Numerous hospital-based laboratories have realized the benefits of outreach testing programs operating with the intent of bringing additional testing into the hospital laboratory from the nonpatient population in a community (see SIDEBAR). These additional volumes help fill excess capacity, lower overall unit cost, and generate revenue. To assist in the fulfillment of this activity, hospitals in several states have formed laboratory networks to facilitate access to ancillary laboratory-services contracts covering a broad geographic area. Essential to this process are the evolving role of the hospital laboratory in the larger clinical sphere, strategic outreach testing, and finding the value potential in laboratory network participation, both today and in the future.
Leveraging Incremental Cost Analysis
Since the mid-1980s, hospitals have focused on reducing patient length of stay and other cost-containment strategies across all departments, including the laboratory, due in part to the introduction of diagnosis related groups (DRGs) and managed care programs. As an inpatient service, the laboratory became a cost center rather than a revenue producer. With declining hospital inpatient days, laboratory testing need naturally shifted to the outpatient setting (where national, commercial laboratories had already established a foothold) and there it has flourished. Most hospital-based laboratories are faced with a need to operate in some capacity 24 hours per day, 365 days per year; thus, fixed costs for staff, technology, and associated materials are accrued regardless.
By its very nature, laboratory medicine is a high-fixed-cost, low-variable-cost business. The real investment is in the upfront cost of instruments, software, space, and human resources, whereas the incremental, variable cost of running tests (eg, reagents and supplies) is comparatively small. Therefore, adding volume in this type of business lowers fixed costs for every test performed, and insourcing tests from physician practices, for example, decreases the cost of individual tests performed for inpatients and outpatients alike. Given the investment every hospital has in their laboratory, it only makes sense to bring in as much testing volume as possible to take advantage of the resulting economies of scale. It is estimated that outreach testing from physician offices generates contribution margins in excess of 20% and reduces the inpatient cost per test by 20%-30%.1
As hospital-based laboratories began operating outreach programs and found themselves competing with national reference laboratories for new testing business, their fees had to become competitive with other hospital and commercial laboratories in the community. One approach is to become a profit center for outpatient and nonpatient testing, while remaining a cost center for inpatient testing. By utilizing the excess capacity of the inpatient testing programs, the laboratory can take on additional workloads without having to purchase new equipment or hire more staff. Laboratory directors can competitively bid for this work utilizing incremental cost analysis, the application of which to the clinical laboratory is an extension of a standard cost accounting technique widely used in non-health care fields.2
Incremental cost analysis can be useful when formulating the price to charge a customer as part of a competitive bid for outreach services as it will yield a lower basis for fee setting than marginal cost analysis or fully attributed cost analysis, because it includes only those significant cost items that actually change with the additional (incremental) test volume. All other costs are considered largely irrelevant to the decision. If fees for new test volumes are set by such an approach, it produces a more competitive bidding posture than historical methods used by hospitals and better reflects the laboratory’s contribution to health system net operating income.2
Historically, payers had turned to national reference laboratories to save money by negotiating an exclusive right to perform non-hospital laboratory testing in exchange for a lower price for the testing, to simplify negotiations, and to reduce the paperwork involved in processing small dollar claims from a large number of individual facilities. Managed care organizations had come to expect a single point of contact, single source billing, combined utilization data, superior customer service, HEDIS data, and the lowest prices. Hospital labs tried for several years to respond to managed care constraints but could not effectively compete. In addition, their own reference labs were competing against them for the physician office market. Hospital owned HMOs were contracting with regional and national reference laboratories for their physician office laboratory testing and paid physicians for the in-office testing they performed. Even though many hospital laboratories had started outreach programs, often they were being excluded from the outreach/physician office market and they needed a new strategy.
Expand Contracting Options
Prior to the mid-1990s, capitated contracts between large commercial laboratories and insurance companies prevented hospital-based laboratories from providing services to many of the patients whose tests originated in physicians’ offices. In response, some community-based hospital laboratories, each providing high quality, cost efficient laboratory services in their own communities, joined together to form an alliance of laboratories in the form of laboratory networks. The purpose of these networks is to secure managed care contracts from which individual members have been excluded due to limited geographic coverage and outreach capabilities and the influence of national reference laboratories. These laboratory networks bring hospitals together to offer single-source contracting, billing, quality and utilization data, and to provide an important and viable alternative to national testing laboratories for insurance companies.
