February 2009: Volume 35, Number 2
The Recession Squeeze
Labs Coping with Tough Times
By Bill Malone
Although healthcare is often considered recession-proof, recent reports indicate that the industry—labs included—is feeling the pain of the economic downturn. New statistics released in December from the U.S. Bureau of Labor Statistics show that more hospitals recorded mass layoffs in 2008 than any year in the past decade. On top of that bad news, an American Hospital Association report found that a combination of tightening credit, declining patient demand, and an increasing number of patients who cannot pay for care is forcing some hospitals to make cuts to staff and services. Even while labs have been diligently doing their part to boost efficiency through measures like Lean for over a decade, a CLN survey found that this recession is once again compelling labs to ramp up cost cutting measures and tighten budgets to cope with the ripple effects of the bad economy. The survey confirms that labs are trimming expenses, watching payrolls, delaying big purchases, and thinking creatively to keep their operations running.
While the full force of the recession hasn’t hit most labs directly, a domino effect of job losses and the ensuing loss of health insurance will undoubtedly put pressure on labs, said C. Anne Pontius, MBA, CMPE, MT (ASCP), sr. medical practice consultant with State Volunteer Mutual Insurance Company. “As people lose their jobs and health insurance, healthcare is going to be something that a family is going to have to budget very carefully for, and when putting food on the table or gas in your car is more important than a well check at the doctor’s office, then we’re going to see a change in how much work is sent to laboratories.”
Not Like the Last Time
While this is not the first recession to affect healthcare, the current economic crisis is creating new dilemmas for labs. Labs did get a 4.5% CPI (consumer price index) update to the Clinical Laboratory Fee Schedule this year, but it’s been 5 years since the last update. And in the past 15 years, the full CPI update recommended by CMS was enacted by Congress only twice, leaving labs out of sync as inflation crept up throughout the rest of the economy. Unlike past recessions that occurred before Congress established the current payment policy in 1984, labs now have little room to boost revenue when times are tough, explained Elisa Passiment, CLS, executive vice president of ASCLS.
Under the current payment scheme, when patients can’t pay, the lab has little choice but to swallow this debt. “In the past, we could increase our charges to make up for some of the bad debt, but we don’t have that ability today,” said Passiment. “We almost all have prospective payment systems, and in the retrospective systems we do have, the fee-for-service payments have such deep discounts that you can barely make money even when everyone is paying.”
While this year’s CPI update is welcome news, labs shouldn’t count on another increase for a long time, as the new Congress tackles a failing economy and healthcare reform, said Passiment. “It will certainly help those labs that have been struggling the last five years, but I don’t know that it’s going to be a significant cushion to get us past what’s going on now. We really have to figure out how we’re going to handle the uncompensated care.”
Slogging Through Bad Debt
One of the predicaments many labs will encounter in the recession is billing patients and dealing with the ensuing bad debt. Deductible increases, higher copays, and the increasing prevalence of consumer-directed healthcare plans or health savings accounts mean that more and more labs have to grapple with problems collecting payment from patients, explained Jondavid Klipp, publisher of Laboratory Economics. Add in the growing numbers of patients who are losing their jobs and healthcare insurance, and you get a recipe for potentially toxic bad debt. “Labs are going to be billing patients directly more frequently and they’re going to have to do a better job of improving their collection rate,” said Klipp. “Billing and collection directly from patients is the worst portion of payers that labs have trouble with. So it’s critical that they improve and pay more attention to collection rates from self-paying patients.”
Echoing Klipp’s concern, AHA’s “Report on the Economic Crisis: Initial Impact on Hospitals,” released in November, described a sharp uptick in uncompensated care across the board. Twenty percent of hospitals reported a significant increase in uncompensated care in just the 3 months before data was collected.
