 beds
avg. daily census
· 57.3
i
I,
2 units
9 pts. treated in 1974
j
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Burn Unit
1 bed (part of ICU)
1
Psychiatric
15 inpt. beds
6.5 avg. daily census
l
Em. Room
12 beds
No. patient visits - 12,562
34.4 avg. pts. per day
I
1
A pediatric intensive care unit is being planned.
Thirty-five percent (35%) of the Medical Staff is represented by the affiliated Medical Clinic, who, for selfinterests might block a consolidated laboratory effort.
Payment for care is 40% third party public payors
(Medi-Care, Medicaid) and 60% private pay.
The State of
Montana is under a 100% charge reimbursement framework for
public programs.
One year ago the hospital corr~leted a $150,000 building addition for a new clinical laboratory.
This was
financed through a community fund drive.
Hours of lab operation are 24 hours a day, 7 days a
week.
All of the major pieces of lab equipment are owned'
by the hospital.
I
--,-------J
2-"+1
i----------------.-----------------------------------------------------------
1 2)
i
Hospital B
·
Ownership:
·
Community
·
1
Non-profit Acute general
hospital
l
il
105 beds
I
Current occupancy:
55%
Annual Gross lab billings (1975):
$419,720
(293,931)
Less Direct expense:
Surplus (Revenue/Expense)
$126,789
(30%)
(Please refer to Appendix B (Page 77) for financial
details)
The hospital is the most recent addition to the
medical facilities in the area.
The institution is
currently financially unstable and is having difficulty
in selling a bond issue which it recently had approved
Services are summarized:
ICU
4 beds with 2 overflow beds
748 days of care
2.0 avg. daily census
Surgery
3 rooms
2,989
Inhalation Therapy
2 rooms, 4 treatments - 11,241
Obstetrics
11 beds
avg. daily census
No. ops. in 1973
7.4.
Nursery
No. deliveries 796 vaginal
"
· "
46 C Sections
avg. daily census 7.8
Pediatrics
20 semi-private beds
1,239 days pt. care
avg. daily census 3.4
Medical
41 beds
avg. daily census 23.2
lI
I
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I
/
25
~-S~~~cal___________ ~~=~---------------l
I
I
I
I,:
a vg. daily census
Isolation
2 beds
Em. Room
6 beds w/Heliport
No. pt. visits 5,311
Avg. pts. I day 14. 6
Phys. on call only
1'
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25.2
II
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Abortion service
I Future Plans
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No. in 1973 - 232
I
Expansion of Pediatrics
Maternity Beds, Neo-Natal ICU
1
~
Many of the Medical Staff at Hospital B are physicians
who have left the staff of Hospital A over the last few
years due to discontent with the former administrator of
that institution.
I
I
I
I
I
I
I
II
Laboratory operations are from 6:00 a.m. to 11:00
p.m~
i
weekdays and 7:00a.m. to 5:00p.m., weekends.
hours are covered on an on-call basis.
All other'
26
r ..- - · - - - - - - - · - - - - - - - - - - - - - - · · - - - - · - - · - - - · - - - - - - .
I
3)
Hospital C
Ownership: Investor,
!
Corporatio~
1
Acute General Hospital. with
long-term care wing
j
1
I
-------------------1
57 beds
Current Occupancy:
45%
Annual Gross lab billings
Less direct expense:
(1975):
$140,724
(100,626)
Surplus (Revenue/Expense)
$40,098
(28%)
(Please refer to Appendix B (Page 78) for financial
details)
Hospital C is the oldest of the hospitals, and has
i
recently been cited for building code structural violations.
I
It is the most solvent of the institutions due to
backing from the Railroad Health and Welfare fund.
Patient revenues can be broken into 55% Medi-Care/
Medicaid; 20% Health Services Association Fund patients;
25% private pay.
The hospital has become unpopular within the medical
community recently following the disclosure that the
facility's owners plan to market a pre-paid health plan
in town, using Hospital C as the primary care center.
Services appear underutilized, and include:
CCU/ICU
L__
Surgery_.- - - -
2 beds
0.21 avg. daily census
3 rooms
1973: No. operations 524
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----~~
. 27
r-----·--·- -------------------------------·----------1
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Obstetrics
None
Pediatrics
None
Medical beds
Long term & self-care patients
28 beds
Avg. daily census: 12
Surgical beds
-20 beds
Avg. daily census:
I
9
2 beds
Avg. No. patients per day:
Emergency Room
47
Laboratory equipment is not extensive, with very little
I automation.
I
I
4)
Age:
I
I
Pathologist of record at
Hospital A.
Pathologist a.
42
Board certified, Anatomical and Clinical Pathology.
Hospital arrangements:
I
16% of gross billings. No
written contract exits.
Effective annual income:
$135,000.
No outside laboratory affiliations.
expressed a positive interest in a
Doctor
tive of his income.
He was unofficially nominated by the
other pathologists as the most likely candidate for a
I
central lab Medical Director.
5)
Pathologist b.
Age:
L_
I
Associate pathologist,
Hospital A
42
Board Certified, Anatomical and Clinical Pathology.
28
~--------·--·----------·---------· ---------------------------------------~
i
Hospital arrangements:
.
I
j
I
$5,000 inCreases annually; first increase scheduled for
April, 1976.
I
I
Salaried, $45,000/year, with
After 3 years on hospital salary, he is to
become a full partner with Dr. "a", sharing in a percent
of the gross.
6)
No outside laboratory affiliations.
Pathologist c.
Pathologist of Record at
Hospital B
Age: 58
Board Certified, Anatomical and Clinical Pathology.
Effective annual income:
$44,803 (Hospital) +
$18,208 (private lab) +
$27,500 (lab withdrawls) =
$91,511
It was rumored that Dr. "c" wished to retire within
the next two years.
He was anxious to sell his labora-
tory to a consolidation and was in favor of a centralized'
clinical lab design.
He is allowed to use the hospital's
Hycel Mark 17 for his private practice panels, and is
charged a flat test fee for its use.