As these networks were originally intended to be a vehicle to increase and retain access to the physician office market for member laboratories, it would be easy at this point to become complacent or think the network model is no longer necessary due to past success. However, competition from commercial laboratories remains strong and payers prefer a competitive market because it suppresses pricing. Until payers eliminate exclusive contracts and allow hospital laboratories access to all their members’ testing, networking laboratories remains a competitive strategy. Continued support and investment into hospital outreach programs by respective hospital administrations is essential to this approach.
Leverage Outreach to Support Growth
Laboratory services comprise less than 5% of a hospital’s budget, contribute up to 80% of a patient’s objective medical record, and their findings may influence as much as 60% to 70% of all critical decision-making, including admittance, treatment, discharge, and medication therapy. Adding to this, laboratory outreach can support the medical center’s financial stability by providing tests and services that can reduce or avoid a hospital stay, using additional testing volume to distribute existing fixed costs and lower overall unit costs, and adding revenue as a direct contribution to margin.3-5
Today, with an increase in vertically integrated health care delivery systems, there is value in having fully integrated laboratory data across the patient continuum of care. The laboratory outreach program provides both patients and providers access to the hospital laboratory, and enables a mechanism to create a comprehensive, longitudinal medical record. By performing all testing within the same laboratory, there is consistency in technology and results, which helps reduce the need for duplicate testing and associated costs. Health care administrators take advantage of the data generated by the laboratory, and its role in improving outcomes, as diagnostic information becomes more important in the future of health care.6 A healthy and growing outreach business allows the laboratory to augment its services and technologies, which in turn has been shown to improve physician and patient satisfaction, drive patient outcomes at reduced costs, and strengthen hospital reputation and revenue in the long term.7
With the implementation of new reimbursement models, health care administrators are looking to reduce costs and waste, and increase efficiency and revenue. Hospital-based laboratories have long enjoyed premium reimbursement over independent laboratories with outreach being reimbursed as part of an overall hospital outpatient contract, and often using “chargemaster” rates, based on inpatient services. Today, these traditional hospital chargemaster-based contracting practices generate exorbitant out-of-pocket expenses for patients. Premium reimbursement becomes the responsibility of the patient until deductibles are met and have thus driven patients to independent laboratories for affordable laboratory testing. This is termed the patient penalty for using hospital-based laboratories for testing services. Independent commercial laboratories capitalize on this phenomenon when marketing to referring physician offices, physician organizations, ACOs, CINs, health plans, etc.
In a recent article in Laboratory Economics, the CEO of one of the largest national reference laboratories is quoted as saying, “There are wide variations [in lab test pricing] where hospital rates can be 2 to 10 times higher than our rates….there is pressure from payers, typically with those that we work with, to push down the [hospital] rates for all the ancillary services and obviously that includes lab tests….Given the high percentage of health plans that have high deductibles and high out-of-pocket costs for these expensive hospital-based services, the payers are looking at more aggressive strategies to normalize the rates.”8
The traditional “payer” in the health care industry has been the insurer or other “third party payer,” but that is changing, as the patient is becoming the new payer. Employers and insurance companies continue to shift costs to the patient by increasing deductibles, co-pays, and coinsurance. Patients now account for over 30% of health care revenue.9 Combining this with an increase in patient responsibility for up to 40% of the medical bill, the patient is now the third largest payer behind Medicare and Medicaid.10 This evolution has been driven by increased utilization of high-deductible health plans as well as higher copays, which in turn have fueled trends in consumerism, demands for transparency, and calls for affordability.9,11
As many health care providers focus on the patient experience, it is important to understand that the biggest source of dissatisfaction is patient bills. Today’s patients are no longer willing to simply accept hospital charge master rates for lab tests that are not competitively priced. The assumption can no longer be made that hospital labs’ costs are CMS rates, with outreach patients being charged the same as inpatients (ie, two or three times the CMS rates). The ability for outreach patients to shop for value is much easier, so laboratory outreach programs must be cognizant of this fact and ensure their tests are competitively priced. Without access to outreach laboratory services contracts and competitive pricing, hospital laboratories run the risk of forcing patients to either pay higher copays and deductibles or seek less expensive services elsewhere.
