Inside the Lab Industry: In a Tough Market, PeaceHealth Laboratories Tries to Drum Up New Revenue

If Ran Whitehead did not have the best high school-age job in the history of American adolescence, it was near the very top of the list.The chief executive officer of PeaceHealth Laboratories in Oregon grew up in Southern Florida in the 1960s and was drummer for a band called the Avengers. It played a circuit of local clubs and opened at the renown Miami club Hullabaloo for a headlining California band, the Turtles, whose biggest hit was the iconic 1967 tune “Happy Together.”When the Turtles drummer needed to take a leave of absence, Whitehead was offered the job. It paid $1,500 a week (more than $10,300 in today’s dollars). He also appeared on the band’s Happy Together album cover, which was its biggest seller by far. But the gig ended, and although Whitehead wanted to continue in music and show business, his parents wanted him to have a Plan B. He decided to pursue a career in health care himself (his father was a physician), and the Turtles money paid for a portion of his education at the University of Michigan, where he studied to be a medical technologist. He later earned an MBA from Duke University. “It was hard to leave the entertainment world, but in retrospect, my parents were right,” Whitehead said. After lab management jobs with such organizations as SED Medical Laboratories and Home Healthcare Laboratories of America, Whitehead joined PeaceHealth Laboratories in 2001 as its chief operating officer. He’s been its CEO since 2003. Whitehead still records albums with local musicians in his spare time. He believes his years in show business have helped him manage PeaceHealth’s 800-plus employees. “Your job is to evince fire and promote programs and that is a form of entertainment. I try to use what I learned to charm, influence, and make a good presentation,” he said. Whitehead also sits in with bands hired for workplace events, a disarming tactic that helps create a greater bond with his workers. But if there any hints of hippiedom within PeaceHealth Laboratories, it appears to be limited to its name. “The leadership is quite strong, with a good commercial lab and hospital background,” said Noel Maring, a vice president with Sonic Laboratories in Texas, who spent nearly two decades as a senior manager with Spokane, Wash.-based PAML, one of PeaceHealth’s competitors. “They have a strong knowledge of both sides of the business, and how to integrate outreach testing with a hospital environment.” Maring believes the PeaceHealth structure is a model for other health systems. “All their hospital labs and the core lab are centrally managed under one leadership team, allowing for standardization, economies of scale, and maximizing efficiencies,” he said. A Difficult Operating Environment And PeaceHealth Laboratories, its management and staff are navigating a difficult environment together, happy or not. The organization, which operates 12 labs in Oregon, Washington, and Alaska, has been battling cuts in reimbursement from Medicare and private payers. Annual test volumes, at around 7.5 million, have been flat for several years (although an uptick in the last quarter suggests to Whitehead that business may finally be on the road toward improvement). “I think the employment picture has improved,” he said, meaning that more people have insurance and therefore are more likely to seek lab testing. Although Whitehead’s organization is affiliated with the 10-hospital PeaceHealth health care system, it operates as an independent lab. As such, it is paid on the Medicare fee schedule and does not enjoy the higher rates paid to hospital laboratories. And while Medicaid expansion under the Affordable Care Act has been unrivaled in Oregon (anyone receiving food stamps was automatically enrolled), it only covers about 60 percent of the costs of providing services. New Product Lines To that end, Whitehead and the rest of the PeaceHealth Laboratories staff have been trying to drum up new product lines that can grow business outside of the traditional revenue streams. According to the CEO of one of PeaceHealth Lab’s biggest competitors, the company is in a good spot to grow organically. “They have excess and growth capacity and have some areas of well-developed expertise,” said Francisco Velázquez, M.D., PAML’s chief executive officer. Among those areas, according to Velázquez, is medication testing and monitoring. Indeed, one of PeaceHealth’s biggest initiatives has been in that realm. That began several years ago. PeaceHealth Laboratories is licensed as a toxicology lab, but its margins in workplace testing had eroded due to price cutting and competition. One of PeaceHealth’s scientists proposed using a different set of testing protocols and algorithms in order to create a more precise test. The result is PtProtect, for which PeaceHealth Laboratories obtained a patent in 2011. The resulting testing panel can detect opioid use at levels as low as two nanograms per decileter, compared to about 50 nanograms per decileter for panels from other labs. As a result, PtProtect can detect opioid use in 37 percent more patients than other traditional tests, according to PeaceHealth Laboratories’ marketing material. According to Whitehead, the test retails for about $500 and average reimbursement is about $300—on the high end for drug assays. Sales of the PtProtect test have enjoyed double-digit annual growth since the panel was launched in 2012, with sales remaining mostly in the Pacific Northwest and Western United States, suggesting that there remains a lot of room to boost sales. But efforts to license the panel to other labs have remained a work in progress, although Whitehead said it has commanded a lot of interest. “We definitely have a plan to expand this, either through licensing or through arrangements with large health care providers,” Whitehead said. He added that PeaceHealth had just hired a national sales representative to encourage licensing and wider use of the PtProtect panel. Meanwhile, tweaks have also had to be made to the test, according to Whitehead. Some users, for example, no longer wish to test for marijuana, which is now legal for medical use in 23 states and the District of Columbia. It is also legal for recreational use in Washington state, where PeaceHealth has a significant presence. PeaceHealth Laboratories is also planning to launch another panel late this year that will focus on medication adherence—ensuring patients are taking their prescribed drugs and in the case of painkillers, not selling them. It will provide similar levels of sensitivity as the PtProtect panel. Whitehead said he hopes the panel, which will be branded as RxAdhere, will eventually reduce hospital readmissions, of which about half are linked to prescription drug adherence issues. The lab is also making inroads into testing and health care delivery using smartphones and other smart devices. It is working with the Finnish company iStoc, although any assays that come out of the collaboration are likely a few years away. Tiptoeing Toward Price Transparency Meanwhile, PeaceHealth has also made inroads with individual patients, many of whom are facing rising out-of-pocket costs for their health care even when they are well insured. Its EasyAccess program, launched about four years ago, offers discounts of around 30 percent to 50 percent on the retail price of tests if patients are willing to pay. “It’s not a huge part of our business, but it is helpful for patients who are uninsured or underinsured,” Whitehead said. One of the biggest surprises: About a quarter of its users had never patronized PeaceHealth Laboratories before, creating a new revenue stream from people who are generally grateful for its opening access. “We have gotten many letters from people who are thanking us for this service. These are people who probably would not have gotten their lab tests done otherwise,” Whitehead said. Takeaway: Creating unique product lines may be a way for enterprises such as PeaceHealth Laboratories to grow revenues in a tough operating environment.