Pathologist "c" was formerly associated with
pathologist "d".
The two men did not get along well
professionally, and after their split of several years
ago, have remained at a distance.
Please refer to Appendix B for a financial analysis
of the private laboratory interest owned by pathologist
"c".
_
!
!
_j
.
29
r--·--·----·------------·---..
j
7)
-·-------------------------·----------··-···--------------~
Pathologist d.
Pathologist of Record at
Hospital C
1
Age:
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!
54
Board Certified, Anatomical and Clinical Pathology.
Hospital arrangements:
11 - 12% of gross.
Wage which is effectively
Private
lab~
with referrals from
private physicians and 5 outlying "circuit" .hospitals.
Effective annual income:
$30,000 (hospital)+ $87,000
(private lab) + $3,000 (coroners work) + $120,000.
I
I
I
This pathologist was the prime motivating force
I
behind the centralized laboratory concept for the town.
I
His motivation appeared to be in selling his private lab
interests and associating with a group effort in order to
I
i
eliminate the administrative burden of running his practice.
I
I
Dr. "dn stated that he would prefer to spend more
of his time on his hospital "circuit", providing patholcgy
services.
He had obtained tentative commitments from at
least thirty (30) outlying physicians who would use the
I
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I
new consolidated facility for their outpatient referrals ..
In addi.tion, the five outlying "curcuit" hospitals served
by pathologist "d" indicated an interest in supporting
the central facility.
These hospitals are from 50 to
100 miles from town, with a total of 195 beds.
Effective in January, 1976, Montana pathologists were.
limited to a maximum of three laboratory directorships.
Doctor "d" has been affected by this change in the State
1
30
f
---···--·---·-~-··"---------------------------------·----·----c--·-·-·--
------------------------.,
I
law, as he had been serving a total of six lab director-
I
ships simultaneously.
I
'
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!
The pathologist co-directors of
the consolidated entity afford Doctor "d" an alternative
for licensing his outlying hospital laboratory commitments.
I
8)
Administrator A.
Administrator of Hospital A
,
I
I
This Sister of the Catholic Order which owns Hospital:
A, had been administrator here for only three months.
Administrator A was very much in favor of the lab
consolidation, but had several concerns:
(1) she feared
that her hospital would be taken advantage of by big
business and male dominance of the Sister's interests,
(2) she did not wish any of the existing employees eliminated as a result of consolidation,
(3) she insi'sted on
hospital ownership of the laboratory and lab equipment,
(4) she was concerned about reaction from contributors
to the recent $150,000 lab renovation, should the hospital
decide to utilize the space for other purposes.
The hospital controller acts as this Administrator's
financial manager in all decisions related to a consolidation proposal.
9)
Administrator B.
Administrator of Hospital B
This man had been administrator here for less than
one year.
Previous background includes a master's degree
--------------~---------~
·---------------
31
r--·--------·----~-------·-------------
-------------·----
------·--------~
I in Hospital Administration and an associate administrator\
j
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position in a major Chicago medical center.
He is
generally mistrusted in the town and has been stereotyped
a "big city hustler".
Administrator B favored a centralized laboratory
effort, and had already considered alternate uses for the
I
!
floor space saved from his laboratory.
I
acceptance ·were that the hospital's maintain ownership
His terms for
I
of the laboratory through some sort of lease-back or
I
1
joint venture design.
He was
unyieldi~
on this point.
This administrator had recently been elected as the
I
Chairman for the 11-member district hospital administra-'
tor's council, and indicated that most of the council
members would encourage their hospitals to participate in.
one form or antother in a centralized service (5 of these
11 hospitals are already accounted for in the projections
volunteered by pathologist "d").
10)
Administrator C.
program.
Administrator of Hospital C
Decisions would be made in this case by the lab
director, pathologist "d".
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,-'"-··--·-·--·-------------------------·--·-----··--·--·---------------------------------1
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11)
1
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Infectious Disease Center (IDC)
/
This entity is a non-profit microbiology lab char-
'
tered by the local Medical Society.
The lab performs
approximately 10,000 cultures per year at a charge of
do most of the local practicioners.
The lab is operated
by two master's level microbiologists in association with
the University of Montana, Dept. of Microbiology.
Quality and service of the lab is reported as excellent.
It was felt that this microbiology service could be
folded into the centralization design without any
appreciable investment.
12)
Professional Village Laboratory
This private laboratory is owned by six practicion-
ers in the "Professional Village" complex in town.
The
lab is supported exclusively by the owner physicians.
The administrative burdens of licensure, quality
control and billing third parties had become excessive
for these doctors.
They had approached me to buy out
their interest and fold their equipment and payroll into
the proposed consolidation.
Revenue data is summarized (Nov., 1974 to October,
1975):
L___~--------·----------·
33
---------------------------~
Gross Income
$55,161
Less expenses
(44,858)
Excess revenue/
expense
$10,302
-
I
(19%)
I
(Revenue/cost details found in Appendix B).
13)
Private Medical Clinic Associated with Hospital A
I
j
This private group is comprised of 38 staff physicians of Hospital A.
They represent a 35% medical staff
quorum at the hospital.
The clinic has its own extensive laboratory, and thelab director expressed concern over the proposal for a
consolidation in town.
The clinic laboratory volume approximates that of all
three hospitals combined (an estimated $1.1 million
annually) .
This i.vas based on a high fee structure.
-According to the local pathologists, the quality at the
Clinic lab is questionable.
The clinic admits that it is
recognizing a high profit on laboratory operations.
All
hospital pre-admission testing is done at the clinic
rather that at the hospital.
The Clinic doctors are not popular with other private practicioners in the community.
Support of the
Clinic appeared to be essential to a workable consolidated venture in the area.
Specific data was not
34
,---I
·----·--·----------·
obtainable from the Clinic due to the "wait-and see"
1
attitude they had
adopted regarding the consolidation.
J
Should the consolidation program be developed, the Clinic!
would be forced to cooperate, or run the risk of eventually having their exorbitant patient laboratory fees
exposed.
l-·---'---·--
·------··-·---J
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~---···-·-·---«------------·-------------------------- -----~
j
III.
