HEALTH SYSTEM MARKET INSIGHTS

Refining Your Ambulatory Laboratory Strategy: A Guide

Adapting ambulatory lab services in an evolving healthcare landscape is challenging.

In our experience, most health systems face three big challenges when developing or evaluating an ambulatory lab strategy:

• Understanding the strategic value

• Calculating the long-term investment

• Finding the right partner for success

The dilemma

Lab diagnostics account for only about 2-3% of a patient’s healthcare bill; however, diagnostic tests:

  • Influence 60-70% of clinical decision-making

  • Represent the majority of objective data in EMRs
  • Comprise a significant driver of patient satisfaction

Process disruptions

A growing portion of healthcare is delivered outside the acute care setting. For health systems, like yours, the ambulatory space can be disrupted by two significant forces:

  • New technologies: Investment in digital health platforms is enabling virtual office visits, unparalleled patient convenience, price transparency and patient access to their medical records
  • Nimble new competitors: These range from established healthcare companies like Walgreens, CVS and UnitedHealthcare to robust organizations like Amazon and Walmart to newer players such as OneMedical/Iora, ChenMed, Oscar Health and Carbon Health

Bottom lines

If you haven’t defined a clear lab strategy or if your lab strategy is more than a couple of years old, consider revisiting your lab approach now.

Labcorp can provide an evaluation with limited interviews and a modest data request. Consult information in the following sections to determine if the ambulatory lab business may be right for you. Contact your Labcorp representative or email [email protected] to set up an introductory discussion.

Over the past two years, major health plans have implemented a variety of cost-cutting strategies to manage lab testing costs, which include designing narrow Preferred Lab Networks that steer patients to more affordable providers of laboratory testing.

Understanding the Strategic Value

To be a strategic asset, as opposed to a purely financial or operational one, the system should identify clear and specific ways in which its ambulatory lab business produces differentiated outcomes that matter to patients and/or payers. As the market evolves over time, the health system’s laboratory should provide a clear, quantifiable service, quality, cost or patient experience advantage for the system. If the perceived strategic value is more about lab data being generated and less about the core laboratory operation, a system doesn’t need to run the lab to obtain result data.

“Using laboratory data in smart, tangible ways is absolutely an opportunity for a health system to differentiate itself and achieve better resource utilization and quality outcomes,” says Deborah Sesok-Pizzini, MD, MBA, chief medical officer and senior vice president of Labcorp Diagnostics.

For example, a health system with objective lab data can reach out to at-risk patients to encourage care options that can help avoid a sentinel event and prevent an ED visit, thereby providing a better patient experience and lowering costs. Another system may identify gaps in diabetic and colon cancer screening and reach out proactively to patients to close those gaps. A system taking financial risk may look at provider lab ordering patterns and find opportunities to substitute large panels with more cost-effective reflex tests, thereby saving thousands of dollars.

Considering the long-term differentiation that can be created by owning an ambulatory laboratory operation, as well as the interplay between lab data, analytic tools and clinical expertise, will help executives answer this question for their organization.

Calculating the Long-Term Investment

Much has been written about the financial attractiveness of hospital-based inreach/outreach labs. However, health systems, like all organizations, have limited capital, IT resources and management time, forcing prioritization of these scarce resources. Many health systems are navigating the challenging shift from a fee-for-service, asset-heavy revenue model to a fee-for-value, outcomes-driven model. At the

same time, they’re trying to deliver services in a consumer-centric paradigm rather than a provider-centric manner. This journey, like traditional car manufacturers pivoting to electric engines and autonomous vehicles, requires intentional capital and resource allocation based on the relative attractiveness of various business lines.3

To perform that evaluation, health systems must understand the revenue opportunities and challenges as well as the costs and resources required to operate the service. In laboratory diagnostics, there are two business fundamentals to consider in the context of the market: strategic pricing and the ability to leverage scale and cost.

a) Strategic pricing for hospital outreach labs

Hospital-based outpatient pricing for laboratory services faces a few headwinds, many of which are general industry trends. The greatest impact will come from the related challenges around price transparency, insurance plans, a rise in consumerism and new regulations.

Price transparency

Expect questions now that negotiated prices are online

 

Consumer expectations

The rise of consumerism in healthcare is creating new expectations and demands on systems

Payer rules and benefit design

High-deductible health plans and incentives to choose lower-cost test options are driving choice

 

PAMA and Medicare rates

Medicare reimbursement for lab tests will continue to drip and will be copied by other insurers

 

b) The ability to leverage scale and costs

Health systems that operate an outreach lab can benefit from increasing test volume inside of their hospital labs. In Labcorp’s experience, the hospital lab’s overall raw purchasing power is often not enhanced materially due to this volume because most systems are part of group purchasing organizations or buying groups already. However, equipment and labor utilization in the lab can become more efficient on a per unit basis.

Being in the outreach lab business can improve efficiencies or subsidize the cost of running an inpatient lab, though savvy executives should be cautious about two things:

  • Reducing per unit costs is not the same as reducing total costs. Per unit costs is an important metric to track; however, in the context of outreach labs and, importantly, test utilization, tracking total costs is also critical.
  • Often the “in-lab” expenses like technical labor, supplies and equipment are tracked reasonably well, so these costs are built into business justification for new equipment, automation and lab information systems. Outreach lab businesses also come with expenses that are more difficult to track, including office-based phlebotomy, couriers, bad debt and denial management, supply inventory, receivables, IT systems and interfacing, and physical space. Some of these are real costs and capital expenses, while others might be considered opportunity costs.

In the context of an outreach lab business decision, one is ideally trying to quantify the incremental revenue a health system can achieve and sustain relative to the costs of operating the whole program that are incremental to the hospital lab.

Finding the right partner for success

The final question involves an assessment of what the market can offer beyond a do-it-yourself strategy. There are a number of services available in the market that can support functional or enterprise lab partnerships for health systems. If you are considering checking the market for laboratory partnerships and vendors that may help your health system lab strategy, keep the following in mind:

Assess your current financial state. Given the discussion points in Question 2, a solid understanding of your current laboratory financial situation will help you set financial outcome targets. There are consultants, brokers, advisers and even companies like Labcorp, who can help you clarify the current financial picture if you lack the expertise internally.

In Labcorp’s experience, most health systems have not invested in the administrative and financial systems to have good visibility into their lab profit and loss, costs or assets, and as a result, don’t really understand their current financial situation.

Articulate your objectives. The market can provide consulting, functional expertise like revenue cycle and full-service enterprise lab partners. If you can write down your specific objectives and requirements, it will make your RFP/RFI process more efficient and tangible. Are you seeking financial improvement and, if so, how so? Are you trying to fix a process or operation that doesn’t function well? What does success look like, using metrics? How much control and autonomy might you give to a partner? How much change might you be willing to go through? If you can articulate answers to these questions, your process is likely to be more fruitful.

Know the desired lab quality and service standards. Everyone wants to enhance quality and service—taking quality backwards is never an option. Laboratory quality and services are highly measurable. With the right tools in place, metrics for turnaround times, test quality (e.g., corrected reports or rates of tests not performed), patient experience, test costs and others can be tracked and surfaced to the right audience. Does your vendor or partner have tools to help surface these metrics as well? While a set of metrics will never tell 100% of the picture, it will help your change management, exploration and contracting process be more data driven.

Contact us to learn how Labcorp can help your health system improve laboratory quality and efficiency