Passiment emphasized that even though lab work might go through a hospital’s billing department, if a patient doesn’t pay, the lab still incurs the loss. Part of the reason labs have so much trouble getting payment is that patients aren’t used to receiving a bill from a lab; likewise, most labs aren’t used to billing patients. “We really need a different mindset,” she said. “We have to start thinking about how to capture payment from patients when and if they present themselves. Most of the time they present themselves either at phlebotomy stations or patient service areas, which can sometimes be totally removed from the laboratory. So trying to get payment might be difficult because this is a group of people who don’t typically ask patients for payment.”
According to AHA, every 1% increase in the unemployment rolls translates to 2.5 million employees and dependents losing their health insurance. In fact, a recent national study from the Center for Studying Health System Change (HSC) found that even modest out-of-pocket expenses cause serious strain on family budgets. “Financial pressure on families from medical bills increases sharply when out-of-pocket spending for healthcare services exceeds 2.5% of family income,” the report said. “Low income families and people in poor health experience financial pressure at even lower levels of spending.” The HSC report noted that health insurance premiums, deductibles, co-insurance, and other out-of-pocket expenses have increased at a markedly higher rate than have family incomes.
This situation leads to patients making tough choices when they access healthcare, and labs are no exception, said Pontius. “When people are faced with a $20 copay for their lab work, yet they also need to buy a prescription, if this causes a hardship for them, the prescription will get paid for before the lab work does.”
Layoffs and Labor Costs
A special CLN survey conducted in December found that in addition to long-standing problems labs have had with staffing, over the last 12 months, the recession has added more strain to this already sore subject, forcing labs to forego hiring needed staff (See Box,below). Close to 50% of respondents said they had left vacant positions open, while 40% froze hiring or eliminated overtime. Only about 15% said they reduced staff hours, while less than 8% actually laid off lab staff.
Responding to the Recession
CLN’s Look at How Labs are Handling the Economy
To gauge how labs are responding to the recession, CLN sent a special survey in December via email to subscribers. In all, there were 524 responses.
Labs in the survey represent a variety of settings: 63% hospital labs, 20% academic medical centers, and 16% reference labs.
The survey found the most notable impact of the recession is on staffing and capital purchases.
Not hiring new employees can ease budget strain in the short term, but it can lead to problems down the road, Passiment said.“For a lot of labs, they’re getting to the point where they have so many vacancies, that if they just wipe them off the books, and don’t fill them with either temp help or part-time help, they could easily make their budget cuts,” she explained. “But the problem is that the people left might be forced into mandatory overtime, so the amount of money that you actually save is not as dramatic as it looks on paper.” Moreover, when a lab is understaffed, people start to get fatigued, which can lead to errors. Another problem can be increased turnaround time. Approximately 18% of respondents to the CLN survey said they had experienced an increased turnaround time due to being short-staffed.
One tactic labs have tried is hiring staff without as much education or experience who will work for less money. But their limited knowledge can require the lab’s more experienced staff to work harder or longer to make up for what the new people don’t know, said Passiment. However, if done right, taking on new people can sometimes translate into a benefit. “There are ways of bringing people into the lab in entry-level positions so that the lab can shift some of the duties and let the senior staff devote themselves only to the more scientific parts of testing. This is another way to control overtime.”
Responses to the CLN survey show labs taking a variety of measures to trim labor costs. Examples include: filling full-time vacancies with part timers and per-diem technologists; getting supervisors to spend more time on the bench; and cross training phlebotomists to receive specimens, order outreach tests, and prepare specimens for testing and send outs. Respondents also revealed harsher measures, such as forcing staff to take days off without pay, forgoing merit increases, or even cutting salaries and benefits. More than 12% of respondents said they had gone without annual merit increases, and respondents from two labs mentioned that employees would not receive matching retirement plan contributions this year.
On a broader level, the AHA report cited 53% of hospitals reducing their staff. Hospitals are also cutting administrative costs (59%) and reducing services (27%).
A downturn in testing also affects IVD manufacturers. Cutbacks in research translate to a smaller pipeline of new tests. This can leave labs unable to expand services. At the same time, the strain on research isn’t limited to manufacturers. Several labs responding to the CLN survey also specified that they had delayed comparison studies for new methods or eliminated research on new tests.