Methodology
I·
I
A.
l
The purpose of this study was to demonstrate that
II;
I
I
1
the
Statement of the Problem
r~gionalized
consolidation of hospital clinical
laboratorieswouid, create substantial direct cost savings
for participating institutions, and that investing in
the formulation and operation of the consolidated
clinical laboratory would be investor-attractive.
For purposes of this study, the following definitions will be assumed:
1.
Demonstrate - to prove the hypothesis of direct:
I
cost savings by comparison of pre- and post-consolidation
data.
2.
Regionalized - refers to a broad geographical
administrative area which would include more than one
standard metropolitan statistical area (SMSA).
3.
Consolidation - merging, aligning, or uniting
two or more similar activities into one functional unit.
4.
Substantial - an increase in savings that is
considered by a potential participant as ample to satisfy,
I
usually a minimum of 6%.
., I
I
5.
I
Direct cost - includes all variable costs of
operation identifiable with the cost of production of a
!
\
~~t ~~-_!erv~~=;~ll cos~-~ ex_cl~~i~~ _o_":_r._~-~--=~- an~-- ger:~
35
36
.------------------------·---·----------------------r
J
I administrative.
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Participating institutions - hospitals or pri- i
I
!
vate clinical laboratories which agree to utilize the
I
6.
I
consolidated system.
1
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7.
I
Investing- to commit money in order to earn a
financial return.
8.
Formulation - all stages of applying the
Ii
regionalized consolidated concept to an actual case.
I
. This would include the feasibility study, design, contract
negotiations 1 financing, and implementation of the program.
9.
Operation - the on-going management of the
consolidated program once it has been implemented.
10.
Investor-attractive - shows promise of success ,
that is great enough to entice the commitment of money to
the project.
Success would be measured by a rate-of-
return on monies committed of at least 20% annually.
B.
.Data
There were three categories of data that were
obtained in order to complete this study.· These cate-
I
gories were:
Revenue Data
Expense Data
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37
~--c-----------·
-----------
------------l
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Utilization Data
I
I
A full explanation of the categories may be found
I
I
in Appendix A (Page 68 ).
The Revenue and Expense data is necessary in order
to determine the excess of revenue/expense that is
generated in each individual laboratory operation.
Pay-
roll and equipment information that is requested as a
part of expense data is needed to equate services provided
to productivity,
Utilization data - the summary of services provided.
i.s then analyzed in order to project the total costs related to a consolidated unit.
I
The data was obtained by personal interview with
hospital administrators, pathologists, hospital controllers, chief technologists, hospital chiefs of staff, and
owners and accountants of the private clinical laboratories, that were involved.
The sources of data included hospital cost reports,
management summaries, daily logs, and departmentalized
profit and loss statements.
Audited financial statements
of the private clinical laboratories were also required,
----------------------'
38
r·
-------·------------------·--'---
I
c.
-------------~
Limitations of the Study
This study is limited by two major factors.
I
I·
First, the establishment of dependable historic baseline
1
cost data is difficult.
I
allocation of indirect costs (general/administrative,
I
I
The data available for the
depreciation, etc,) is often incomplete and unreliable.
Items of direct cost, especially laboratory supplies, are often presented in a confusing manner.
I
[
Inventory control is usually deficient.
As a result, be-
fore and after cost comparisons are often inaccurate.
Second, time constraints on the length of this
study did not allow for a retrospective review of the
effectiveness of the implementation of the consolidated
program,
The negotiation and incubation time involved in
implementing the model extended well past the study
period.
Therefore, this study addresses itself to the
conceptualization, feasibility study and projection of
cost savings of the consolidated model.
I
39
·n.
Analysis of the Data
Determining the extent of savings incurred through
the consolidation effort involved the tabulation and
·comparison of historic cost and revenue data to projected
costs /revenue figures.
Please refer to Appendix A (Page
data collection format.
68) for the
The details of the various
tabulations will not be given.
Instead, the highlights
and end-products of the determinations will take priority.
Step 1.
Based on historic cost/revenue figures obtained
directly from the hospital controllers and from private
laboratory financi-al statements, a historic performance
wastabulated for the purpose of calculating the percent
of surplus (profit) generated from laboratory operations
currently.
Medi~are
cost reports did serve as a reliable
source of verification for data supplied by the controllers
or accountants.
Determinations were prepared from the most recent
fiscal records, and records from the most recent threemonth period, if not included in annualized figures.
Appendix B (Page
75
) displays the profit/loss
tabulation for Hospitals A, B, C, and the private laboratories involved.
It is most important to note that only direct
40
operating expenses are included in determining the hospital's laboratory management prowess.
Indirect allocations
such as floor space, utilities, general/administrative,
etc. are generally not available from most institutions,
and thus the hospital is given the benefit of not
appropriating them for purposes of profitability determinations.
Total expenses (direct and indirect) are used
in calculating the ·profitability of the consolidated
entity,
As such, the consolidation would theoretically
represent a truer savings than is proposed.
The determination of current operating performance
shows the following:
Annual Gross
Revenue
Percent Surplus (profit)
Hospital A
$920,000
33%
Hospital B
447,000
30%
Hospital C
141,000
28%
Pathologist "c" laboratory
105,000
18%
Pathologist "d" laboratory
105,000
OL./o
. Professional Village Laboratory
55,000
18%
1,065,000
62%
Facility
Clinic Laboratory
nna1
The clinic's decision to decline participation in
the laboratory consolidation project will have obvious
ill-effects on the overall productivity of the new
tion.
opera~
This decision not to participate was made essen-
tially out of fear of losing a portion of the income
th~t
41
is now generated from the lab operation.
The clinic
physicians were apprehensive about the possibility that
their monopolistic situation could be revealed to the
community through involvement in the consolidation plans
(remember that the clinic fee schedule is excessive,
considering the outpatient nature of the work performed,
and that the patient referrals are ''captive", thus explaining in part the high profitability of their operation.)
