MedStar Health

A Case Study in How Right-Sizing Leads to Financial Turnaround

Situation

MedStar Health System (MedStar) is a six-hospital system with two distinct regions, Washington, DC, and Baltimore, Maryland. MedStar had been in a joint venture outreach program with a nationally-known laboratory for about five years. After an in-depth review of this arrangement, it was determined that the business structure was unnecessarily complex, masking financial losses. With the losses determined to be in the millions of dollars over the five years, MedStar contracted with Chi Solutions (Chi) to analyze the market and present new options. MedStar chose to work with Chi to sever the arrangement with the national laboratory and bring the Washington region outreach program under the structure of Washington Hospital Center (WHC). Along with this business structure change, a focused strategy was adopted, emphasizing profitable sections of the marketplace. The new business unit was named MedStar Diagnostic Laboratories (MDL).

WHC had been the testing laboratory for the previous joint venture, but all other sales and marketing, patient services centers, couriers, electronic reporting, billing, and management had been provided by the business partner.

Strategy

MedStar Health, recognizing losses from an outreach joint venture with a national laboratory, partnered with Chi Solutions to analyze and evaluate their options. Relying on Chi’s extensive experience in laboratory outreach, MedStar Health adopted a strategy that focused on profitable business and allowed the “right-sizing” of the expense side of the revenue-expense equation. This produced a very positive bottom line within one year and set MedStar on a course toward growth and increased profitability.

Challenge

Primary Challenge: Sever the outreach joint venture relationship with the existing laboratory partner and transfer all of the outreach business to MedStar (WHC’s laboratory), doing business as MDL. Contractual decisions required this to be done in six weeks.

Secondary Challenge: The second challenge was to complete the operational transition, establish supporting functionality (such as billing), and stabilize the operation. Unlike many new outreach programs in which there is a ramping up of volumes and activity that allows for fixes and improvements to be made while the client and patient impact is still minimal, this transition required the nearly immediate transfer of the program to the WHC inpatient laboratory. Any miscues would be felt by over 100 clients, not a few dozen.

Results

Financial:
  • 16% (fully loaded) contribution margin.
  • Net revenues in excess of $3,000,000.
  • Net profit in excess of $500,000.
  • Net overall improvement of over $1,000,000 in Year 1.
Sales:
  • Client base maintained; first-year focus on stabilization, not new sales.
  • Experienced sales team provided by Chi.