Klipp sees the recession flowing from payers to labs, with labs then pressuring their suppliers. “Labs are putting a lot of pressure on the IVD manufacturers to get better pricing, and the suppliers have very limited ability to raise prices given what’s happened to reimbursement over the last few years,” he said. More than 50% of labs in CLN’s survey reported delaying capital expenditures, while about 11% are switching to renting or leasing instruments instead of buying. Labs also indicated they are being more competitive in buying products and, as one survey respondent put it, “whoever gives the best pricing is who we are going with, despite long-term relationships.”
Klipp predicts that labs with large drugs of abuse (DOA) testing businesses might suffer. “This impact comes directly from the core economy. There’s definitely less hiring taking place and less employment drug screening taking place. That’s a part of business that many labs are involved with that has definitely been directly hurt.”
The so-called credit crunch will also have important, if less direct, effects on the lab community, according to Klipp. He points to a slowdown in lab acquisitions made by private equity investors who are having trouble raising cash. Venture capital firms that fund new IVD companies and labs will be hurt, too, he said. Likewise, there will be fewer buyouts of existing private labs, even though big players like Quest Diagnostics and LabCorp will continue making acquisitions because they can generate their own cash without tapping credit.
What to Watch For
What seems clear is that this economic crisis will not spare labs. But laboratorians can do more than just wait it out. Though the economic downturn has penetrated the national economy, each lab’s local economic conditions will play a far greater role in how individual labs weather the recession than will headline-making national events, according to Pontius. “If you’re operating a local laboratory, it’s local. It’s what’s happening in your town,” she said. She gave the example of the new Volkswagen plant under construction in Chattanooga, Tenn. The company says it will create around 2,000 jobs in the city as part of an overall $1 billion investment in the area. A lab serving this community could expect a possible increase in volume. On the flipside, if your lab is in a neighborhood where a manufacturer is closing its doors, then the lab could take a big hit as jobs are lost or people move away.
Pontius emphasized that labs have to keep a close eye on their own communities so they can roll with the economic flow. “You have to look to the future, even though labs are working very hard to maintain the status quo, constantly feeling like they need to cut back,” she said. “Labs have to make some predictions and recognize that if there’s a big company or industry that’s moving out of town, and they’re going to be losing business, then they need to look at their budgets.”
On a national scale, labs should also keep an eye on the loosening of credit. Especially in the outreach and reference lab sector, business loans are an essential part of the daily routine, said Passiment. “If the money continues to stay this tight, that’s an indicator to lab directors and medical directors that we’re in for an even more difficult time than we’re already coping with. I don’t know how we’re going to be able to do this, but it’s going to make it even harder to handle the bad debt and the uncompensated care.”
Looking forward, labs can take clues from entities that monitor business in the healthcare sector. The global credit rating agency Fitch Ratings noted in its most recent “For-Profit Hospital Industry Quarterly Diagnosis” that several factors will influence the success of healthcare in the recession. First, providers can adopt new measures to tackle the problem of uninsured patients, such as point-of-service collections, patient screening, and efforts to qualify patients for Medicaid or other programs that can ease bad debt. Furthermore, the report is optimistic about the current political climate, suggesting that Democrats are likely to take on state Medicare shortages and enhance healthcare coverage.
Passiment agreed that universal healthcare coverage, or something close, could be a boon for labs if Congress doesn’t cut too deep in order to pay for it. “If we do get universal healthcare, all boats rise, and we should begin to see more testing. There is a lot of pent-up demand in the system, people who have passed on care because they couldn’t afford it, and we could see a remarkable increase in our volume and demand for our services.”
With so much at stake in this political fray, now more than ever laboratorians must get better at promoting the value of their services and advocating for their profession on Capitol Hill, said AACC President Barbara Goldsmith, PhD. “Even at the individual employer level, this has been a criticism we have long had, which is we’re not very good at selling ourselves. We need now to take this even more seriously.”