Step 2.
Monthly average utilizations of each test pro-
cedure was determined for each facility.
The actual
figures from the previous three-month period were used in
this step.
The procedure is demonstrated, using Hospital A (see
next page),
This display allows the examiner to view the test
averages for staffing projections and also to review the
contributions to revenue which.each procedure represents.
Hospital A:
Table. 2. Mo:nthl:l Average Utilization Determination
Utilization
(outpatient = 10% of total)
Aug,
1975
Sept
1975
Oct.
1975
Monthly
Average
Monthly
Test
Fee
Acetone
4.00
2
8.00
2
8.00
2
2
8.00
15.00
18
270.00
18
270.00
27
21
315,00
9.50
10
95.00
12
114.00
8
10
95,00
Alcohol (EtoH)
12.50
5
62.50
4
50.00
8
6
75.00
Aldolase
12.50
--
--
1
12.50
9.50
32
304.00
33
313.50
21
29
. 284,00
Ammonia
17.50
--
--
--
--
1
Amylase
9.50
57
541.50
36
342.00
24
39
371.00
Acid P'tase
Albumin
Alkaline P'tase
Au~
SeEt $
~
.pN
43
Step 3.
This evaluation consideredthe fee and total test
volume analysis of the participant laboratories collectively, using the individualized format from Step 2.
A grid is used to display the fees and the monthly
average utilization of every test listed as an available
procedure (see next page for example from this case).
Consolidated staffing and equipment requirements can
now be determined from this evaluation of average number
of test procedures to be anticipated per month.
· £L'ab·le
'3 ,
- ..
~
CONSOLIDATED TEST TOTALS
Monthly
Totals
TEST
Hos;Eital A
Fee
M~. Avg.
Hos;Eital B
Fee
Mo. Avg.
Acetone
4.00
2
3.50
1
6.00
--
3
15.00
21
8.00
8
8.25
5
34
9.50
10.
6,00
4
7.00
12
26
Alcohol (EtoH)
12,50
6
10.00
--
11.00
2
Aldolase
12.50
1
10.00
2
11.00
1
4
9.50
29
8,00
20
8,25
5
53
Ammonia
17,50
1
15.00
--.
15.00
--
Amylase
9,50
39
9,00
10
10.00
5
54
Bl,JN
9.50
131
8,00
40
9,00
24
195
Acid P'tase
Albumin
Alkaline P'tase
'
Hos:Eital C
Fee.
Mo. Avg.
-
'.
8
1.
(Test totals for the private laboratories would also be included in
this analysis, but have been left off of this example).
+=-+=--
45
Step 4.
A payroll and fringe benefit summaryvJas next
prepared.
This staffing detailwas used to determine areas
of improper manpower utilization, and possible overstaffing.
The fringe benefit summary was neces s::try as a com-
parison from which a new fringe benefit package might be
developed, keeping in mind that the most generous of the
benefits in each category must be accepted in the new program.
The payroll summary of Hospital A was used to show
their current staffing level:
(Please refer to summary ori following page)
46
Table 4.
HOSPITAL A:
PAYROLL SUMMARY
Hourly
Rate
FTE
Annual
Chief Tech
7.33
1
$15,246
Tech
5.13
3
32,010
Cytotech
6.66
1
13,853
Tech
4.98
1
10,358
Tech
4.80
1
9,984
Position
(3)
Tech
(4)
4.62
4
38,440
Tech
(1,6)
4.53
1.6
15,075
Tech
4.44
1
9,235
Tech
4.01
1
8,341
Helper
2.36
1
4,909
!
Helper
2.30
0,8
3,827
Clerk Typist
2.51
1
5,221
Secretary
2.85
1
5,928
$172,427
'
47
From the individual facility payroll summaries, a
total payroll summary representing all laboratories was
prepared:
·Table 5,
TOTAL PAYROLL, ALL LABS
Position
Hourly Rate
FTE
Ch.:Lef Teens
5
Med, Techs,
22
Cytotech
3
Cleri,cal/Sec,
6
Tech, Aids
2,8
38,8
Annual
349,679
The comparison fringe benefit summary was also
developed;
(Please see following page for summary)
· ~ral:lle ·'6,
FRINGE BENEFIT SUMMARY
Pension
Plan
Hospital A I
2.0%
Life
Insurance
I
$2,000
.76¢/mo.
Health
Insurance
Paid
Paid
Holidays Vacation
Blue Cross
I 7 days 12onewksyear,
after
single
3
I 17.15
wks after
5 years
Hospital B
Yes
$5,000
Full hospital
& outpatient
services. Grp
health & acci·dent
Hospital C
I
Being
Revised
N/A
Single
Premium
Paid
9 days!Chief Tech:
4 wks.
Sick Emergency
Leave
Leave
1 day/
mo - 36 I 3 days
days max
accum,
8 days
N/A
12 days
N/A
Others: 2
wks,
7 daysl2 weeks
Standard for all facilities:
(1)
FICA, 5.85%
(2)
Unemployment Compensation, 3.10%
(3)
Workman's Compensation, 2.0%
.f..'
00
49
Step 5.
Equipment Sunnnary.
One of the reasons for laborer-
tory consolidations is the potential for reducing duplication of expensive equipment.
This presents a realistic
problem in consolidations: what to do with the excess
equipment that has already been bought by the-previously
non-aligned labs?
The large laboratory management firm
must have the capital to purchase the existing equipment
and sell or utilize the excess pieces outside of the
consolidated framework.
The market for used laboratory
equipment is limited, but some resale value can be
achieved as a result of the efforts.
This return can
be anticipated at one-half of the market value.
An inventory of all equipment (not including supplies
or expendables) was made for each facility.
The pieces
were categorized by department: chemistry, hematology,
microbiology, pathology, miscellaneous.
Terms of leases
and ownership must be verified.
Total equipment cost, depreciation, and net book
value was then summarized for each laboratory.