Many successful outreach programs have developed market-based outpatient or outreach fee schedules separate from hospital charge masters with the following benefits:
Payers also have been historically reluctant to negotiate multiple separate laboratory contracts with different hospitals within a state or geographic location when it is far easier and less expensive to contract with a national reference laboratory. These large reference laboratories have capitalized on this trend by developing exclusive payer relationships, often at the expense of hospital laboratory outreach programs. This approach has commoditized laboratory testing overall, increasing fragmentation of hospital services and patient care, and causing inconvenience and dissatisfaction for patients and physicians. As an example, specimen transport from certain patient communities to a commercial laboratory location can result in delayed turnaround times and has the potential to compromise specimen integrity. This approach also takes revenue out of the community; hospitals lose their ability to control costs as they lose influence over the delivery of laboratory services.
As the US health care system moves away from fee-for-service reimbursement and toward value-based reimbursement, hospital-based laboratories may find themselves in the detrimental predicament of not only becoming a cost center, but also being further excluded from outreach contracts by third-party payers. This challenge occurs when the hospital-based laboratory outreach program is not able to engage in effective health plan contracting. Belonging to a laboratory network can mitigate this risk.
An emerging trend in health plan contracting, especially involving ancillary services, is the use of “narrow networks,” which limit provider choice and levy financial penalties on members who use services outside of the restricted network. These financial penalties include high co-insurance, a high co-payment, or even non-payment for services provided by the out-of-network provider.12 Due to these restrictive health plan contracts, the laboratory may not be able to provide outreach testing for many of the patients in their communities in the future. A lack of access to the outreach patient data necessary for population management could have a profound effect on managing chronic diseases, which in turn could impact the total cost of care, thus affecting the value-based reimbursement provided to the health system.
When hospital-based laboratories form a network across a geographic region, they can secure health plan contracts that allow them to provide services to a broader population of patients. By securing effective relationships with patients, providers, and health plans (payers), the hospital laboratory can contribute significantly to population health management.
As health care reform efforts continue to evolve and we transition from fee-for-service reimbursement models to value-based payment models, health care organizations must be able to gather and analyze clinical data to reduce episode-of-care costs and establish and implement evidence-based, standardized care processes. Hospital laboratories add value to the broader continuum of care by providing insights on patient populations and monitoring key disease trends. Laboratory data can be used to affect executive level policy decisions, and positively impact care management workflow, provider engagement, and individual patient treatment decisions.
However, this can only happen if the hospital laboratory has access to the total continuum of care. Access to payer contracts that allow the laboratory to provide outreach services to its entire patient population is imperative.6,11 Hospital executive support and investment in the laboratory outreach business model is compatible with the health system goals of avoiding cost, generating revenue, and improving net operating income. Belonging to a laboratory network enables the long-term success of the hospital-based laboratory and the health care organization overall.
Michael J. Hiltunen, MBA, MT(ASCP), CLC(AMT), is president of MedStar Consultants and the executive director of the GreatLakes Laboratory Network. A certified laboratory consultant and sales coach with over 30 years’ experience working in a variety of hospital laboratory settings, Michael has held positions ranging from medical technologist to outreach client sales rep, through outreach client services manager and laboratory director. MedStar Consultants service clinical laboratories that wish to leverage outreach services to maximize revenue.
John Kolozsvary, MSA, is chief executive officer of Joint Venture Hospital Laboratories (JVHL), having come from Michigan State University’s College of Human Medicine, where he served as the executive administrator for its department of surgery. He has over 30 years of diverse experience in health care, having served in various senior leadership positions in both the hospital and private health care settings. In March 2016, John was elected to the Board of Directors of the American Clinical Laboratory Association (ACLA).
Daryl Bohlender, MT(ASCP), is the executive director of Carent Laboratory Solutions and principal of Collaboratory.us, which provides management processes to hospital laboratories that wish to leverage their outreach services through the formation of laboratory networks.
According to CMS, a nonpatient is a beneficiary that is neither an inpatient nor an outpatient of a hospital, but has a specimen submitted to a hospital for laboratory analysis while not being physically present at the hospital. The CMS have additional stipulations as to what constitutes a nonpatient specimen.
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