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
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Consumer expectations
The rise of consumerism in healthcare is creating new expectations and demands on systems
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Payer rules and benefit design
High-deductible health plans and incentives to choose lower-cost test options are driving choice
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PAMA and Medicare rates
Medicare reimbursement for lab tests will continue to drop and will be copied by other insurers
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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.