In this project, it was determined that the following
pieces of equipment could be eliminated based on the total
laboratory production of the proposed consolidated
organization:
(Please
ref~r
to following page for listing)
50
Table 7.
EQUIPMENT CONSOLIDATION
MARKET VALUE
Clinicard System
$4,000
ACA Analyzer (DuPont)
30' 000
Flame Photometer 143
1,500
Chloridometer
3,750
Electrophoresis Integrator
275
Digiscreen R
325
Turner Flame Photometer
175
4 Microscopes (A/0)
400
Ainsworth Analytical Balance
200
Coulter Zf
w/ diluter
Cryostat
4 refrigerators
Tissue Tek Imbedding Center
3,000
1,200
100
2,000
3 autoclaves
150
3 spectrophot.ometers
450
TOTAL APPROX MARKET VALUE
$44,525
51
The book values calculated for the equipment assets
at each facility were:
Hospital A
$98,200
Hospital B
17,100
c
22,100
Hospital
Pathologist
"C" Lab
6,900
Professional
Village
13,400
$157,700
The total book value of equipment was $157,700.
About
one-half of the excess equipment market value can be
expected in a resale, so that $22,260 can be hoped for
in this case.
The acquisition cost for equipment then
becomes $135,440.
52
Pro-Forma Income Projections
Revenues
First year operating revenue is projected for the
seven laboratories involved in the consolidation.
In
general, an increase in test volume of 5% annually can
be anticipated in the hospitals.
Costs can be expected
to increase about 10% annually, and account attrition is
historically 10%, although we might be able to show a
greater rate of retention of business due to the local
flavor of the enterprise, and the lack of competition.
The following page demonstrates the anticipated first
year revenue from existing programs.
· !able 8, · l.'roj ~ct:ed First Year Revenu·es
Hasp,
Hasp,
Hasp.
Path,
Prof.
____A_
B
C
"c" lab
Village
Gross Receipts
(1975)
920,100
Add 5% Increase
46,005
First Year Gross
Receipts
966,105
468,825.147,735
Less: 40% kept by
the Hospital
386,442
187,530
59,094
Net receipts to
laboratory
579,663
281,295
88,641
446,500 140,700
22,325
Path.
"d" lab
IDC
105,170
55,000
105,000
75,000
105,170
55,000
105,000
75,000
105,170
55,000
105,000
75,000
7,035
Total First Year Net Receipts from
existing facilities:
1,289,800
U1
w
54
The marketing of additional physician outpatient
referrals and hospital esoteric test referrals plays a
vital role in this particular consolidation case.
In 1973 an independent marketing survey was performed
with regard to the Montana clinical laboratory market.
At
that time it was found that approximately 2 million
dollars per year in testing is mailed out-of-state to
a large automated laboratory in Oregon.
This assessment
appears to still be valid.
It was felt by the pathologists involved in this project that the prospects for capturing a major portion of
this revenuewas excellent.
Provincial Montana physicians
would prefer to keep their testing in the State, given a
reasonable service level at competitive fees.
Professional hospital laboratory arrangements are not
readily available outside of the larger towns.
Interest
has been demonstrated in full service contracting with a
hospital lab management group at a given percent return
to the hospital.
The annual gross revenue projected from additional
hospital testing was $460,000 for the first year.
This
support had been verified through the pathologists and/or
'hospital administrators responsible at the given institutions solicited.
56
hospitals in the State is also a reasonable forecast
over a longer planning horizon of 18 months.
It had been
determined that the initial revenue possible on a mailorder basis from this source would contribute an additional $20,000 during the first operating year.
If
successful, this program could be expected to contribute
up to as much as $100,000 annually in later years.
EXPENSES
Projected operating costs for the centralized entity
represent total costs of producing the level of service
required to maintain an on-going program.
Payroll is approximately 10% less than historic
experience due to the elimination of several technical
job classifications.
First year payroll was anticipated
to be $315,000.
Pathologists annual incomewas reduced under the consolidation plan, but their total earnings over the length
of their professional contract with the new entity is
protected as the result of a cash buy-out of their individual practices at the time of acquisition.
The three-
year potential earnings as an independent contractor was
compared to the three year term earnings as an employee
of the centralized organization.
The difference between
the two projections is paid to the pathologist as a cost
of acquisition.
57
Refer to Appendix C (Page 81) for the determination
of proposed pathologist income in this project.
First year pathology salaries were projected as
$270,000.
(Pathologist "c" plans to work only part time
after consolidation) ..
Facility costs total $109,000 per year, consisting
of:
Lease (14,000 square feet)
$84,000
Maintenance, etc.
Leasehold amortization
20,000
5,000
$109,000
Other expense categories include Data Processing
(30,000); service pickup (four drivers and cars= 48,000);
salesmen (40,000) Accounting (40,000).
The pro-forma income statement for the first year of
operation is presented:
(Please refer to following page for pro-forma
information).
58
· Table 9,
ESTIMATED PRO-FORMA INCOME STATEMENT (1976)
'·
Revenue;
Hospital A
$579,700
Hospital B
281,300
c
89,000
Pathologist "c" lab
105,000
Pathologist ''d" lab
105,000
Professional Village
55,000
IDC Lab
75,000
Hospital
Expense:
8 Additional Hospitals
460,000
Physician commitments
127,000
Univ. Health Center
40,000
Hospital mail-order
20,000 1,937,000
Administrative
80,000
Payroll
315,000
Pathology
270,000
Facility
109,000
Data Processing
30,000
Service Pickups
48,000
Sales
40,000
233,000
Supplies (12%)
Fringe Benefits (20%)
63,000
Start-up Costs
25,000
100,000 1,313,000
Miscellaneous
-
·-··---·-··--··
59
Expense: (continued)
Net income before taxes: (32%)
Income after taxes:
50%
624,000
312,000
In order to acquire the elements of the consolidated
entity, approximately $677,000 in capital is required.
