Optimizing the strategic value of your lab: Q&A with Noel Maring

Noel Maring, executive director of health systems at Labcorp, answers questions healthcare executives may have around optimizing the strategic value of their lab.The following is adapted from the Accumen webinar, Optimizing the Strategic Value of Your Lab.

Q: Are hospital and health systems executives considering a lab transformation, and if so, why now?
A: We are seeing a lot more deal activity compared to pre-COVID periods, yes. COVID and the need for COVID testing really brought the importance of the lab to the c-suite.

But I think there’s more going on, including health systems’ focus on overall profitability and margins right now. Outreach laboratory reimbursements are going down for most health systems. Additionally, most health systems are (or soon will be) moving to some form of value-based or risk-based reimbursement models. In those models, the outreach laboratory really turns into more of a cost-center, as opposed to a revenue and profit center, when compared to current fee-for-service reimbursement models.

Most importantly, the new issue that we’re seeing is labor shortages in the laboratory. There is a shortage of medical technologists nationally, and in some areas of the country, even lab assistants and phlebotomists are in short supply.

Q: What other factors could lead to a health system executive looking at their lab strategy? Do you have any examples?
A: Some progressive health system leaders are looking for transformational change within their system, which includes making changes at the lab level.

Our most recent example was the Ascension deal. We acquired their outreach business and we are now managing approximately 100 inpatient laboratories for Ascension across the nation. This means that Labcorp now manages more hospital laboratories than any other organization in the country, which gives us a scale and depth of knowledge of inpatient laboratory operations unavailable to most health systems.

Q: Why would a system like Ascension consider Labcorp as a partner for transformation in their labs?
A: Ascension had made significant investments in both their outreach operations and their inpatient operations, but they felt they needed to take the lab to another level. And they were looking for a partner to help them do that.

Labcorp has made significant investments in both people and technology for the inpatient laboratories. For example, almost three years ago we bought Visiun, the premiere software provider for managing real-time productivity, quality and turnaround times in a hospital lab environment.

And then, there’s a case of possessing a deep technical knowledge that labs like us have in the environment. Most hospital executives don’t have a lab background. The majority come from other, much larger portions of the health system. So, there’s a knowledge gap and they’re looking for a partner that can help in those areas.

Q: What recommendations do you have for healthcare executives considering optimizing their lab strategy? What about those who aren’t yet looking at their labs?
A: I think each health system needs to assess their lab program based on their individual system’s needs. I’d recommend the health systems do a separate but overlapping analysis of their inpatient laboratory needs and their outreach laboratory business. The strategic issues on the inpatient side are different than on the outreach side.

Most consider inpatient laboratory testing a key service line for the health system, while the outreach lab business is generally considered non-core and may have significant value to the system if it decides to sell it.

Q: If you were a health system executive, what questions would you start with to review your outreach lab strategy?
A: On the outreach side, I’d be asking myself, “What’s the financial situation for my health system? Is there value in generating cash from an outreach sale? Could I reinvest that cash and generate better returns in a core service line?”

I’d also ask, “What are my payer pressures on the outreach business?” This pressure varies by region, but generally, payers are looking to reduce laboratory reimbursement rates to hospitals. Commonly, the payers are paying 1.5-2x the reimbursement to health systems than they are to commercial laboratories. Most payers are targeting these reimbursements for reductions.

I’ve talked to health systems executives who have compared this to what happened in the ambulatory surgery center space 3-5 years ago. In that area, the payers very aggressively reduced health system surgery rates for services that could have been done on an ambulatory basis to receive a higher rate. So the ambulatory surgery rates reduced rather precipitously.

Finally, I’d ask, “Are we transitioning to a value- or risk-based contract?” If you are going with a value-based system, you may be in a better position to monetize the outreach business now as opposed to when you’re in a risk-based environment, where the reimbursements are going to be lower and reduce the value of that business.

Q: What questions would you ask yourself in reviewing the inpatient lab strategy?
A: On the inpatient side, I’d go back to my previous comment on labor shortages: “What’s my labor situation?” That seems to be the most prevalent discussion we’re having on the inpatient side. “What are my leadership issues? Are my leaders near retirement? Can I replace that leader if they’re retiring?”

Other questions might include, “What’s the condition of my laboratory? How old is my lab equipment? Do I need to recapitalize? Am I going to recapitalize now in an environment where the cost of capital is going up?”

We can address these questions in our current deals with various health systems. The cost of recapitalizing is part of what we bring into the equation of these deals.

I’d be looking at those areas, and if I were a health system, I’d ask myself, “Can I get a partner that has significant expertise in this area to help me operate my lab more cost effectively?”

Q: What does a successful process to achieve a long-term partnership look like?
A: To me, a successful process has three phases: the diligence phase, the deal structure phase, and the transition phase. Each needs to be planned carefully with a clear understanding of what outcomes the health system would like to achieve.

Q: Can you tell us more about the diligence phase?
A: Here, we’re really understanding the health system’s goals and objectives. We spend a lot of time getting into that, as we want to assure health systems that we share their objectives and values because we truly view them as long-term partners. These aren’t just transactional in nature, even on an outreach acquisition. It’s a long-term deal for us.

In this phase, in addition to understanding goals and objectives, we want to at least do an initial financial analysis; what’s going on in the outreach side and what’s going on in the inpatient side. We want to work with the health system so that they decide what’s included in the initial phase of the deal. The Ascension deal was, for example, an outreach acquisition and the inpatient laboratory service agreement combined.

Q: Can you describe the deal structure phase?
A: In this phase, we discuss the structure and details of typical contracts. We want KPIs baked into deals so their objectives are measurable. The governance structure is also very important to us. We strongly prefer a collaborative governance structure so there’s good discussion pre-deal, post-close and ongoing.

Q: Lastly, can you tell us more about the transition phase? How does this phase tie in with other strategic goals such as innovation, provider satisfaction or health equity?
A: This phase involves consistent, ongoing dialogue with health system leadership. It’s not a onetime transaction. We want routine feedback so we can enhance our services as we move forward. And more and more now, we want to establish an innovation focus with the health system. We have many services that can help with population health and health equity.

Q: What if a health system has competing priorities? Why should they decide to do something with their lab strategy now?
A: This is a great question. Health systems always have competing priorities. And, we do need to recognize it’s only 3% of the health system spend, but the inpatient lab is a key service line. If it’s not performing correctly, things can turn into a crisis. I’ve been called in to situations where the lab has failed in some area and is nearing loss of licensure. Without being proactive, you can turn something that is not a problem into a crisis very quickly.

On the outreach business, the reason to be proactive is that it can have significant value. Some of that value could be lost if markets change. Reimbursement changes could impact valuation, and ultimately there are only a handful of potential buyers.

The key issues health systems are seeing now are not short-term trends. They are long-term trends. These labor issues are only going to get worse. It’s understandable that health systems do have limited bandwidth and outside priorities, but partners such as Labcorp can do the heavy lifting so health systems can be strategic with the lab. That way, health systems can focus on another area of core competency.

Noel Maring is executive director of health systems at Labcorp. He is a seasoned professional with more than 25 years’ experience in developing new business, maintaining key account relationships, conceiving and executing innovative strategies, and developing strategic partnerships and management agreements. He has an excellent ability to develop health system executive and c-suite relationships, resulting in the creation of multi-million dollar LLC joint ventures and management agreements with regional and national health systems. Additionally, Noel is adept at strategic planning and infiltrating new geographic markets and has extensive operations background in addition to business development experience.