These acquisition costs include:
Pathologists (Appendix C)
$288,000
Equipment (net of resale)
135,440
Leases liability
68, 155
Supplies on hand
35,075
Goodwill (multiples of earnings)
Total acquisition cost:
150,000
$676,670
First year, after tax earnings:
312,000
Payback Period, based on after tax earnings:
2.2 years
r-----------1
IV.
----~
Results
I
I
I
--------------------
The cost-effectiveness, as measured by profitability'
was analyzed for each of the laboratories operating independently and under a consolidated structure.
I!
i
I
I
I
I
'
A comparison of the two alternatives for laboratory :
I
operation demonstrates the financial benefits to the hos-:i
-
-
I
i
Please refer to the following ;
pital for the first year,
page for the presentation of the results of this comparison.
A total of $132,237 improved profitability to the
hospital aggregate was projected under the consolidated
framework for the first year of operation.
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _____j
60
---------------------------·l
----------··-··-
· ·Table' 10,
Independent Laboratory Performance Compared to Consolidated P-erformance
I
!
I
i
I
I
I
First Year
Gross Receipts
Hospital Lab Profits
if Hospital Operates
Their Own Lab
Hospital Lab
Profits Under
Consolidation
Favorable I
Variance I
386,442
67,627 (7%?
I
<$
I
Hospital A
986,105
318,815
(33%)
(40%)
. /
Hospital B
468,825
140,648
(30%)
187,530
(40%)
I
46 ,88 2 (10"")
II
I
I
I
Hospital C
147,735
41!365
1,602,665
500,828
(28%)
59.094. (40%)
633,066
17 ,728.
.132,237
I
(12~)
i
I
I
I
L ___
I
-----
___j
()'\
~-~
.,---
1
V.
i
I
i
---------·------,
-----·----
Summary
I
An analysis of the data from this study did prove the
II
i
hypothesis that the regionalized consolidation of hospital:
!;
clinical laboratories would create substantial direct costi
I
!
:
savings for the participating hospitals, and that the
.
con~itment
of funds to this project would be attractive
to investors.
Under the consolidated structure, costs of laboratory
operation were reduced 7% for Hospital A, 10% for
Hospital B, and 12% for Hospital C.
It was agreed by the
administrators of these hospitals that a 6% reduction in
operating costs would be sufficient to interest them in
involving their institution in the laboratory consolidation.
A total of $132,237 improved profitability to the
hospital aggregate was projected for the first year of
operation,
This is an average cost reduction of 9.6%.
Therefore, the consolidated proposal did represent a
substantial direct cost savings.
The first year gross revenue to the consolidated
organization was projected to be $1,937,000, with total
expenses of $1,313,000.
The pre-tax net revenue was
i.
then projected to be $624,000.
62
Assuming a corporate
I
63
r----------------Funds required
1
l
I jected to be $677,000,
The period required to pay back
I
II
1
the original investment would be 2,2 years, based on the
after tax earnings.
I
In order to attract investors to commit funds to the
consolidation project, a minimum.·of 20% pre-tax earnings
with a payback period under 3 years is considered reasonable,
This project is projected to yield a 32% pre-
tax profit with a 2.2 year payback period.
Therefore, the consolidation project would be considered attractive to investors.
I
I
I
l_
II
!
r---------------------------------~·-·-~---· --·····~~--~--------,
I,
1 VI.
I
I.
Concluding Remarks
I
Several aspects of this study merit additional corrrrnent.
First, the consolidated laboratory proposal received
negative reaction from some of the participants.
Adminis-'
trators of Hospital A and Hospital B were reluctant to
relinquish an equity position in the consolidated laboratory.
Each hospital was concerned about one of the other
institutions securing a superior position in the decision
making process at the central laboratory.
As was
previou~
ly mentioned, the large private clinic did not wish to
participate because of their existing monopoly on their
laboratory fees, and the fear of loss of control over
this vital profit center in their operation.
Two of the pathologists admitted privately that they
were apprehensive about the restructuring of their income
sources, even though it was agreed that their existing income level would be maintained or enhanced after consolidation.
Several of the cheif technologists expressed concern
about the role they would play in the consolidated program.
Second, the test volume in the hospitals was lower
than would be expected based on their size.
This was due
i
primarily to the low occupancy experience in the corrrrnunity'.
Consolidation of the three hospital laboratories exclu-
I
:
--~
64
65
r-·-------·-·-------------------··--_:_ __________._________________________1
iI sively would have shown far less dramatic results than
I.
I were demonstrated in this study.
I
i
I·
I
Prospects for success
i
'
!I
:
in this case were dependent upon the added test volume
9btained through the acquisition of the private labora-
·i tories in town and through extensive marketing of the
I
\ surrounding area.
Dealing with acquisition of for-profit laboratories
andmarketing of additional referrals is outside the realm
of the charters of the three hospitals, and such activity
could jeopardize their tax-exempt status (Internal Revenue:
i
Codes, C-4 exemption).
The need for an outside organiza-
tion acting as an intercessor in this project is obviated
i
!
i
by these facts.
The marketing aspects of this project make it a
greater risk as an investment than if there was a firm
business base provided by the charter institutions alone.
Third, the projected first year profits of 32% are
well above the 20% level which -v1as considered to be
attractive to the investor group.
Some additional
potential for profit was considered necessary due to the
marketing risk involved in the consolidation.
The
difference between the 32% projected and the 20% minimum
required is a point for negotiation between the investing
company and the individual hospitals.
The income pro-
jections for this ·project were_ hased on a 60%;40% income
__ j
,
66
,---------------------------------------------------------------,
-~
I division between the laboratory organization and the
i
!
t
hospitals.
I
ted as much as 5% in favor of the hospitals.
The contractual arrangements could be negotia-!
The result- i
j
I
ant 55%:45% arrangement would still yield profits to the
I
consolidated entity above the 20% criteria set by the
investor· company.
I
I
Finally, with extensive cost reimbursement experience
.i
I
in a hospital, there exists little incentive to struggle
i
j
to cut costs because the public programs reimburse efforts:
on a cost basis only.
The level of program activity
(Medicare, Medicaid) is low in this particular setting
(under 20%).
Thus, the savings achieved through the
consolidation efforts can be recognized as an increase in
laboratory profits 80% of the time in this particular
study.
This increase in profits can be expressed as an
I
additional surplus to be used for the traditional purpose
of offsetting losses in other departments, or at some
I
point in the future, the decreased costs might be expressed
by lowering patient charges for testing.
The cost savings achievable through the consolidation
and sharing of programs, as was demonstrated in this
laboratory consolidation study, are significant enough to
focus attention on the concept as one approach to
responsible cost control in the health care setting.
As
67
~------
--------
-1
I
the gap between health planning and hospital administra-
j
tion is bridged, these three institutions will be in the
I
enviable position of having already committed to the cost-!
l
effectiveness of the consolidated model.
I
I
_j
l
,~
1.
I
Appendix A:
Feasibility Study Data
68
69
------------------C------l
APPENDIX A
1
~---------
~
Ii
1
I
I!
Feasibility Study Data:
Hospital based laboratory
In order-to perform a financial evaluation on which
an equitable proposal can be based, certain data is requi red of you:·
I.
Revenue Data
(a)
Gross laboratory billings for the most recent
fiscal (annual) period.
laboratory billings for the most recent three-
I
I
month period (if not included in the annualized
statement).
I
I
I
In addition, the gross
(b)
Net revenues.
Surplus (revenue/expense)
generated from your hospital laboratory operation for the most recent annual period.
(c)
Bad debt experience on laboratory billings.
(d)
Summary of your arrangements for block banking,
EKG, and any other auxillary laboratory respon-
!
sibilities.
I·
I
(e)
A copy of your current laboratory fee schedule.
II.· Utilization Data
An Itemization of test procedures performed in your
laboratory operation.
'------'-----------------------------------l
II
70
l,r------ (a~-~ont~~y
(or
annualiz~d) . ave~-~:e-::~~~:-:;-~r=-!
I
cedures by type (CBC, glucose, urinalysis,
l;
I
panels, etc.) performed on-site in your
i
laboratory,
(b)
1
hospita~
Monthly (or annualized) average number of
procedures by type referred to outside reference
laboratory sources.
Please include some comment
on the "STAT" requirements expected of your
OUt-'
side reference laboratory source ..
(c)
Hours of laboratory operation, including night
I
staffing requirements.
III.
Expense Data
(a)
Approximately what percent of your indirect
hospital operating expenses (general/administrai·
tive, depreciation, etc) do you assign to your
lkboratory operation?
(b)
Payroll,
Number of personnel currently em-
ployed in the laboratory in each job category
(chief technologist, supervisory tech., lab
aids, clerical, etc.).
Salaries of each, and
applicable fringe benevit summary.
(c)
Annual supply costs for laboratory operations
to include clinical supplies (where applicable).
_j
'
71
-----·-··--·--------··-------------~---·--~
(d)
List of major pieces of laboratory equipment-owned?
Leased?
I
Book value and depreciation
schedule of owned equipment.
Terms of the
leased equipment.
(e)
Terms of the arrangement with your pathologist(s) .
1
!
Is your pathologist amiable to a relation,
!
!
ship with a consolidated organization?
Curricu,
lum vitae from your pathologist, if available.
I.
L_
72
APPENDIX A
Feasibility Study Data:
Private Laboratory Organization
I
I
f
In order to perform a financial evaluation on which
an equitable proposal can be based, certain data is required of you:
I.
Revenue Data
(a)
Annual financial statements - most recent
fiscal period:
(b)
income statement; balance sheet
Locations of your physician office accounts;
hospital accounts,
Terms of written contracts
with accounts; are the contracts transferable
to a consolidated entity?
Your appraisal of
the potential to retain your account support in
the event of a consolidation.
(c)
II.
A copy of your current fee schedule(s).
Utilization Data
Annualized test volumes by procedure (CBC, urinalysis,
glucose, etc.), performed in your operation.
include itemized test totals for the most recent
three-month period, if not included in the annualized
figure.
Test itemization to include itemized totals:
(a)
On-site·in hospital contract accounts.
I
Please'
73
,--------------·--·-----·--··-·-----·--------··-----------1
(b)
On-site in satellite facilities or in contract
account facilities.
(c)
On-site in central laboratory.
(d)
Referral tests - types of tests referred,
average monthly referral volume by type, and
monthly average dollar amount paid for reference service.
(e)
Please comment on the level of "STAT" or
special services provided to clients.
III. Expense Data
(a)
Payroll.
Number of personnel currently employed
in the laboratory in each job category (chief
technologist, supervisory techs, lab aids,
clerical).
Salaries of each, and applicable
fringe benefit summary.
(b)
Annual supply costs for laboratory operations,
to include clinical supplied (where applicable).·
(c)
List of major equipment currently in the laboratory.
Owned or leased?
Net book value of
owned equipment.
(d)
Transportation service .costs - number of autos,
owned?
(e)
or leased?
Terms of the arrangement with your pathologist(s)
I
74
r--------·---
·---·---------·-----··---·-----------·--··
is your pathologist amiable to a relationship
1
!
with the consolidated entity?
II
I
Curriculum vitae
from your pathologist, if available.
IV.
Please indicate any contingencies which you feel
could prove to be a deterrent to a workable transition of your operation into a proposed consolidated
framework.
I
I
·J
r--·------·---------··----------------·----------------------·-1
I
I
I
l
I
I
I
I
I
I
I
I
Appendix B:
Laboratory Performance Analysis
•
•
I
I
I
I
I
I
I
I
I
______j
75
76
,------------------------------·---------·-·-----·-----------·----·---------,
I
APPENDIX B
l
I
I Hospital
A:
Laboratory Performance
II
!
:
I
(1975)
Monthly
.
! Gross Revenue
I,
Annual
1
i
76,678
920,136 :
7, 668
92, 014
69,010
828,122
(12,268)
(147, 221).
(3,750)
(45,000)'
(14,369)
(172, 427),
(2,155)
(25,864)
Annual Supply Costs (1975 Projected)(ll,934)
(143,213)
I
Less: · B/D (10%)
Adjusted Gross
i
I Less:
!
Pathologist (16% Gross)
Pathologist (45,000 Annual
w/5~000 per year increases)
I
Salaries
1 Chief Tech
12.6 FTE Techs
1 Cytotech
1.8 Helpers
1 Secretary
1 Clerk/Typist
Fringe Benefits (@ 15%)
Book Value Equipment 98,223
Depree. (remaining life: 5 years)
!
I Surplus (Revenue/Expense)
I (Percent
.Ij
(19,645)
(553,370)
(1,637)
(46,113)
22,897
33%-274,752
Surplus generated compares with Medicare
Reporting data from 1973 of 34%).
/
!'
~J
77
r···--------------------------------------------------------------- - - - - - - _ _ _ ,
APPENDIX B
i
I
! Hospital B:
Laboratory Performance (1975)
!
Monthly
Gross Revenue
Annual
37,415
446,511
B/D (6%)
(2,245)
(26,790)
Adjusted Gross
35,170
419,720
3,734
44,803
.• 1' 030
12,355
Techs (6 FTE) 10,192 x 6
5,096
61,152
Clerical (1 FTE)
478
6,604
5,741
79,248
Fringe Benefits @ 15%
990
11,817
6,900
~82,800
45
550
2,659
31,908
Equipment Service @ 10%
266
3,191
Owned Equipment-Deprec (8 yrs.)
284
2,844
Call Time
500
6,000
1-,875
22,500
(estimate)
600
24,457
7,200
292,931
Surplus (Revenue/Expense)
10,713
30%-126,789
Less:
Less:
Pathologist
Payroll:
Chief Tech (lFTE)
Surplus (1974 Data)
Travel/Education
Equipment Lease
(estimate)
Cultures to IDC (estimate)
Referral Work
--------------'
78
r·-'-····------
-·--···---·------·---
1
Appendix B
1
Hospital C:
Laboratory Performance (1975)
Annual
Monthly
11,727
140,724
Pathologist
2,553
30,638
Salaries/Wages
2,546
30,552
148
1,480
2,103
25,236
Supplies, general
152
1,824
Referral Fees
485
5,820
Equipment lease
239
2,868
30
360
114
1,368
40
8,410
3,317
480
100,626
28%-40,098
Gross Revenue (includes B/D)
Less:
Payroll Tax
Supplies, Med/surg.
Preventive maint./repair
Equipment-depreciatiqn
Misc. (license, travel)
Surplus (revenue/expense)
(Administrator's calculations for Jan. -Aug. '75
showed a surplus of 32% being generated)
._J
79
,---------------------------Appendix B
1
I
l
I Private
Laboratories:
Laboratory Performance (1975)
i
1
Pathologist "c" Private Laboratory
I
1
l
122,811
Gross Income
Less: outside referrals
(17,641)
105,170
Adjusted Gross Income
Less:
I
I
I
Wages
38,289
Rent
13,804
Supplies
14,283
Other
19,586
I Net Income
19,208(18%)
(1975)
II Pathologist
"d"
85,962
Private Laboratory
·I
l
105,000
Gross Income
Less:
Wages
Supplies
16,000
2,800
I Net Income (1975)
I
18,800
86,200(82%)
(No rent, utilities, equipment expenses as all of these
are contributed free of charge by Hospital C.)
(Note: this business is comprised totally of a professional
1
_component, and as such is a lesser desireable laboratory
from the standpoint of future earnings).
80
r-----------------------------
----------~
Appendix B
Professional Village Laboratory
55,161
Gross Income
Less:
Wages
20,984
Supplies
11,676
Outside Referrals
2,428
Other Expense
9,770
44,858
10,302
Net Income Before Bonus (5%)
515
Less 5% Bonus:
9,787
(18%)
Net Income, 1975
(The net income from this operation is paid to the
owner physicians as dividends).
Clinic Laboratory
1,065,000
Gross Income
Less:
Wages
149,600
Supplies
184,080
Outside Lab
27,250
Lab Director
2,000
License, Q. C. , Other
Utilities .
Net Income (1975)
29,270
4,990
397,190
(62%)667,810
(The clinic has declined participation in the consolidated
L
entity)___
r---------------------------------·-- - - -
1
t
I
Ii
I
I
I
i
I
I
I
Appendix C:
Proposed Pathologist Income
L_--- 81
~-(a)
rathologist
(b)---. -zc-r·-----·--raT____TeY_______CEY_____________(gy-------- -- ---------(h) ________ l
Present Proposed
Annual
Total
3-year
3-year
Income
I
Income
Salary
Incentive
Income
Income as
Income
Difference i
· (c + d) independent w/new lab
(g - f)
i
-
-------------
I
------------- - - - - - - - - - - - - -
I
"a"
130,000
70,000
17,000
87,000
390,000
261,000
(129,000)
I
I
I
I
I
"b"
"c"
(will semiretire)
50,000
90,000
60,000
20,000
11,000
71,000
31,000
11,000
150,000
135,000
(part-time)
213,000
93,000
(part-time)
63 I 000
G>l
42,000
I
I
iI
I
I
I!
"d"
120,000
70,000
11,000
81,000
360,000
243,000
(117,000)
>
"'d
"'d
(1)
:;.:$
0..
1-'•
~
(')
i
I
I
I
Totals
390,000
240,000
50,000
270,000
1,170,000
· . 870,000
(288,000)
I
i
I
I
I
I
I
I
I
I
I
I
J
I
-------------·-------
----·----------------
.
----------
00
!....:.
r----·--------------------
-----·--·--------------·---·------·-----------~
I
I
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1.
Anmer, D. S.
"Research Study Reveals Economic Problems
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I
Through Increased Outpatient Testing".
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jl7.
i
!
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i
18.
Wagner, Bernard.
in 1985?"
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''
i
I!
i
I
lI
I
l____.
"Whither the Hospital Laboratory
pg. 75-8.